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How to Invest in Government Bonds: Individual Bonds vs. Bond Funds

Invest in government bonds directly through individual Treasuries or indirectly through bond fund shares. Here’s how the choices differ in maturity, payments, price risk, and management.
From TheFinanceBase Team6 min to read

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You can invest in government bonds by buying individual securities directly or by buying shares in a bond mutual fund or ETF. This guide uses U.S. Treasury securities as its example; other countries have different issuers and purchase channels. The central difference is that an individual Treasury has a stated maturity and payment terms, while a fund share does not mature on a date when its underlying bonds do. Neither route prevents market-value losses if you sell while prices are down.

Choose between owning a Treasury and owning fund shares

Consideration Individual U.S. Treasury Government bond fund
What you own A specific Treasury security with its own terms and maturity. Shares in a portfolio investment; you do not own a claim to a particular bond’s maturity payment.
Maturity and cash flow Has a stated maturity and contractual payment schedule. A conventional fund share has no set maturity date; holdings and portfolio value can change.
Management You choose securities and manage their maturities. The fund follows its mandate and manages a portfolio for shareholders.
Diversification You build diversification by selecting multiple securities. One holding can provide exposure to a portfolio; check the actual holdings and strategy.
Value before you sell Market price may be above or below face value before maturity. Share price or net asset value fluctuates with holdings, rates, and other relevant risks.

A U.S. Treasury’s backing concerns the government’s payment obligations; it does not guarantee the price you will receive if you sell early. A fund holding government securities can also decline in value.

How to buy individual U.S. Treasury securities

Know the available security types

Treasury marketable securities include bills, notes, bonds, Treasury Inflation-Protected Securities (TIPS), and floating rate notes (FRNs). Bills are short-term securities that mature in one year or less; TreasuryDirect lists terms from four weeks to 52 weeks. Notes have terms of 2, 3, 5, 7, or 10 years and pay fixed interest every six months. Treasury bonds have 20- or 30-year maturities. TIPS and FRNs have distinct inflation-adjustment and floating-rate features, respectively.

These are electronic book-entry securities backed by the full faith and credit of the United States. TreasuryDirect’s marketable securities overview describes their types and terms.

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Buy at auction or in the secondary market

  1. At auction through TreasuryDirect: Open a TreasuryDirect account and submit a noncompetitive bid. You accept the rate or yield established at auction rather than specifying a minimum return. TreasuryDirect states a $100 minimum purchase in $100 increments; confirm current requirements on its how to buy marketable securities page.
  2. At auction through a financial institution: A bank, broker, or dealer can submit an order. Competitive bidding is available through financial intermediaries: you specify the return you will accept, and the bid may be filled in full, in part, or not at all.
  3. In the secondary market: A financial institution or broker can help you buy or sell an already-issued Treasury. The price depends on market conditions and the security’s terms, and may be above or below face value.

TreasuryDirect currently says a newly purchased marketable security generally must remain in the account for at least 45 calendar days before it can be transferred or sold. Its page notes an exception when the purchase was funded by reinvesting a maturing security. Check the service’s current terms before planning a transfer or early sale.

Understand the price and payment mechanics

Treasury bills do not pay periodic interest. They are sold at face value or at a discount, with the difference paid at maturity as interest. Treasury notes and bonds pay interest every six months. Their market price can differ from face value: if a note or bond’s yield to maturity is above its coupon rate, its price is below par; if the yield is below the coupon, its price is above par. The coupon rate is not the same as the yield an investor earns when buying at a different price.

For some reopened or newly issued notes, bonds, TIPS, and FRNs, the purchase price can include accrued interest. The buyer pays it as part of the price and receives it back in the next regular interest payment. Bills work differently because they do not pay periodic interest. TreasuryDirect explains these purchase details on its purchase guidance page.

How to invest through a government bond fund

A bond fund may be a mutual fund, ETF, closed-end fund, or unit investment trust that invests primarily in bonds or other debt securities. Some focus on government debt; others combine government bonds with corporate, mortgage-backed, municipal, or other securities. A fund’s name alone does not establish its exact government exposure, credit quality, maturity range, duration, or use of derivatives.

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Before investing, review the fund prospectus, latest shareholder report, current portfolio, and expense information. Compare its mandate, duration, maturity profile, holdings, fees, distribution policy, and trading costs with your goal. A fund can simplify portfolio ownership, but its manager may buy and sell securities or replace maturing holdings. Its shares do not promise to reach a particular value on a date you choose.

What can make a government bond investment lose value?

Interest rates and market prices

“A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions,” according to the SEC’s Office of Investor Education and Advocacy in its Investor Bulletin dated June 26, 2013. When rates rise, an older fixed-rate bond may have to fall in price to compete with newly issued bonds. Longer maturities generally have greater rate sensitivity than otherwise similar shorter maturities.

If you hold an individual Treasury to maturity, you can receive its face value at maturity and its contractual interest, assuming the U.S. government meets its obligations. If you sell before maturity, the market price may be lower or higher than face value, and the sale locks in that price. A fund can also fall when rates rise; longer-duration portfolios generally move more when rates change.

Other risks depend on the investment

The SEC’s general bond-risk categories include interest-rate, inflation, liquidity, credit, and call risk. U.S. Treasury issuer credit risk is generally viewed as minimal compared with that of many other issuers, but that does not remove price risk. Inflation can reduce purchasing power, and funds holding non-Treasury government-related or mortgage securities may carry risks that differ from a portfolio of U.S. Treasury securities alone. “Risk-free” is not an accurate general description of a Treasury fund or of an individual Treasury sold before maturity.

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How to decide which route fits your goal

  • Need a known maturity or scheduled cash flow? An individual security has stated terms and a maturity date. A fund share does not mature when its underlying bonds do.
  • Prefer diversification and simplicity? A fund can provide a portfolio through one holding. Managing individual securities means selecting and monitoring each one.
  • Want control over maturity dates? Direct ownership can let you choose securities to align maturities or cash flows with a goal. A fund manager follows the fund’s strategy, which may maintain a target duration or maturity range.
  • May need the money early? For an individual security, consider the possibility that selling before maturity means accepting a market price below face value. Fund shares also remain exposed to market price changes.
  • Comparing costs and access? Check current expense ratios, brokerage charges, bid-ask spreads, transaction fees, minimums, and account terms. Costs vary by provider and fund.
  • Seeking Treasuries specifically? Confirm the fund’s current holdings and mandate rather than relying only on its name; “government” exposure can include securities beyond U.S. Treasuries.

Neither approach is best for everyone. The choice turns on your time horizon, need for predictable cash flows, preference for portfolio diversification or control, comfort managing maturities, and tolerance for interim price changes.

Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.

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