Piece of the Treasury for $100

The following appeared on page B2 in the April 12-13,2008 weekend edition of the Wall Street Journal.

Piece of the Treasury for $100
Bills, Notes, Bonds Easier to Get, But Do You Want Them?
By Chuck Jaffe

At a time when investors seem obsessed with safety and security, the Treasury Department in the past week instituted a major change in the way people can invest in Treasury bills, notes and bonds.

While many market observers question the value of buying Treasurys now – yields are so low that ordinary bank accounts can be a better value – the changes should cause a stir among small investors looking for safe havens.

On Monday, the Treasury started making all of its marketable securities available to the public in “minimum and multiple amounts of $100.” For roughly the last decade, the threshold has been $1,000.

The change is significant because it means consumers can buy Treasurys for a C-note, making these securities affordable for the masses. It also puts Treasurys on the level of savings bonds and gives consumers new and different low-cost options.

What’s more, it simplifies the process for anyone looking to buy Treasurys. In the past, an investor with $1,200 or $2,700 to put into bills or notes would only be able to invest to the nearest thousand dollars. That made mutual funds or bank deposits more attractive alternatives. Now, that barrier has been eliminated.

“The policy makers are just trying to open it up as widely as possible,” said Stephen Meyerhardt, a Treasury spokesman. “But in opening Treasurys up, I hope that people understand what they are getting and really make sure that they are getting the right investment for their needs.”

Treasury securities can be purchased noncompetitively directly from the Treasury. For this, you need to open an account through the TreasuryDirect program.

The TreasuryDirect program isn’t for traders, and knowing the rules is crucial. For many investors, savings bonds will continue to be the superior choice to Treasurys.

Savings bonds lock up your money for up to 30 years, but an investor can cash out after five years without penalty. Even if you sell after the first year, the penalty amounts to just three months’ worth of interest charges – not much considering that the current payout is fixed at 3%.

With marketable securities such as Treasurys, in contrast, you are locked in to a set term. While you can sell the security through TreasuryDirect before it reached maturity, market forces can rip into the bond’s value, plus you’ll be facing a $45 charge from TreasuryDirect for the privilege. That’s a steep fee on a small-dollar investor who was throwing a few hundred bucks into Tresaurys rather than bank deposits.

One place where the changed Treasury program will help investors is in creating laddered portfolios of securities, where you hold different maturities of bonds and each time one matures, you simply reinvest the proceeds into a new issue that is at the long end of the time spectrum. So an investor might buy one-year, two-year and three-year bonds, for example, and then buy a new three-year note every time one step of the ladder reaches maturity.

Another area where small investors might turn to Treasurys is in place of short-term government bond funds. The little secret that most fund firms don’t say is that most Treasury funds are largely unmanaged. Rather than trying to pick the perfect mix of short-term maturities, the fund manager simply pools the cash, buys a new issue meeting an appropriate time frame and repeats the process whenever there’s cash to invest.

Individual investors can do the same through TreasuryDirect and avoid bond-fund expenses.

Because of their simplicity, Treasurys are something of a commodity, and the changes allow investors to buy in for less money upfront.

“You certainly could replace a bond fund, assuming you have the time and energy to devote to doing it yourself,” said Jeff Tjornehoj, senior research analyst at fund-tracker Lipper Inc.

“You’re not getting a lot of professional management in most short-term bond funds,” he added, “so what you are really paying for is convenience. …But some people probably would feel better having their money with the government – and the full faith and credit of the United States Treasury – than with some fund company, given what we have seen happening in the financial-services business.”

For his part, Mr. Meyerhardt says investors need to be careful not to view Treasurys as a replacement for a bank account. “If what you want is a savings account, and you are below the FDIC insurance limits, you can trust that,” he said, “and not be putting just $100 or $200 into Treasurys.”