Treasury Direct is the online platform through which investors can purchase U.S. government securities directly from the U.S. Treasury. Such securities include Treasury bills (T-bills), Treasury bonds, Treasury notes, or savings bonds that are backed by the U.S. government.
Treasury Direct is most often used to purchase government bonds when they are initially issued and not yet traded on secondary markets (similar to an IPO). Investors may still purchase these investments from more traditional channels, such as banks or brokerages.
How Does Treasury Direct Work?
Treasury securities are usually sold at auction at the time that they are issued for sale to the public. Through the auction process, the securities’ rate and yield are established. Interested parties can place two types of bids on the securities when they are sold: competitive bids and non-competitive bids.
Competitive bids are placed when bidders specify a given rate (also known as yield or discount rate) that they are willing to accept. Non-competitive bids are placed when bidders accept the rate or yield that results from the auction process. Naturally, the non-competitive bidders get their orders filled first. The remainder of the securities is then allocated to competitive bidders, from the lowest bid to the highest bid.
For investors to open a new Treasury Direct account, four requirements must be fulfilled, as follows:
Treasury securities are, for the most part, considered to be completely risk-free investments. While they earn a relatively low rate of return, their returns are backed by the U.S. federal government. The U.S. government is widely observed as being the safest and most creditworthy entity in the world from which to purchase securities. The high creditworthiness stems from the fact that the U.S. government has an extremely low chance of defaulting on its payments and leaving investors with massive losses.
Such risk-free securities are important in the valuation of equities and in establishing expected return figures on other investments. The higher the risk-free rate, the higher the equity risk premium (ERP) will be. This is because investors demand a proportionally higher rate of return on more risky investments. If the risk-free rate climbs, then the required rate of return for riskier investments will also increase.
Conversely, if the risk-free rate decreases over time, investors don’t demand as high a return rate to be compensated for the risks they are taking on when investing in equities.
Thank you for reading CFI’s guide to Treasury Direct. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)® certification program, designed to transform anyone into a world-class financial analyst.
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