STEP 1
Click the "Investment Products" tab and go to the "Fixed Income & Bonds" section of Fidelity.com.
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[/align]This page has lots of information about bonds, so feel free to click around this page a bit before you click on the "Find Bonds" button.
STEP 2
In this tutorial, I'm going to buy the longest Treasury bond I can find on the Secondary Market. The Secondary Market is simply the open market where Treasury Bonds are bought and sold. You're not going to receive any paper or stained certificates in the mail or anything like that. It's all done electronically now, just like stocks are handled. You could certainly buy your bonds via the scheduled Treasury Auction, and the process is almost identical to what we'll be covering here (you would just do a "non-competitive" bid). Again, once you purchase the bonds, it makes no difference if they were purchased by you at auction, or sold to you on the Secondary Market — the bonds are the same either way. However, you can only sell your bonds on the Secondary Market (since you won't be holding your own Treasury Auctions).
Some brokerage houses will offer free Treasury purchases via the Treasury Auctions and make you pay a fee for Secondary Market transactions. I recommend checking what the fees are for both auction and secondary transactions before you purchase so that you don't find yourself paying a $40 fee to sell the bonds you got for free at the auction. Again, Fidelity, Vanguard and Schwab do not charge a fee when you buy and sell Treasuries online. And Vanguard appears to now offer free Treasury transactions over the phone as well.
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[/align]So, you just click on "Secondary" and proceed to the next page.
STEP 3
This is a Search page to find the kinds of Treasuries you want. (You can click on each field name for a glossary explanation.)
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[/align]The options on this page look confusing, but they are only there to help you narrow down they type of Treasury you want to purchase. If you don't get specific with the search fields, you're probably just going to get a very long list of bonds, which is fine. For this tutorial, we are purchasing the longest Treasury Bonds we can find. I selected "Bonds" for the "Type" of Treasury, and this will just filter out the Bills, Notes and TIPS from the resulting list. For "Call Protection" I put "Yes," though in reality, every Treasury Bond has call protection. For "Zero Coupon" I selected "No" because we want bonds with a coupon for the Permanent Portfolio. You can select "Graph" or "Table" for your resulting display. I usually choose "Table" because I just want to read the basic details. You can leave the other fields blank to see every available Treasury bond. Now, let's click "Show Offerings" and we'll see what appears...
STEP 4
Here is the list of the available bonds on the Secondary Market...
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[/align]I've cut out the middle of the list so that you can see the longest Treasury bond is at the bottom of this list. Your list may look different depending on what options you chose. Or your list might be multiple pages long if you didn't narrow your options down on the search page. You can always edit the search in the upper-right hand corner, above the list. On this particular list, the longest bond is at the end of the list. You can see that the maturity date is 2041 — 30 years from now. That's what we want for the Permanent Portfolio.
You may be tempted to buy the bond with the larger coupon. However, keep in mind that the higher coupon will sell at a premium. The truth is that it doesn't really make a difference. The Secondary Market is so liquid and efficient that the bonds are priced in a way that you aren't going to make more money by buying the higher coupon — you'll just pay more to get more more.
For the Permanent Portfolio, we don't care what the coupon is. We just want the longest Treasury bond we can find, because longer Treasuries are more powerful. We've found the longest Treasury available here at the bottom of our list, so let's buy it. Click on the "Trade" button next to that Treasury bond.
If you have multiple accounts, Fidlity will ask you which account you want to purchase the bonds in. Select the proper account and proceed.
STEP 5
This is the order page. If you're familiar with Fidelity, you'll see that this is very similar to the screen you see when you're about to buy a stock.
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[/align]Make sure you've selected the right account. For the "Action" field, select "Buy." Next you'll see the CUSIP# for the bond you selected. Every type of stock or bond has a unique CUSIP#. So, everyone who bought the same bond as you will have that exact CUSIP# associated with their bond. This number is helpful for quickly looking up bond details. The description explains the bond associated with that CUSIP#, and that's what we'll be purchasing here.
Next, we'll select the quantity of bonds we want to purchase. As you can see from the text below the quantity field, each bond has a face value of $1,000. Depending on the market price of the bond, you may pay more or less than this face value.
Long Term Treasuries are in very high demand right now, so as I'm writing this (as of 2:38pm on Wednesday, October 26, 2011), just 1 of these 30 year bonds is currently worth about $1,110. In this example, I have $5,860 in this account, so I should be able to purchase 5 of these bonds. So, I put "5" into the quantity and now I just need to select the Order Type.
Many people suggest only using Limit Orders for any purchase, so that you can choose the maximum price you're willing to pay. If you use a limit order, you'll want to look at the Ask/Bid prices being shown in the Real-Time Quotes section of the page (in the lower-right-hand corner). For this tutorial, I'm just going to use a Market Order (understanding that some High Frequency Trader may make a few pennies off of me in the process). If nothing else, a Market Order will make sure the transaction happens quickly.
Next, I will choose "Preview Order" to check my transaction one more time. Once everything looks good, be sure you click "Confirm" on the next screen to place your order.
One word of warning. Once your order is placed, you may see that the quantity of your order has shifted from the bond quantity to the face value number (i.e. my quanity would change from 5 to 5,000 once the order has been placed). Don't worry, this is normal. You can also call up Fidelity to confirm that everything is ok. (I believe this is due to the fact that the Treasury actually sells these bonds in $100 increments, even though Fidelity only lets you purchase them in $1,000 increments).
Once the order has been placed, it will appear in your portfolio listing after the Settlement Date (usually three business days later). And after the end of each day, Fidelity will update the market price of your bonds in your portfolio so you'll always know what they're worth.
That's all there is to it. Please leave comments and questions below and I'm sure someone here will happy to help.
* NOTE: When you purchase bonds through a brokerage, such as Fidelity, the bonds are typically held in the brokerage's "street name" registration.
http://www.sec.gov/investor/pubs/holdsec.htm
In other words, the bonds are registered in the brokerage's name, and they act as a custodian for your bonds. You are the "beneficial owner" only in their internal records. Your brokerage house may "borrow" your bonds for their own lending purposes, and there is always a small amount of counterparty risk with this arrangement. This is how the brokerage is able to offer "free" Treasury trades. You're basically buying assets for the brokerage's own use. You absolutely have a legal right to those bonds. But, you just need to understand that all brokers have small amounts of counterparty risk.
Harry Browne believed that during times of severe market stress is when counterparty risk was at its highest — when you needed your investments the most. If your brokerage were to declare bankruptcy — and followed the rule of law (and they didn't illegally steal your assets) — your ownership of your bonds would need to be verified by the bankruptcy trustee before they were released for transfer to another custodian.
As far as I know, TreasuryDirect appears to be the best way to have direct ownership of Treasuries. TreasuryDirect is excellent for holding bonds to maturity. However if you need to sell your bonds in TreasuryDircet before they reach maturity, you need to fill out a form to transfer them to a broker (such as Fidelity) for selling on the Secondary Market.
