IMPORTANT NOTE: I wrote this article on Wednesday to be published Sunday while I am visiting family out of town. It appears that Vanguard has backed off on raising the bond minimum to $10,000, based on Boglehead discussions posted Saturday and today.
The note announcing the change has been removed from the trading platform. If anyone gets further updates please post them in the comments.
By David Enna, Tipswatch.com
A few years ago, I was writing about bid-ask spreads for TIPS on the secondary market and noted I was able to purchase a “very small” order of $10,000 with a bid-ask spread only 2 basis points below a high-dollar purchase..
What I meant: In the world of TIPS trading, $10,000 is an insignificant amount. But a reader immediately jumped all over me for saying a $10,000 purchase is “very small” and noted that a lot of investors can’t afford that large a purchase.
Point taken and lesson learned. But then last week we got this message at the top of Vanguard’s bond-trading platform:
As of September 13, Vanguard said, it would raise its minimum bond purchase, currently $1,000 par value, to $10,000. That would apply to all bond purchases — including Treasury auctions. Only new issue CDs would be exempt from the new policy.
That would be a dramatic and unwelcome change.
I know that many Tipswatch readers use the Vanguard site to make small Treasury auction purchases, especially for T-bills. For example, an investor could buy $1,000 in 4-week Treasurys every month and then roll them over to cap out at $12,000 in one year. That makes sense for an investor who can’t afford a one-time $10,000 investment.
From my own experience: When TIPS real yields were just starting to rise from below-zero in April 2022 I began “nibbling” into TIPS at auction, usually with $5,000 purchases. That would no longer be allowed.
And this year, as TIPS and other investments in my traditional IRA have matured or paid interest, I have purchased T-bills maturing before the end of the year to prepare for RMDs beginning in January 2026. All of those purchases were less than $10,000.
As of last week, you could still do a $1,000 minimum purchase for a TIPS auction, as shown in this quote from Wednesday. That option would have ended on September 13, five days before the next TIPS auction of a reopened 10-year.
I tend to do all my individual bond purchases on the Vanguard site, where I have my individual IRA. I also have an account at Fidelity, where $1,000 remains the minimum bond purchase for a Treasury auction. TreasuryDirect has a $100 minimum.
At all brokerages, bond sellers set minimum lot-size amounts, which will vary and will often lock out a $1,000 purchase. Vanguard said its new policy would not apply to “sell orders” — which are placed on an exchange outside of Vanguard — so it may be possible to find sellers still allowing $1,000-lot offers. I find this very confusing.
Clearly, however, auction purchases would have had a $10,000 minimum.
Why do this?
Vanguard has not stated its reasoning for this move (or the apparent reversal), which is going to lock some investors, especially small-scale investors, out of buying individual bonds. And then what? In Vanguard’s brief announcement, it provides a link to “other products that have lower minimums.” The link goes to a page titled “Investment products: Mutual funds, ETFs and more,” which actually offers no advice at all on products with low minimum investments.
Obviously, Vanguard’s reason No. 1 is cost savings, because these small-lot bond purchases entail some costs and some Treasury purchases have zero commissions. So Vanguard’s aim is to get you out of this market and into one of its other, more profitable products.
For evidence, just look at the top left corner of your account dashboard for a prominent ad promoting Vanguard’s new and heavily promoted Cash Plus Account:
I don’t have a Vanguard Cash Plus Account (I use Fidelity’s Cash Management Account instead). Vanguard’s version is probably a fine product — and it has no minimum investment — but it is currently paying 3.65% versus 4.24% for Vanguard’s much-loved Vanguard Treasury Money Market Fund (VUSXX).
Of course, I totally accept that a cash management account — with its flexibility for bill payments and withdrawals — would have a higher expense ratio than VUSXX’s ultra-low 0.07%. Fidelity’s CMA allows access to its Treasury Money Market Fund (FZFXX), currently yielding 3.93%. Its expense ratio is 0.42%.
By increasing its minimum bond investment to $10,000, was Vanguard trying to prod small-scale investors to move into its Cash Plus Account? For many investors, that could actually be a smart move. But for others, the higher bond minimum is at least an annoyance.
Reaction or over-reaction?
Vanguard has apparently reversed this $10,000 minimum before it went into effect. I hope that is true and the decision was based on strong investor feedback.
In my case, why buy T-bills in a traditional IRA when I can (and do) use VUSXX for idle cash? The yields are going to be similar. The reason is psychological, I guess, in that I am trying to use T-bills to set aside cash for a specific purpose — in my case, future required minimum distributions.
Other investors may be setting aside locked-up cash for property taxes, wedding expenses, a car purchase, even I Bond purchases next year. Or maybe they want to build a 10-year bond ladder with $5,000 in each year? The new $10,000 minimum is going to throw a wrench into those strategies.
This isn’t an Earth-shattering policy change. But it would affect investing plans for some of Vanguard’s customers.
Years ago, I had a cash account at Wells Fargo that paid current money market rates. For a long time, that rate was about 0.05%, but then over a half year yields surged higher to about 3.0%. I was pleased. Within a month, Wells announced it was changing the terms and the rate dropped to 0.05%, where it remains. I pulled nearly all my investments from Wells Fargo.
I won’t do the same with Vanguard. I am just going to announce that I am disappointed with this decision from an investment firm I have trusted and admired for four decades.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
