How to Buy Treasury Bonds in the Secondary Market

Securities issued by the U.S. Treasury are among the world's safest investments.

Securities issued by the U.S. Treasury are among the world's safest investments.

Treasury bonds are U.S. government debt securities issued with maturities of 10 to 30 years. These types of Treasuries pay the investor interest on a semiannual basis. First sold through the primary market, which are regularly scheduled auctions, these bonds are bought by registered brokers and dealers who can resell them through the secondary market. This secondary market is where the average investor can buy the bonds more readily.

OTC Markets

The U.S. Treasury does not sell securities in the secondary market. Instead, a small number of primary dealers buy the bonds at auction and make a market for the securities by offering the investment products to other investors or trading among themselves, according to the Federal Reserve. For bonds, this secondary market generally operates as an over-the-counter market. This OTC market is made up of commercial banks and other financial institutions, investment companies and brokerage firms. Trading takes place through telephone and digital transactions. Contact a bond dealer and ask about the specific terms.

Indirect Ownership

As an alternative to buying Treasury securities outright, Treasury bonds can become part of your investment portfolio by investing in mutual funds that buy Treasury bonds. The Securities Industry and Financial Markets Association points out that some funds that hold Treasuries hold other products in the fund. The association suggests you familiarize yourself with the complete portfolio of such a fund before investing. An initial purchase in a bond fund may require you to put up a specified minimum amount of money.

Benefits

Buying Treasury bonds holds certain benefits for investors. A readily available market for the products provides liquidity. Because the full credit and taxing power of the U.S. government back Treasuries, the bonds hold very little risk. Investors know upfront what the interest payments will be and can count on the income. In addition, earnings on Treasuries are exempt from state and local taxes.

Dealer Sales and Prices

According to the SIFMA, buying Treasury bonds in the secondary market without paying a sales commission may be possible. The association states that dealers earn a return by selling the bonds at a higher price than that which they paid. At the initial auction, the face values of the bonds are set. In the secondary market, price adjustments reflect current interest rates. Longer-term securities are more affected by changing interest rates, as rates are more apt to move up and down over extended periods. This characteristic of long-term bonds can significantly affect the overall yield. However, if you hold the bond until maturity, you will receive the original par or face value.

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