You can invest in fixed income securities by buying individual bonds through a brokerage account or TreasuryDirect, or by purchasing bond ETFs and mutual funds that hold baskets of bonds for you. The approach you choose depends on how much you want to invest, how hands-on you want to be, and what role bonds play in your overall portfolio. Fixed income securities pay you regular interest and return your principal at a set date, making them a core tool for generating predictable income and balancing the volatility of stocks.
Types of Fixed Income Securities
The fixed income universe is broader than most people realize. Each type carries different levels of risk, different yields, and different tax treatment.
- U.S. Treasury securities: Issued by the federal government, these are considered the safest bonds available. They come in several flavors: Treasury bills (mature in a year or less), Treasury notes (2 to 10 years), and Treasury bonds (20 or 30 years). The 10-year Treasury currently yields in the range of 3.75% to 4.25%. Treasury Inflation-Protected Securities (TIPS) adjust their principal based on inflation, giving you a built-in hedge against rising prices.
- Municipal bonds: Issued by state and local governments to fund public projects. Their main appeal is tax-advantaged interest, which can make them especially attractive if you’re in a higher tax bracket. More on the tax treatment below.
- Corporate bonds: Issued by companies to raise capital. They generally pay higher yields than government bonds to compensate for the added risk that the company could default. Investment-grade corporate bonds (rated BBB or higher) are relatively safe, while high-yield bonds (sometimes called “junk bonds”) carry more risk and pay more interest.
- Certificates of deposit (CDs): Issued by banks with FDIC insurance up to $250,000, CDs lock your money for a set period in exchange for a guaranteed interest rate. They’re the simplest fixed income option but offer less flexibility.
- Agency bonds: Issued by government-sponsored entities like Fannie Mae or Freddie Mac. They typically yield slightly more than Treasuries and carry an implicit (though not explicit) government backing.
Where and How to Buy
You have two main channels for purchasing fixed income securities: directly from the government or through a brokerage.
TreasuryDirect
TreasuryDirect is the U.S. government’s online platform for buying Treasury securities and savings bonds. It’s completely free with no fees, no matter how much or how little you invest. You set up an account as an individual (or as an entity like a trust or partnership), link your bank account, and buy directly at auction. When your securities earn interest or mature, the payment deposits automatically into your linked bank account. You can view and manage holdings around the clock.
The limitation is selection. TreasuryDirect only handles Treasury securities and savings bonds. You can’t buy municipal or corporate bonds here, and certain specialized Treasury products like STRIPS (zero-coupon bonds created by separating interest payments from principal) aren’t available on the platform either.
Brokerage Accounts
A brokerage account gives you access to the full range of fixed income investments: Treasuries, municipals, corporates, agency bonds, bond ETFs, and bond mutual funds. Most major brokerages let you search their bond inventory by type, maturity date, credit rating, and yield. Some charge a markup on bond purchases (built into the price rather than listed as a separate commission), while others offer commission-free trading on certain Treasury or new-issue bonds.
If you want to place competitive bids at Treasury auctions, meaning you specify the yield you’re willing to accept rather than taking whatever the auction produces, you need to go through a broker. You can always transfer Treasury securities purchased through a broker into your TreasuryDirect account later if you prefer to hold them there.
Individual Bonds vs. Bond Funds
One of the first decisions you’ll face is whether to buy individual bonds or invest through bond ETFs and mutual funds. Each approach has real trade-offs.
Individual bonds give you control over exactly when your principal comes back. If you buy a 5-year Treasury note and hold it to maturity, you know precisely what you’ll earn and when you’ll get your money. This predictability is the core advantage. The downside is that bond trading happens mostly over the counter, which means less price transparency and less liquidity compared to stocks. Building a diversified bond portfolio with individual securities requires meaningful capital, often $50,000 or more to spread across enough issuers and maturities.
Bond ETFs trade on stock exchanges throughout the day, just like stocks. A single purchase gives you instant diversification across dozens or hundreds of bonds, making them far more practical for smaller portfolios. You can start with a few hundred dollars. The trade-off is an ongoing management fee (called an expense ratio), typically ranging from 0.03% to 0.50% per year depending on the fund. Over a long holding period, those fees add up and eat into returns. Bond ETFs also don’t have a fixed maturity date the way individual bonds do. The fund continuously buys and sells bonds, so your principal value fluctuates with interest rates rather than returning to a set amount on a specific date.
Target-maturity bond ETFs offer a middle ground. These funds hold bonds that all mature in the same year, then distribute the proceeds to shareholders. You get the diversification of a fund with something closer to the predictability of an individual bond.
Building a Bond Ladder
A bond ladder is a strategy where you buy bonds with staggered maturity dates, spreading your investment across several time horizons. For example, you might put equal amounts into bonds maturing in one, two, three, four, and five years. When the shortest bond matures, you reinvest that principal into a new five-year bond at the end of the ladder, keeping the cycle going.
This approach solves two problems at once. First, it manages interest rate risk: if rates rise, you’ll reinvest maturing bonds at the new higher rates rather than being locked into a single low rate for years. If rates fall, only a portion of your portfolio rolls over at the lower rate. Second, it provides regular liquidity, since a bond matures and returns cash to you at predictable intervals.
A few practical tips for building a ladder. Space your maturities based on when you’ll need money. If you want access to some cash every six months, buy bonds maturing every six months. Avoid callable bonds, which are bonds the issuer can redeem early. Callable bonds defeat the purpose of a ladder because they might get paid off ahead of schedule, typically right when interest rates drop and you least want to reinvest. You can build a ladder with individual bonds or with target-maturity ETFs if you want simpler diversification within each rung.
How Fixed Income Interest Gets Taxed
The tax treatment of bond interest varies significantly by bond type, and understanding the differences can change which securities make sense for your situation.
Corporate bond interest is fully taxable at both the federal and state level, just like ordinary income. If you’re in the 24% federal bracket and your state taxes income at 5%, you’ll keep only about 71 cents of every dollar in interest.
Treasury bond interest is taxable at the federal level but exempt from state and local income taxes. This makes Treasuries more attractive than their stated yield might suggest if you live in a state with high income tax rates. A 4% Treasury yield could be worth more to you after taxes than a 4.3% corporate bond yield, depending on your state rate.
Municipal bond interest is generally exempt from federal taxes. If you buy a bond issued in the state where you live, the interest is typically exempt from state taxes too, giving you a double tax advantage. This makes munis particularly valuable for investors in higher tax brackets. To compare a muni yield fairly against a taxable bond, divide the muni yield by (1 minus your marginal tax rate). A 3% muni yield for someone in the 32% federal bracket is equivalent to about a 4.4% taxable yield.
One nuance: if you buy a bond at a price above its face value (called a premium), or below face value (a discount), the tax math changes. The premium or discount gets amortized over the life of the bond, affecting how much of each interest payment counts as taxable income. Your brokerage will typically handle this calculation on your year-end tax forms.
How Much to Allocate
The right amount of fixed income in your portfolio depends on your time horizon and tolerance for seeing your account balance swing. A common starting framework is to hold a percentage in bonds roughly equal to your age, so a 35-year-old might keep 35% in fixed income. That’s a rough guideline, not a rule. Someone with a pension or other guaranteed income might hold less in bonds. Someone approaching retirement or saving for a near-term goal might hold more.
What matters most is that your fixed income allocation serves a clear purpose: dampening portfolio volatility, generating income you plan to spend, or preserving capital you’ll need within a few years. Shorter-term bonds (one to three years) offer more stability and less interest rate sensitivity, while longer-term bonds (10 years or more) typically pay higher yields but can lose significant value if rates rise.
Getting Started Step by Step
If you’re new to fixed income investing, a practical path looks like this. First, decide what role bonds will play in your portfolio. Are you looking for steady income, capital preservation before a major purchase, or diversification against stock market drops? That answer shapes everything else.
Next, open the right account. If you only want Treasuries and savings bonds, a free TreasuryDirect account works. For broader access to munis, corporates, and bond funds, use a brokerage account. Many investors use both.
Start simple. A broad bond ETF that tracks the total U.S. bond market gives you exposure to Treasuries, corporates, and agency bonds in a single holding. As your portfolio grows and your needs become more specific, you can layer in individual bonds, build a ladder, or add municipal bond funds for tax efficiency. The key is matching your bond investments to when you’ll actually need the money. A bond that matures right when you need the cash eliminates the risk of having to sell at a loss in the meantime.