how to buy government bonds

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A bond is money loaned to a business or government with the pledge that it will be returned at a certain time — called the maturity date — along with an agreed-on percentage of interest.
Ever wonder how large companies raise capital when the bank won’t loan them any more money? One of the most accepted ways of borrowing money in the financial world is to issue bonds.
The government began phasing out all paper bonds, like these Series EE Savings Bonds, in favor of electronic bonds sold through TreasuryDirect.gov. See more investing pictures.
Despite the much-publicized downgrading of the United States’ credit rating, Treasury bonds are considered risk free.
Venzon, Christine.  "How to Buy Treasury Bonds"  10 October 2011.  HowStuffWorks.com. < ;  18 October 2014.
Issuing bonds increases or decreases the amount of money available to banks.
On the next page, learn how your interest in bonds can yield a profit.
Usually, the Fed buys and sells short-term government bonds in order to change a very short-term interest rate called the “federal funds rate.” Now, the Fed is buying and selling longer-term government bonds, with the aim of influencing longer-term rates.
(While the Federal Reserve is buying both government and private bonds, here we will focus just on purchases of government bonds.) The reduction in long-term interest rates, in turn, is meant to stimulate investment and other forms of spending.
This makes money less plentiful and drives up the price of borrowing.) When Fed policymakers decide they want to lower interest rates, the Fed buys government bonds.
If banks start buying private-company bonds (with the money they made by selling government bonds), then the price of private-company bonds will go up and the interest rate on those bonds will go down.
Suppose the Fed starts buying government bonds, and that makes the bond price go up to almost $101 (pushing the interest rate on government bonds down to 1%).
More demand for bonds (including demand from the Fed) means a higher bond price, and that pushes down interest rates.
If the risk on private-company bonds were the same as on government bonds, as we assumed in our example, then the process would continue as long as the interest rate on the private bonds remained higher than that on the government bonds.
In the meantime, the government can spend the money it received in exchange for the bond.) At any time, there are lots and lots (and lots) of bonds owned by people or institutions who have either bought them directly from the Treasury, or bought them from someone else in the “bond market.” Bonds may change hands lots of times after their initial sale by the Treasury.
When we hear about government policies designed to change the money supply or influence interest rates (monetary policy), we are talking about the role of the Federal Reserve (or “the Fed”).
The idea behind government policies to lower interest rates is that some projects that would not have been profitable for a company at a higher interest rate would be profitable at a lower interest rate.
As mentioned earlier, during a recession the Fed usually buys short-term government bonds, which has the effect of driving down short-term interest rates.
The idea is that lower interest rates encourage people and companies to spend, adding to demand for goods and services and stimulating production and employment.
That experiment, the Fed’s massive buying of paper assets, mostly U.S. Treasury bonds, was aimed at driving interest rates and bond yields down further – to promote borrowing and spending in the private sector to parallel the stimulative buying and spending by government.
It shows that as a result of those QE programs the Fed is now holding $1.66 trillion in U.S. Treasury bonds, and $926.7 billion in mortgage-backed securities.  It had pledged to continue the program through 2013 (or until the economy improves enough to have the unemployment rate down to 6.5%). At the current rate of purchases, that would mean the purchase of an additional $1.02 trillion of Treasury bonds this year.
That is, how would the Fed manage to eventually reverse its efforts and sell those assets off its balance sheet without driving interest and bond yields sharply higher, bond prices sharply lower, thus hurting the economy and bond investors? It hadn’t seemed to be of immediate concern – until the Fed released the minutes of its last FOMC meeting this week.
And now the Fed’s release of its FOMC meeting minutes puts more pressure on bond-traders and large institutional holders to bail out of bonds even faster in order to stay ahead of further selling pressure that might result from the Fed halting its supportive bond-buying earlier than previously thought.
U.S. Treasury securities, used to finance the federal government debt, are also considered to have the bond market’s lowest risk because they are guaranteed by the U.S. government’s “full faith and credit” or, in other words, its taxing authority.
One of the world’s largest and most liquid bond markets is comprised of debt securities issued by the U.S. Treasury, by U.S. government agencies and by U.S government-sponsored enterprises.
Government agencies and government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac also issue debt to support their role in financing mortgages.
For municipal bonds the interest earned is free from federal taxes and generally any associated taxes from the region where the bond was issued.
Investors can purchase both federal and municipal government bonds from a variety of sources such as brokerages or banks.
Federal bonds are issued by the federal government, while municipal bonds are issued by state governments or local municipalities.
The U.S. Treasury offers a service whereby you can purchase these bonds directly from the U.S. government through its website or a regional Federal Reserve Bank.
For federal bonds, the interest earned is generally exempt from any state and local taxes.
For further reading, please see The Basics of Federal Bond Issues, Advantages of Bonds and The Lowdown on Savings Bonds.
Login to your account and from the "My Accounts" page, click on the BuyDirect® tab, select Bonds, click on the security you wish to purchase, the purchase amount, and whether you wish to reinvest the security.
When you buy a bond in TreasuryDirect, we withdraw the purchase price from the source of funds that you specify, which could be one of your bank accounts or your Certificate of Indebtedness (C of I).
The system uses your preferred registration and the primary bank you identified in your account, and then schedules your purchase for the next available auction date.
The blue line represents the price of long-dated U.S. Treasury bonds (TLT), also denominated in U.S. dollars.
While treasury bonds, once the benchmark for asset preservation, are now flat, gold has increased around 25 percent more than US Treasury Bonds.
Although it is extremely unlikely the US government would default on repayment of Treasury Bonds, the value of putting ones assets into them is now in question.
Buy treasury bonds or buy gold? That is the question.
US Treasury Bonds have, for years, been considered the safest bonds or way of saving money in the world.
The chart shows the green line representing the price of one ounce of gold (GLD), measured in U.S. dollars.
The importance of this shows up in the interest rate paid and the value of the dollar as against the value of gold.
So if the Treasury issued a new 30-year, $1,000 bond today, at current interest rates, an investor would be paid a coupon of roughly $17.50 every six months.
The less each Treasury bond is worth also and the less value each dollar of interest becomes.
Bond prices can swing substantially over 30 years, so it’s important to realize that they can behave more like dividend paying stocks than other fixed income securities that offer greater safety of principal.
Many investors are shying away from fixed income investments because of the historically low rates of return they provide, but there’s no better place to be than Treasury securities when the stock market is misbehaving.
Because of the longer term, Treasury bonds also generally pay higher rates of interest than either bills or notes.
In fact the variation in principal is greater for bonds than for notes due to the longer term of the securities.
They’re purchased at a discount, which is to say that your interest income is the difference between what you pay for the securities (the discount) and what you will be paid at maturity.
Treasury notes do carry some risk of principal if they’re sold prior to maturity.
Like all fixed income securities, the price of the security moves in inverse proportion to interest rates.
These securities are established to provide fixed income while at the same time protecting your principal from inflation.
Rates are set by auction but the principal amount of the securities is adjusted based on changes in the Consumer Price Index (CPI).
Treasury bills are the shortest term variant of Treasury securities, featuring maturities running from a few days to one year (52 weeks).
Since all interest is paid at maturity, you will not receive periodic interest payments the way you would on other securities, such as certificates of deposit.
The Fed announces the times at which it will buy securities and the price at which it will buy them.  The Fed price in Quantitative Easing is always greater than the market price for the same securities.  Given this information in advance, market participants either (a) unload Treasury bonds from their books at a great profit (since Treasuries are trading at all time highs) or (b) go out into the open market and purchase Treasury bonds that cost less than the Fed's announced prices, creating an arbitrage effect.
Because to conduct monetary policy it wants to buy and sell treasury bonds owned by people other than the treasury.  If the Fed wants to increase the amount of cash in the financial system, then buying Treasuries from the US government doesn't do anything.  On the other hand, if they convince me that it's a good time to sell my Treasuries and get cash, that impacts the economy since I get the cash.
By buying bonds outright, the ECB is aiming to free up space on banks’ balance sheets to lend more, and thus neutralize the effect of its own ongoing health check on Eurozone banks, which has made them even more risk-averse than they already were.
The European Central Bank cut its official interest rates to new record lows and announced two limited programs to buy bonds in the market, in another effort to revive the Eurozone’s stalling economy.
It also cut its deposit rate by the same amount to -0.20%, meaning that banks will have to pay an even bigger penalty for stashing excess cash away at the central bank instead of putting it to work in the economy.
That should enable banks to pass on lower interest rates to a larger range of clients faster, he said, arguing that they might otherwise have held off in expectations of being able to borrow even more cheaply in the future.
Draghi said that the main purpose of the rate cut was to encourage banks to take part in a series of offers of cheap long-term money starting this month.
It will also start a third program for buying covered bonds, a popular way for Eurozone banks to repackage mortgages and public-sector loans.
The package of measures comes only three months after the ECB’s last rate cut, and reflects how the Eurozone economy has struggled as the Ukraine crisis has sapped confidence.
As expected, the ECB stopped short of buying government bonds en masse as the Federal Reserve and the Japanese and U.K. central banks have done.
The ECB’s is the last of the world’s major central banks still to be easing policy six years after the financial crisis.
In another thinly-disguised swipe at France and Italy, Draghi urged governments to enact structural reforms, saying that failure on that front was the main drag on Eurozone growth.
ECB data last week showed banks cut their lending to businesses and households by 1.6% in the year to July, and by €12 billion in July alone.
Series I bonds, the ones linked to inflation, are paying 3.06%. Series EE bonds yield just 0.6%. Savings bonds are certainly a decent replacement for cash that’s earning next to nothing in a savings account—a savings bond will never be worth less than it’s face value.
In the past, paper savings bonds were purchased at half of face value (i.e. you bought a $100 bond for $50).
Unlike Treasury bonds, savings bonds aren’t traded—you register your bond with the Treasury as if you made a personal loan to Uncle Sam (which, in fact, you do).
Cashing savings bonds remains very easy: many local banks will redeem them for you or you can use the Treasury’s Web site if you purchased the bond electronically.
There are other ways to hedge inflation, in particular Treasury bonds designed very similarly to I savings bonds (known as TIPS).
Buy guaranteed securities, loan assets, savings bonds and more.
Ordinarily, an increase in reserve balances in the banking system would push down current and expected future levels of short-term interest rates; such an action would serve to boost the economy and variables like bank lending and the money supply.
Although Federal Reserve purchases of Treasury securities do not involve printing money, the increase in the Federal Reserve’s holdings of Treasury securities is matched by a corresponding increase in reserve balances held by the banking system.
In addition, U.S. currency has expanded at only a moderate pace in recent years, and the Federal Reserve has indicated that it will return its securities holdings to a more normal level over time, as the economy recovers and the current monetary accommodation is unwound.
Anderson says: ”One size doesn’t fit all, and as people move towards the later end of their working life, an increased fixed-income exposure will help preserve capital.” Typically, fixed interest should make up between 20 per cent and 40 per cent of a retail investor’s portfolio, she says.
With interest rates in the medium term likely to climb further, Conheady says investors would do better by avoiding fixed-rate bonds and choose floating-rate securities instead.
”We have been underweight in fixed interest since early 2013 because we see it as being overvalued and coming back in price.” To the uninitiated, that means investors chased bond prices up (and yields down) as part of the yield contagion that also hit sharemarkets.
Trading can involve buying and selling, or simply buying your discounted bond at $50 and holding it to maturity, when the issuer will repay its face value of $100 – delivering a capital gain and a healthy interest rate along the way.
So what are the advantages of fixed-interest investment? David Simon, a partner with Westpac Financial Planning, says the beauty of investing in fixed income is a ”non-correlated investment” to the sharemarket, meaning the bond market acts independently of the sharemarket.
So what happens is the capital value of your bond will fall to $50 to ensure a buyer gets the same 10 per cent yield the new bonds are offering.
If interest rates move up to 10 per cent and you want to sell your bond, you will get a shock.
So if bonds can be a profitable investment, why do so many people not understand how the market works? Put simply, a bond is a loan made by an investor to a government or corporation.
There are also a smaller number of Commonwealth index-linked bonds listed on the ASX, where the capital value of the bond increases with inflation, which protects the real value of the investment.
FIIG’s education director Liz Moran says the company offers investments of $50,000 and ”we say you should have exposure to five bonds, which is $250,000.” That might still be a bit much for many investors, but Moran says FIIG is working on a $10,000 minimum offer.
Anderson says fixed interest is a ”heterogeneous” asset class – lots of different bonds are on offer and they have varying characteristics and risks.
The big gains for bonds since the global financial crisis came as falling interest rates forced capital values to rise.
Historically, we’ve had a culture of investing in bank deposits and equities, which has been encouraged by the tax system, especially through franking credits [which make share investment tax effective].” Australian fixed-income weighting is probably less than 10 per cent of the average retail investor’s portfolio.
The borrower issues a bond in recognition of the loan and promises to pay interest at a certain rate and to repay the capital after a set period, which can be from one year to 30 years or more.
With zero or negative returns guaranteed on supposedly ‘safe’ government bonds and bank deposits, ever more investors, including small savers, will turn toward gold which has the additional advantage that its upside is practically unlimited – its price can double, triple or quadruple (all of which I expect) as long as paper money debasement continues, which I consider a near certainty.
This would mean expanding the money supply by buying member countries’ government bonds – a realization of ECB President Mario Draghi’s “outright monetary transactions” scheme, announced in August 2012 in the midst of growing uncertainty about the euro’s future (but never used since then).
This year, the emerging economies are worried about a tightening of global monetary policy, not the policy loosening that three years ago fueled talk of “currency wars.” As the Fed tapers its purchases of long-term assets, including US treasury securities, it is a perfect time for the ECB to step in and buy some itself.
(After all, there would be little point in upholding pristine principles if doing so resulted in a breakup, and fiscal austerity alone was never going to return the periphery countries to sustainable debt paths.) At the moment, there is no need to support periphery-country bonds, especially if it would flirt with illegality.
In Germany, ECB purchases of bonds issued by Greece and other periphery countries are widely thought to constitute monetary financing of profligate governments, in violation of the treaty under which the ECB was established.
Such foreign-exchange operations among G-7 central banks have fallen into disuse in recent years, partly owing to the theory that they do not affect exchange rates except when they change money supplies.

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