No matter how you dress up bonds these days, they still have one problem: They’re bonds.
With the stock market continuing its wild ride, it’s hard to get anyone interested in bonds, no matter how good the story. So when the U.S. Treasury announced changes to its direct-purchase bond program recently, just days after the market posted a one-day record climb of more than 250 points, hardly anyone noticed.
But if you are a bond investor or a bank customer, the new clothes worn by the Treasury Direct program look pretty sexy indeed.
In effect, the Bureau of Public Debt has now made Treasuries as easy to buy as mutual funds, easier to purchase and handle than many bank certificates of deposit because you can make the entire transaction from home.
While the Bureau of Public Debt was simply trying to make Treasury Direct more functional, it just happened to make Treasury securities more competitive with other cash investments and worth considering for any investor looking for income.
Treasury Direct is the 11-year-old program that lets investors buy bonds, bills and notes direct from the government, avoiding brokers and commissions. Like mutual funds or direct-purchase stocks, Treasury Direct is a book-entry system, meaning your money is on account; you do not hold the paper yourself.
Recently, the government unveiled some enhancements to the program. They are:
– Pay Direct, a feature that allows existing customers to let the Treasury debit an authorized bank account on the day their security is issued. In the past, investors paid when submitting their order. The new system eliminates the need for a cashier’s or certified check.
– Reinvest Direct, a telephone hot line for investors to roll over their Treasuries. Upon receiving a notice that a Treasury security is maturing, an investor can simply call in to keep the money working.
– Sell Direct, which lets investors unload Treasuries without first transferring them to a bank or brokerage, an annoying problem Treasury Direct investors have faced in the past. To sell now, an investor completes a form and submits it to the Chicago Federal Reserve Bank, which handles sales for the Treasury. The Chicago Fed then gets three price quotes from dealers, accepts the highest bid and wires the sales price, minus a $34 processing fee, to your bank. The fee is lower than handling charges many brokerage firms charge.
– A single order form, which greatly simplifies the program. In the past, there were different forms for the many different types of Treasuries.
The simplified paperwork, coupled with the reinvestment and sales features, make buying and managing Treasuries as easy as investing in a money-market fund.
What has not changed is that the Treasury Direct program offers no-transaction fee access to federal government securities.
Treasury securities represent the federal government’s debt. Backed by the full faith and credit of the U.S. government, Treasury securities often are considered “risk-free,” in that there is little event of a default.
The different types of Treasuries are easily confused.
– Treasury bills are short-term securities, maturing in one year or less. They are issued in minimum denominations of $10,000, with $1,000 increments above that. “T-bills” are the primary way the Federal Reserve regulates the nation’s money supply.
– Treasury bonds are long-term debt instruments, maturing in 10 or more years. They are sold in minimum amounts of $1,000 and in $1,000 increments.
– Treasury notes split the difference. They are intermediate securities with maturities from one to 10 years. The minimum initial purchase for notes with maturities of less than five years is $5,000 and $1,000 increments. Longer-term notes have the same increments, but are sold at a $1,000 minimum.
All types of Treasury securities avoid state or local income taxes, though investors owe federal taxes on their income.
Treasury Direct is not done changing. Eventually, the program will probably incorporate transactions on the Internet. For now, however, the Internet remains the easiest place to get information on the program. The Web address is www.publicdebt.treas.gov.
For investors who aren’t on-line, information is available from the nearest Federal Reserve Bank or branch or by writing to the Bureau of the Public Debt, 200 Third Street, Parkersburg, W. Va. 26106-1328. You also can call the Treasury Direct information line at 202-874-4000.
“We looked at the Treasury Direct program itself and tried to decide what would make it easier for our customers,” says Richard L. Gregg, commissioner of the public debt. “It was not our intention to compete against other investments, although I could see that as a side-effect. Anytime the system gets easier, we would expect more people to use it.”
All of which brings this discussion back to the idea of bonds not being terribly attractive these days, in light of the stock market. With Treasury securities returning in the neighborhood of 6 percent and the buoyant market up several times more than that thus far this year, bonds remain a tough sell.
“Bonds have a purpose in a portfolio, and this is a low-cost way to own them,” says Peter Crane, managing editor at IBC Financial Data in Ashland, Mass. “If someone is looking for a guaranteed return or guaranteed safety–maybe for the down payment on a house or for money they know they will need in a few years and don’t want to put in the stock market–Treasuries are worth looking at.”
Holding individual treasury securities is also seen by many experts as preferable to holding a mutual fund that invests in treasuries.
Most Treasury funds do not actively manage the maturities of their holdings. That kind of management would reduce interest rate risk; without it, a fund’s expense ratio is simply a drag on returns.
Says Crane: “You do just as well holding Treasuries on your own as in most funds.”
That is, of course, providing you actually want to own bonds.
“We did a lot of things to make the program more attractive, but that isn’t going to make a stock investor want to buy bonds,” says Gregg. “For people who do want bonds, there may be some who have a relationship with a broker or with a mutual fund company and who just want everything in one place or on auto-pilot. If people do not fall into that description and they want to own Treasuries, I think they’d investigate Treasury Direct now.”
