This is for anyone who may be interested in purchasing US Treasuries (bills, notes, etc) directly from the US Treasury, but doesn't know how to do it. Specifically, I will explain the process I go through as I purchase a TIPS (Treasury Inflation-Protected Security) at this week's auction.

Buying Treasuries directly is very easy. There is no need to go through a broker or pay any fees. All you have to do is set up an account with Treasury Direct. I have an on-line account with Treasury Direct that is linked to my primary checking account. That means that any time I purchase a Treasury the funds are automatically taken out of my checking account, and any funds I receive (interest payments and proceeds from matured Treasuries) is automatically deposited to my account. I like having the accounts linked because there is no "lag time" while funds are being moved.

In the past I have purchased T-Bills through Treasury Direct, but I haven't done that for awhile because the interest rates have not been competitive with what I can earn on a MMA or short-term CD. However, I do keep my eye on the T-Bill rates, and no doubt I will buy more in the future.

What I am buying this week is a TIPS: Treasury Inflation-Protected Security.
The minimum investment for a TIPS is $1,000. I will be buying a $3,000 TIPS.

TIPS are currently available in 5-, 10-, or 20-year terms. I will be buying a 10-year TIPS.

Unlike T-Bills which are sold as often as weekly, TIPS are sold infrequently. TIPS are sold either Annually (5- and 20-year terms) or Semi-Annually (10-year term). They are also re-opened Annually or Semi-Annually. That means that if you want to buy a 5- or 20-year TIPS, you only get 2 chances a year. And if you want to buy a 1o-year TIPS, you only get 4 chances a year. If they are something you are interested in, you will definitely want to check out the US Treasury auction schedule and note the dates on your calendar.

The 10-year TIPS I am purchasing was announced today (tho' the announcement had been tentatively scheduled long ago), and the actual auction will take place on Thursday. The TIPS I am buying will be issued on July 16th (because the 15th is a Sunday), and will mature on July 15, 2017.

TIPS pay interest every 6 months, and the principal amount is adjusted for inflation (or deflation). The interest you earn is on the inflation-adjusted amount, so as long as there is inflation your interest payments as well as your principal continue to go up.

This is why I like TIPS:
- They are an extremely safe investment, fully backed by the US government.
- They are a good hedge against inflation. I prefer TIPS to long-term CDs because I know that I'll always be getting "inflation + alpha." I do not have to worry about inflation eroding my principal.
- Once you have a Treasury Direct account set up, they are a breeze to buy.

These are the drawbacks to TIPS:
- They are pretty conservative investments. If you are looking for gangbuster returns, they aren't for you.
- They make tax time just a wee bit more complicated because you get a form "1099-OID" in addition to a "1099-INT." The 1099-OID is for the inflation-adjustment you receive on your principal.
- You have to pay taxes on not only your interest but also the inflation-adjustment to your principal in the year it is received. What that means, quite simply, is that you are paying taxes on money you haven't even received yet.
- The government's formula for inflation may or may not accurately reflect the "real rate of inflation" you experience in your life.

These are the steps I went through to purchase the TIPS:

1. I checked the auction schedule and made a note on my calendar that a TIPS auction announcement was scheduled for today.

2. Once the auction announcement was posted at the Treasury Direct web site this morning, I logged on to my Treasury Direct account and entered a buy order for a $3,000 10-year TIPS. That means that I now have a non-competitive bid entered for Thursday's auction.

3. I went to on-line banking and transferred $3K from my MMA to my checking account. I could have waited a few days to do that, but I didn't want to risk forgetting or being unable to do that and being charged an overdraft fee. [Of course, this means I lose a bit of interest income because my checking account pays less than my MMA.]

Easy as pie.

Because my bid is non-competitive, I won't know what the interest rate will be until the auction is completed. Once the auction results are posted, I'll blog again and let you know how it went.

Want to learn more?

Treasury Direct web site:
http://www.treasurydirect.gov

To learn more about TIPS in general, start here:
http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Upcoming auctions are announced here:
http://www.treasurydirect.gov/instit/annceresult/press/press_secannpr.htm