What is Treasury Direct?
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 thus not yet traded on secondary markets (similar to an IPO). Nonetheless, investors may still purchase the 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 the bidder is 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, then allocates the remainder of the securities to competitive bidders from the lowest bid to the highest bid.
For investors to open a new Treasury Direct account, four main requirements must be fulfilled, as listed below:
- Investors are required to submit a U.S. Social Security number (or other forms of identification such as a Taxpayer Identification Number).
- Investors must reside in the U.S. and present a valid U.S. address.
- Investors must provide the account details for a valid checking or savings account.
- Invest must provide a valid email address.
It is important to note that other entities such as limited liability corporations (LLCs), estates, trust or institutional investors can also maintain Treasury Direct accounts.
What are Treasury Securities?
Treasury securities are, for the most part, considered to be completely risk-free investments. While they earn a very 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 risk-free securities. The high creditworthiness stems from the fact that the U.S. government offers 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 specific stocks. The higher the risk-free rate, the higher the equity risk premium (ERP) will be. It is because investors will demand a proportionally higher rate of return on more risky investments if the risk-free rate climbs since the “standard” or required rate of return for the investors will also increase.
Conversely, if the risk-free rate decreases over time, investors will demand a lower rate of return in order to be compensated for the risks that they are taking on when investing in equities.
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