Replicating a Treasury Money Market Fund

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Dovahkiin
Posts: 247
Joined: Thu Jan 26, 2012 10:36 pm

Replicating a Treasury Money Market Fund

Post by Dovahkiin »

My Situation:

I'm invested in HFEA in a taxable portfolio margin account at TD Ameritrade holding VOO and TLT directly. I borrow by shorting SPX box spreads in $100k increments around 30 days to expiration. I'm resetting the leverage daily which means I have a fluctuating cash balance. On average, I estimate I have $50k of "left over cash." These cash balances can vary +- $25k in a week depending on market activity.

I don't like trading box spreads under $100k increments as the liquidity is bad - I've gotten interest rates 1.5% to 2% over the rate listed on www.boxtrades.com by being a borrower. It takes a lot of effort and waiting to fill smaller boxes - both as a lender and as a buyer. At this point I'd rather just throw the left over cash in a money market equivalent investment.

With an average $50k of "left over cash" at 3% interest rates I estimate I have an annual $1,500 opportunity cost by keeping a cash balance instead of investing in a money market fund. I'd like to invest this cash in a money-market equivalent. I need unpredictable immediate liquidity needs based on my margin resetting strategy.

One major problem at TD Ameritrade is their money market mutual funds are not marginable securities. They use 100% buying power. TD Ameritrade allows 1% margin on T-Bills held directly and 3% margin if you buy VGSH or SHY directly. (Shorter term treasury ETFs are 15%+ margin or are non-marginable securities.) Then TD Ameritrade's margin rates are really bad (even after negotiation), the "left over cash" drag from $100k box spread increments is better than carrying a $15k or higher margin balance.

TD Ameritrade is commission free buying treasuries at auction. They have a 3 basis point spread commission buying or selling treasuries on the open market. (Buying then immediately selling = 6 basis points.) They have a T+1 settlement.

I'm having a hard time deciding which investment strategy I should follow with my average $50k of "left over" cash balance:
  • Buy 100% VGSH: 3.07% SEC yield, 1-3 year treasury fund, 1.7 basis point spread. 1.9 years duration.
  • 4-week T-Bill Ladder: 2.14% auction yield, 1.8%-1.0% market yield, 0.03 duration, 3-6 basis points spread. Buy 25% each week, roll weekly. Sell nearest duration when I need immediate cash.
  • 52-week T-Bills: 3.18% yield, 1.00 duration, 3-6 basis point spread: Treat it the same as I would with VGSH.
  • Keeping brokerage cash: 0.10% yield, $0 risk, takes zero thought or effort, guaranteed slippage costs of $1,500 a year.

There's pros and cons to each. In my leverage resetting strategy I tend to have large cash balances when the market moves sideways and when interest rates increase (de-leveraging SPY and TLT.) That means I'd be buying VGSH when prices are low, and selling VGSH when prices are high. VGSH's bid/ask spread is half that of buying and selling at the market treasuries at TD Ameritrade. Finally, it should all theoretically average out because my investment needs is higher than 30 years.

On the other hand, it feels wrong to use VGSH as a money-market equivalent. It certainly has duration risk for surprise interest rate increases. If I did the 4-week T-bill ladder, it's average duration is 2/52 weeks, and if I only need to sell less than 25% to buy more SPY/TLT then the duration is effectively 0. The unfortunate thing though is the bid/ask spread appears to be the worst at TD Ameritrade vs letting the t-bills mature.

Finally, there is splitting the difference: Buying tomorrow's 52-week T-Bills at auction has a very impressive implied yield. It has a lower duration.

One major drawback of trading Treasuries at TD Ameritrade is I can only place the order on the website. The mobile website doesn't give you the option, the mobile app refuses the order to trade treasuries, and so on. I can trade VGSH like I trade any other ETF. It's a negative for me.

Which money-market equivalent investment strategy would you follow if you were in my shoes?
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