I’ve been using TreasuryDirect for a little for over 3 years. For those who aren’t familiar with it, it’s the Treasury Department direct online service. Instead of going through a broker, or a bank, you can buy directly from the Government. For instance on E*Trade, you’re charged $40 per Treasury transaction. Ameritrade is $25, and Fidelity is $19.95. These fees are much higher than brokerage costs for stocks which typically hover at around $10 per trade at most online brokerages.

Even though, I’ve had my treasurydirect account for over 3 years, I haven’t done all that much with it.  I got some i-bonds which are basically the inflation adjusted equivalent to a savings bond – not terribly exciting.  I keep telling myself to use the account more, and was reminded once again by Sun’s post on emergency funds. Treasury Bills and Notes typically have rates that are competitive with most CDs (if not better), and are exempt from state and local taxes as well.  He has other great articles that go into much more detail about investing in Treasury securities as well.

By buying treasury bills, notes, or bonds through the treasury auctions you face a certain amount price uncertainty.  When you participate in the treasury auction via treasurydirect or most brokerages for that matter you go in as a price taker. Whatever price the auction clears at  - you get – though generally speaking there shouldn’t be big suprises.  By participating in the auctions, you can expect to beat most CDs.  Treasury Bills come in 4, 13, and 26 week terms, and there’s an auction weekly.  Notes come in 2, 3, 5, and 10 year terms.  TIPS(Treasury Inflation-Protected Securities) are issued in 5,10 and 20 year terms which allow you to hedge for inflation.  The principal amount in a TIP is adjusted for inflation and interest payments are based on that adjusted principal rather than the original nominal principal.  There is only one 30 year bond, fondly known as the “Long Bond” in fixed income circles (at least back when I used to know a fixed income broker or two).  I don’t know why the different lengths for these securities have different names at least when it comes to bonds and notes.  Notes and Bond both have coupons which are periodic interest payments.  Given your access to all these different types of securities, TreasuryDirect is a perfect place to invest instead in place of saving accounts and CDs. Careful management of treasury bills should yield superior returns in comparison to a savings account without trading off too much liquidity. Notes are a perfect alternative to CDs.  Transactions costs at brokerage could take a big bite out of the return if you cycle through alot shorter term Treasury Bills.   Good thing Treasurydirect is free. 

The one complaint I have is the Zero-Percent C of I securities that TreasuryDirect forces you to hold if want to keep a balance from which to fund your transactions. These “securities” pay no interest which actually isn’t the crux of my complaint. I don’t like the long name and the rather confusing nature to what is essentially cash holdings. On the most part there isn’t much of a need to have a balance in Zero-Percent C of I securities as transactions are easily funded via a linked account. The mature value of a security can then be funneled back to the linked account rather into the ZPCI instrument as well. The only real reason I see for keeping money in the Zero-Percent C of I is too quickly make transactions when funding the account would otherwise take too long.  I wouldn’t really know since I haven’t done so.