Our experts choose the best products and services to help make smart decisions with your money (here’s how). In some cases, we receive a commission from our partners; however, our opinions are our own. Terms apply to offers listed on this page.
You can buy some types of bonds directly from the US government.
Tetra Images/Getty
Buying bonds is a great way to diversify your assets and produce consistent income.
Bonds can be owned indirectly through a mutual fund or ETF.
Certain government bonds can only be purchased through the US Treasury.
For many investors, bonds aren’t the most exciting assets to own. But they can play an important role in building a strong investment portfolio. They can also add a layer of diversification and stability to your investment strategy.
“Bonds have a long history of moving in the opposite direction of the stock market during times of market volatility, helping to provide your portfolio with a smoother journey,” says Shane Sideris, a chartered financial analyst (CFA) and co-founder and financial planner at Synchronous Wealth Advisors.
See Insider’s picks for the best online brokers »
What are bonds
Through bonds, investors lend money to governments or companies in exchange for regular payments at certain intervals, usually semi-annually. Bonds are known as fixed-income assets as they provide a regular income stream.
“They trade in the public markets just like stocks, and have their values fluctuate based on two key variables: inflation and interest rates,” says Jarah D. Macfarlane, an accredited portfolio management advisor (APMA) and founder of Macfarlane Investors.
There are four main categories of bonds: corporate, municipal, government (federal), and agency bonds.
Corporate bonds: Issued by individual companies, corporate bonds are used to expand the company’s operations. The interest earned from corporate bonds is taxable but generally offers higher returns than government or municipal bonds.Municipal bonds: Also known as “munis” these bonds are issued by state and local governments. Municipal bonds are used to build roads, schools, and other projects. Interest payments from muni bonds are tax-free.Government bonds: Government bonds are issued by the US Treasury and is regarded as one of the safest investments available. Examples of government bonds include T-bills, T-notes, and T-bonds.Agency bonds: What separates agency bonds from government bonds is the issuer. Agency bonds are issued by any government department that is not the US Treasury. These examples could include the Small Business Administration or the Federal Housing Administration.
Note: T-Bills have maturities between four weeks and 52 weeks. T-Notes are between 2 to 10 years, and T-Bonds are either 20 or 30 years.
How to buy bonds
There are three primary ways to buy bonds: through your brokerage account, direct from the US Treasury, or indirectly through a mutual fund or ETF.
1. How to buy bonds through a brokerage
The first step to buying a bond through your brokerage is to check and see if it offers individual bonds. Generally older, legacy brokerages will offer bonds while newer fintech companies will not.After selecting a brokerage where bonds are available and logging into your account, navigate to the products or trading menu. In most cases, you will find an option for bonds and CDs. If not, then you may find an option for bonds under the fixed-income section.Depending on the brokerage you use, you may be presented with a grid with bonds organized by type (government, corporate, etc.) along with their interest rates and maturities.Select the category you’re interested in to find a list of bonds and select the buy button.
Important: Remember that most bonds are denominated in $1,000 increments and there may be a minimum purchase required. If your brokerage has a minimum purchase of, say, nine bonds, you will need to spend $9,000 before any fees.
2. How to buy bonds through a mutual fund or ETF
Buying bonds through a mutual fund or ETF is the most common way that most investors add bonds to their portfolios. The process is similar to buying a stock.Begin by navigating to your investing account and finding the trading menu.Once found, you will need to enter the ticker symbol of the fund that you’re looking to invest in.After the symbol has been entered, your brokerage should display all of the fund’s share price. From there you can execute the trade to buy as many shares as you desire.
See Insider’s picks for the best investment apps »
3. How to buy bonds directly from the government
To buy bonds issued by the US Treasury, your first step is to register for an account at TreasuryDirect.govNavigate to the “Buy Direct” tab.You will be presented with a number of options to choose from, select the type of bond you want to buy and submit the purchase.
Note: You can buy most government bonds, including treasuries through your brokerage, however I-Bonds can only be purchased through Treasury Direct.
Key considerations when you buy bonds
When considering bonds it can be helpful to think about them in the context of inflation and the direction of interest rates.
“Over very long periods of time, bond returns will equal the interest rate they were purchased at, but investors seldom access bonds in this regard,” says Macfarlane.
This is because the interest rates set by the Federal Reserve have influenced the level of inflation on everyday goods. If inflation is high, the Fed will raise interest rates and as a result newly issued bond rates are higher than older bonds. The reverse is true when the Fed cuts rates.
See Insider’s picks for the best robo-advisors »
Keep in mind that bonds generally underperform compared with stocks.
“Bonds have lower returns than stocks, but they also have lower risk,” says Sideris. “Historically, US bonds have returned 5% per year and U.S. stocks returned 10% per year. But the stock market has lost more than 10% in a year 14 times in the last 100 years, but the bond market has only done this twice.”
If you’ve decided to add bonds to your portfolio, how much should you add?
“An investor’s recommended bond allocation will vary greatly based on goals, risk tolerance and time horizon,” says Macfarlane.
One common rule of thumb to use is the age method. “This postulates that an investor should have a percentage allocation to bonds equal to their age. A 45 year old pre-retiree might be well suited starting her allocation path at 55% stocks and 45% bonds,” Mcfarlane says.”
As with any rule of thumb, you will want to consider your individual situation and adjust as needed.