Do I have to buy treasury notes through a bank or brokerage firm?

I would like to purchase $5,000,000 in ten-year treasury notes at a competitive bid. Is it true that I cannot purchase these by myself and must use a bank or brokerage firm? How much interest must I lose to have them assist in this purchase? What will they charge me to do this transaction?

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Joshua is the #1 ranked financial advisor on Investopedia’s Advisor Insights

There are three ways to purchase Treasury notes directly; through a brokerage, through a bank, or directly from the U.S. Treasury at Buying it directly through the U.S. Treasury will mean it is a noncompetitive bid purchase, so if that is a requirement, you will need to use a broker or a bank. There may be a fee with buying them from a bank or brokerage firm, but it likely won't be a significant percentage of a $5 million purchase. As with all services, you will want to shop around to see what value each company provides and at what cost.

Understand the Risks of Treasury Notes

The amount you are looking at purchasing is significant, so it is probably worthwhile talking with a fiduciary financial advisor to get advice on return expectations, opportunity costs, and risks of such a move. While most people think of Treasury Notes as risk-free assets, that is only academically true. While they are considered free from default risk, Treasury Notes carry significant other risks including interest rate risk and inflation risk. This is especially true with today’s interest rate environment.

Interest Rate Risk

If interest rates rise over the next few years, the market value of your portfolio will decline if you have to sell the notes prior to maturity. With up to a 10-year maturity, these notes are going to be impacted significantly by any potential increases in market interest rates. Assuming a 9-year duration on the Notes you purchase, if interest rates on Treasuries increase by 1% you would experience a 9% decrease in your portfolio’s value.

Inflation Risk

Similarly, with interest rates at their current lows, inflation could significantly eat away at the true value of this portfolio over the next decade. Treasuries have historically performed slightly above inflation, but that doesn’t mean they will always beat out inflation over shorter periods of time.

Final Thoughts

I am NOT saying this is a bad investment, as I have no idea what your goals are nor what the rest of your portfolio looks like. I do think, however, it will be important and benefit you to have a full understanding of how these and other risks could impact your portfolio so you are comfortable with the potential downsides.

Joshua Escalante Troesh is a Tenured Professor of Business and advises people across the country on their finances. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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