Investors can buy bonds from brokers, banks, or directly from certain issuers.

You can buy newly issued corporate, municipal, and agency bonds, or bonds trading in the secondary market through your broker or from certain banks. In the secondary market, you buy bonds that are being sold at some point after issue by a previous investor.

You can also buy US Treasury issues through these intermediaries or you can buy them directly in a regularly scheduled Treasury auction with no middleman and no commission.

How does Bond trading work?

Most already-issued bonds are traded over-the-counter (OTC), a term that really means over the phone or by computer. Bond dealers across the country are connected via electronic display terminals that give them the latest information on prices. A broker buying a bond tries to find the dealer who is offering the best price and calls to negotiate a trade.

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Brokerage firms also have inventories of bonds to sell to clients looking for bonds of particular maturities or yields. Often, investors make out better buying bonds their brokers already own — or make a market in — as opposed to bonds the brokers have to buy from another firm.

Trading Treasurys

The Bureau of the Fiscal Service handles transactions in new Treasury issues. To buy, you establish a TreasuryDirect account, which keeps electronic records of your transactions and pays interest directly into your bank account. You can find the forms you need on the TreasuryDirect website to enroll online. You can sell your Treasury securities before maturity, but, if they’re in a TreasuryDirect account, you must move them to a brokerage account. With small balances or relatively short times to maturity, this may not make financial sense.

The Treasury bill auction process

T-bills offered on Thursday for Monday sale

The US Treasury offers 13-, 26- and 52-week T-bills for auction every Monday.

  • Across the country, institutional investors (such as pension funds and mutual funds) who want to buy the major part of the issue ready their competitive bids. Their bids must arrive at the Treasury by
  • 1:00 p.m. on Monday, the auction deadline. Bidders state the rate they are willing to accept on the bills. At the same time, individual investors can submit non-competitive tenders, or offers, through TreasuryDirect. Investors decide how much they want to put into T-bills, and authorize a debit to cover that amount.

1 pm Deadline for all bids

  •  The Treasury accepts bids, from the lowest to the highest rate, until the quota is filled.

1:10 – 1:15 Results announced

  • Within minutes, the Treasury announces the auction results, and bidders learn what the auction rate is and the price they will pay to buy the bills.
  • All the competitive bidders who bid rates lower than the cutoff bid have their orders filled at the auction rate. However, any institution whose bid is at the cutoff, or auction rate, may not be able to invest as much as it had wanted if the quota has already been filled.
  •  Individuals and small institutions that have submitted non-competitive bids get the auction rate that’s been determined by the competitive auction. They can invest as much as they wish, up to $5 million in an individual purchase.
  • A non-competitive bidder’s transaction is completed when the amount due for the purchase is debited from the bank account linked to his or her TreasuryDirect account.
  • At maturity, par value is credited to that account, or $100 for each bill. If the purchase price was $99 per bill, the $1 per bill difference is the interest. At maturity, noncompetitive bidders can roll over their T-bill investment in their TreasuryDirect at the new auction rate, or they can opt for redemption at par value.

What Bonds to buy?

High minimum investment requirements can make it hard for individuals to invest in most bonds. Even though par value is usually $1,000, bonds are often sold in minimum lots of five or more and may require an investment of at least $10,000. US Treasurys are the exception, since you can purchase just one bill, note, or bond at a time if you wish. As a result, institutional investors, such as banks or mutual funds, hold the majority of individual bonds, corporate bonds in particular. Many high net worth individual investors hold substantial numbers of munis.

An alternative is buying bonds through an actively managed account, or portfolio of individual bonds chosen and overseen by a professional investment manager. You’re just one of the hundreds of investors whose accounts are overseen by the same manager. But while all the accounts will include many of the same bonds, you can customize your individual account to some extent in collaboration with your investment adviser and the professional manager.

Other investors may choose bond funds, rather than bonds. A bond fund makes it easier to diversify a fixed-income portfolio and allows you to reinvest your earnings to buy more shares. But funds don’t promise return of principal at a set maturity date or pay a fixed interest rate. In fact, in one sense, buying a bond fund is actually making an equity investment in debt securities, as you own shares of the fund that owns bonds.

All You Need To Know About Buying And Selling Bonds by Inna Rosputnia

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