I showed how to buy new-issue Treasury bills and notes in the previous post How To Buy Treasury Bills & Notes Without Fee at Online Brokers. Buying a new issue is the easiest and the least expensive way for most people. You should try to stay with new issues for the most part.
However, sometimes it’s necessary to buy Treasuries on the secondary market. Major online brokers such as Fidelity, Vanguard, and Charles Schwab don’t charge fees for buying Treasuries on the secondary market either. I show you how to do it in this post.
What Is the Secondary Market
Buying on the secondary market is like buying a used car. Someone bought the Treasuries when the government sold them brand new. Now they’re reselling them. You’re buying these “pre-owned” Treasuries when you buy on the secondary market.
You’re not getting an inferior product when you buy “pre-owned” Treasuries on the secondary market. The U.S. government still guarantees full payments of both principal and interest. As such, you’re not getting a bargain either when you buy on the secondary market as opposed to buying new issues.
Why Secondary Market
Two scenarios make it necessary to buy on the secondary market.
Term Not Available As New Issue
New-issue Treasuries come in these maturities:
- 1-month (4-week)
- 2-month (8-week)
- 3-month (13-week)
- 4-month (17-week)
- 6-month (26-week)
- 1-year (52-week)
- 2-year
- 3-year
- 5-year
- 7-year
- 10-year
- 20-year
- 30-year
If you want a Treasury that matures in 9 months, 18 months, or 4 years, you won’t be able to get it as a new issue. Your only option is to buy it on the secondary market. A 1-year Treasury issued 3 months ago has 9 months to run by now. It’ll be your 9-month Treasury when you buy it on the secondary market.
Don’t Want to Wait
The government sells new-issue Treasuries on a preset schedule. Short-term Treasury Bills come out weekly. Longer maturities (1-year and up) come out only once a month. If you’d like to buy them today and don’t want to wait until the next scheduled sale, your only option is to buy on the secondary market.
For example, as I’m writing this, the next scheduled sale for a 1-year (52-week) Treasury will be on November 29 and the one after that will be on December 27. If you miss the November 29 sale and you don’t want to wait until December 27, you’ll have to buy it on the secondary market.
TIPS
The available terms and the sales schedule especially affect TIPS — the inflation-protected Treasury bonds. New issues of TIPS bonds only come in these maturities and frequencies currently:
| Maturity | New Issue Frequency |
|---|---|
| 5-year | 4 times a year (April, June, October, December) |
| 10-year | 6 times a year (January, March, May, July, September, November) |
| 30-year | Twice a year (February, August) |
If you want a 2-year TIPS or if you want a 5-year TIPS in January, you’ll have to buy it on the secondary market.
Known Price and Yield
When you buy a new issue, you place your order without knowing exactly what the price and yield will be, because the price and yield are determined by an auction (see the previous post How To Buy Treasury Bills & Notes Without Fee at Online Brokers). You’re trusting you’ll get a good price and yield because you’ll pay the same price on your small order as banks buying $100 million. Prices can move between the time you place the order and the time the auction completes. The actual yield you get may be higher or lower than the going yield you see when you place the order.
When you buy on the secondary market, you get a quote before you buy. You know exactly what yield you’re getting. Some people prefer this certainty as opposed to not knowing what price and yield they’ll get on new issues.
This third reason to buy on the secondary market is only personal preference. Although you can’t know the price and yield on a new issue ahead of time, the actual yield you end up getting is often better than the yield you can get on the secondary market.
Not All Brokers Offer New Issues
Another reason to buy on the secondary market is that not all brokers offer new-issue Treasuries. Merrill Edge, for example, doesn’t offer new-issue Treasuries online. You have to call and pay a fee to have a representative place the order if you want a new issue, but you can buy on the secondary market online without a fee. If you must use Merrill Edge, buying on the secondary market probably still beats paying a fee every time to buy a new issue.
You can buy new-issue Treasuries online without a fee at Vanguard, Fidelity, Charles Schwab, and E*Trade. See detailed steps with screenshots in How To Buy Treasury Bills & Notes Without Fee at Online Brokers.
The Downside
Buying on the secondary market has some disadvantages.
Bid/Ask Spread
The biggest disadvantage is the bid/ask spread. You’re buying from bond dealers when you buy Treasuries on the secondary market. The difference between the price you pay when you buy and the price you receive when you sell is the bid/ask spread. The true price is somewhere in between. You’re paying a slightly higher price than the true price when you buy on the secondary market.
For example, here’s a quote for a 1-year Treasury on the secondary market:
| Price | Yield | |
|---|---|---|
| Bid | 95.428 | 4.814% |
| Ask | 95.493 | 4.743% |
You get a yield of 4.74% when you buy (paying the ask price) but you must pay a yield of 4.81% when you sell (receiving the bid price). The fair value is somewhere in between. Suppose it’s 4.77%, which means you’re getting a yield of about 0.03% lower than the fair value when you buy on the secondary market.
Everyone pays the same price and gets the same yield when they buy a new issue. There’s no bid/ask spread. It may be OK if you pay a bid/ask spread once to buy a 10-year bond and hold it for 10 years but if you pay a bid/ask spread every three months, it adds up fast.
Complicates Taxes
When you buy Treasuries in a taxable account, buying them on the secondary market adds more complications to your taxes than buying new issues. You’ll need to know what to do with accrued interest and, if applicable, amortizable bond premium (see IRS Schedule B Instructions). They’re not impossible to deal with but it’s still extra work.
Selling Treasuries in a taxable account on the secondary market before they mature adds yet more complications to your taxes. If you must buy Treasuries on the secondary market in a taxable account, at least hold them to maturity and don’t sell them on the secondary market.
Buying or selling on the secondary market in an IRA doesn’t affect your taxes.
Must Place Order When the Market Is Open
When you buy a new issue, you need to place your order during an order window but you can do it in the evening or on weekends. You’re good to go as long as your order goes in by the night before the auction date.
When you buy on the secondary market, you must place your order when the bond market is open. That’s typically Monday through Friday, 8:00 a.m. to 5:00 p.m. Eastern Time. This may interfere with your schedule.
No Auto Roll
Some brokers such as Fidelity and Charles Schwab offer an optional “auto roll” feature when you buy new-issue Treasuries. If you enable the feature when you buy, they will automatically place a new order for the same term and face value when this Treasury matures. It’s especially helpful for short-term Treasuries.
This feature is only available for new issues. You can’t “auto roll” when you buy on the secondary market.
Online Brokers
If you have good reasons to buy Treasuries on the secondary market and you understand and accept the downside, here’s how to do it at some major online brokers. Click on the link to jump directly to the section for the broker you use — Fidelity, Vanguard, Charles Schwab, and Merrill Edge.
Fidelity
Here are the steps to buy Treasuries on the secondary market in a Fidelity account. Fidelity doesn’t charge fees for buying Treasuries on the secondary market.
Under News & Research on the top, click on Fixed Income, Bonds & CDs.
Click on the Bonds tab.
U.S. Treasury and Secondary are selected by default. Suppose you want a Treasury that matures in November 2023. Enter the from-and-to months in the maturity range fields. The button tells you how many Treasuries fit your search. A CUSIP for bonds is like the ticker symbol for stocks.
You see a list of Treasuries available. Look at the Ask columns when you’re buying. The Yield to Maturity and Yield to Worst numbers are always the same for Treasuries.
You won’t necessarily get the quoted Yield to Maturity in this table because those yields are for the minimum quantity in the Price | Qty(min) column. For example, you’ll have to buy $3 million of face value in the Treasury Bill maturing on 11/02/2023 to get the 4.755% yield to maturity (3,000 in the parenthesis means $3 million because 1 bond is $1,000 of face value).
The $3 million minimum is only the minimum for the quoted price and yield. You can still buy a smaller quantity. You’ll just have to pay slightly more and get a slightly lower yield than a $3 million order.
After scanning the results table, suppose you’re interested in the Treasury bill that matures on 11/02/2023. Click on the Buy button next to this Treasury.
Click on the Account dropdown to select the account in which you will buy this Treasury. Click on More Quotes – Depth of Book and Recent Trades to see the price and yield for the quantity you’ll buy.
Look at the Ask Prices when you’re buying. Find the quote for the minimum quantity you’re buying. If you’re buying $10,000 face value, you won’t get the price and yield for the $3 million minimum or the $250,000 minimum. You’ll pay a slightly higher price and get the yield for a $1,000 minimum order size, which is 4.740% in the screenshot.
If you’re satisfied with the quoted yield, enter the quantity you’d like to buy. 1 bond is $1,000 face value. To buy $10,000 face value, enter a quantity of 10. The minimum order size is 1 for $1,000 face value.
This final screen shows how much you’ll pay for this order. The money will come out of your cash balance and money market funds. Principal and interest payments will automatically go into your cash balance. You can’t “auto-roll” when you buy on the secondary market.
This specific Treasury doesn’t have any accrued interest but some others do. You pay the accrued interest to the current owner and you get it back in the next interest payment. If you’re buying in a taxable account, you’ll have to remember to subtract the accrued interest when you do your taxes. Otherwise you’ll pay more taxes than you really owe.
Vanguard
Follow these steps to buy Treasuries on the secondary market in a Vanguard brokerage account. Vanguard doesn’t charge fees for buying Treasuries on the secondary market.
Click on the three dots next to Transact near the top right of your account and scroll toward the bottom. Click on Trade bonds or CDs.
Click on the Treasuries tab. The Secondary radio button is selected by default. Enter the range of maturity dates you’re interested in and click on Search.
You get a list of available Treasuries. You can click on the heading to sort by maturity or yield. Look at the second line in each row when you’re buying.
You won’t necessarily get the quoted Yield to Maturity in this table because those yields are for the minimum quantity in the Min. qty column. For example, you’ll have to buy $1 million of face value in the Treasury Bill maturing on 11/02/2023 to get the 4.756% yield to maturity (1,000 means $1 million face value because 1 bond is $1,000 face value).
The $1 million minimum is only the minimum for the quoted price and yield. You can still buy a smaller quantity. You’ll just have to pay slightly more and get a slightly lower yield than a $1 million order.
Suppose you’re interested in the Treasury maturing on 11/02/2023. Click on Show more in that row.
Now you will see the price and yield for smaller orders. Look at the Ask side when you’re buying. Find the quote for the minimum quantity applicable to you. If you’re buying $10,000 face value, you won’t get the price and yield for the $1 million minimum or the $250,000 minimum. You’ll pay a slightly higher price and get the yield for a $1,000 minimum order size, which is 4.752% in the screenshot. Click on the Buy link next to the applicable minimum order size.
You’ll see a page full of information about this Treasury. Click on the Buy button if you’re still interested in buying it.
You have to check the box to say you know what you’re doing. Enter a quantity of 10 to buy $10,000 face value. Click on Calculate to see the yield again.
You see a big warning on the top saying you’re paying a higher price for your small order. Nothing you can do here unless you can afford to buy $250,000 or $1 million.
Now comes the final screen before you submit the order or cancel. You see the yield, the accrued interest if applicable, and the net amount that’ll come out of your settlement fund. Principal and interest payments will automatically go into your settlement fund. You’ll have to reinvest those payments on your own.
This specific Treasury doesn’t have any accrued interest but some others do. You pay the accrued interest to the current owner and you get it back in the next interest payment. If you’re buying in a taxable account, you’ll have to remember to subtract the accrued interest when you do your taxes. Otherwise you’ll pay more taxes than you really owe.
Charles Schwab
You can buy Treasuries on the secondary market in a Charles Schwab account as well. Schwab also doesn’t charge fees on buying Treasuries on the secondary market.
Click on Trade in the top menu and then Find Bonds & Fixed Income.
I don’t have more screenshots for Charles Schwab at this moment but the process should be similar to Fidelity and Vanguard. I’ll add screenshots here when I have them.
Merrill Edge
Buying new-issue Treasuries at Merrill Edge requires a phone call and a $30 fee but you can buy Treasuries on the secondary market online without a fee.
Click on Trade in the top menu and then Fixed Income.
Click on the Fixed Income Screener link to find the CUSIP for the Treasury you want. The CUSIP for a bond is like the ticker symbol for a stock.
Click on Treasuries.
Suppose you want a Treasury that matures in November 2023. Click on Maturity and then choose the month and the year.
You get a list of Treasuries that mature in that month. Click on any heading to sort by that column. Yield-to-worst is the always same as yield-to-maturity for Treasuries.
Suppose you picked one based on the maturity date and the yield. Click on the three dots next to that Treasury and then click on Trade.
You’re back to the order entry page. Enter the face value you’d like to buy under Quantity. For example, enter 10000 if you’d like to buy $10,000 face value. The minimum order is $1,000 face value for this one but sometimes the minimum can be higher.
The final review page shows how much you’ll pay for this order. You see the yield, the accrued interest if applicable, and the net amount that’ll come out of your cash balance.
This specific Treasury doesn’t have any accrued interest but some others do. You pay the accrued interest to the current owner and you get it back in the next interest payment. If you’re buying in a taxable account, you’ll have to remember to subtract the accrued interest when you do your taxes. Otherwise you’ll pay more taxes than you really owe.
***
Buying Treasuries on the secondary market fills gaps when the term you want isn’t available as a new issue or when the next new-issue auction is too far ahead in the future. It’s a viable option if you understand and accept the downside of buying on the secondary market. Buying them in an IRA removes the tax complications.
The need to buy on the secondary market is especially applicable to TIPS because new-issue TIPS don’t come in as many maturities as nominal Treasuries and they come out much less frequently.
Bond prices change by the minute. New issues won’t always have a higher yield. If a new issue is coming out shortly, you may decide to wait, but you can buy on the secondary market now and lock in the current yield if the auction for the next new issue is quite far ahead.
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