Trading Treasuries (nominal and TIPS)

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BlueEars
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Regarding the real return of intermediate nominal Treasuries, I came across the chart below that I made in 2006 and now updated through 2016.
This uses the Fed inflation data plus the 5 year constant maturity Treasuries.
I simply computed the 5 yr real return as: 5yr_real = 5yr_Treas - 5yr_forward_inflation
The average real return for this entire period was 1.98% which masks wild variations.
Also added 5yr TIPS to compare.


Image

Does this look like a reasonable way to do this sort of thing?

Just trying to see what kind of risk 5 year Treasuries might look like compared to TIPS.
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Re: Trading Treasuries (nominal and TIPS)

Post by Tdubs »

Kevin M wrote: Mon Jul 25, 2022 11:38 am
Tdubs wrote: Mon Jul 25, 2022 8:22 am Hi, I just want to confirm that there is no rollover option at Vanguard for T Bills--If I purchase a 6-month T bill, it will just dump back to my Vanguard account at the end of six months?

I've seen that said on other threads about Vanguard, but I just want one last confirmation before I pull the trigger. I've not done this kind of purchase before on Vanguard. In my case, I absolutely DO NOT want it to rollover.
Correct. Regardless of broker, unless you set up auto roll (which Vanguard does not offer), the proceeds of your matured Treasury will be deposited into your settlement fund.
Thanks!
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Mon Jul 25, 2022 2:13 pmYes. The yield curve is quite flat between 6-month and 2-year maturities. The chart below is from ask yields pulled from Fidelity today.
A bit off topic here, but CD yields are not so flat and curve is not inverted, thus significantly higher yields for some terms. I bought 10 with about 4 years, 4 months to maturity at a yield of 3.475% vs. comparable Treasury at about 2.85%, for a spread of 0.63%. Back in May, I'd gotten only 0.25-0.35% above comparable treasuries. (Of course, I also could've gotten about 3% on a shorter term treasury.)
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Re: Trading Treasuries (nominal and TIPS)

Post by buckeye7983 »

How do I determine the bid-ask spread when buying TIPS on the secondary market at Schwab?

For example, if I wanted to purchase 1 bond of the TIPs as shown here, what is the bid-ask spread? What is a reasonable spread for a small TIPS purchase?

Image

Also, Kevin has talked about the spread between small purchase (such as this) and large purchase. How is that determined? What is a reasonable spread?

Thanks so much! :beer
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

buckeye7983 wrote: Tue Jul 26, 2022 9:29 am How do I determine the bid-ask spread when buying TIPS on the secondary market at Schwab?

For example, if I wanted to purchase 1 bond of the TIPs as shown here, what is the bid-ask spread? What is a reasonable spread for a small TIPS purchase?

Image

Also, Kevin has talked about the spread between small purchase (such as this) and large purchase. How is that determined? What is a reasonable spread?

Thanks so much! :beer
The best price when selling is the highest bid price for your quantity. When buying it is the lowest ask price for your quantity. The difference is the spread. From the chart you included, for quantity 1 that is 97.513-97.399 = a spread of .114 per $100 of purchase. That means if you sell a $1,000 bond you would net $1.14 less than it would cost you to buy that bond (but see my closing note about TIPS).

Spreads are typically lower for treasuries than other securities. As for what's reasonable, that's a judgment call.

For TIPS, the actual prices will need to be adjusted by the current inflation factor for the bond; for simplicity I've not included that in the calculation.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

MisterMister wrote: Tue Jul 26, 2022 11:18 am
buckeye7983 wrote: Tue Jul 26, 2022 9:29 am How do I determine the bid-ask spread when buying TIPS on the secondary market at Schwab?

For example, if I wanted to purchase 1 bond of the TIPs as shown here, what is the bid-ask spread? What is a reasonable spread for a small TIPS purchase?

Image

Also, Kevin has talked about the spread between small purchase (such as this) and large purchase. How is that determined? What is a reasonable spread?

Thanks so much! :beer
The best price when selling is the highest bid price for your quantity. When buying it is the lowest ask price for your quantity. The difference is the spread. From the chart you included, for quantity 1 that is 97.513-97.399 = a spread of .114 per $100 of purchase. That means if you sell a $1,000 bond you would net $1.14 less than it would cost you to buy that bond (but see my closing note about TIPS).

Spreads are typically lower for treasuries than other securities. As for what's reasonable, that's a judgment call.

For TIPS, the actual prices will need to be adjusted by the current inflation factor for the bond; for simplicity I've not included that in the calculation.
The inflation factor would be the same for both prices, so the percentage spread would remain about 0.114% (exact figure would be a little higher, since price is not 100).

The large/small quantity spread would just look at ask for 1 (or some other small quantity) vs. the lowest ask. So here that's 97.513-97.469 = 0.044 or about 0.044%, again actually a bit higher.

You can also look at both of them as a (real) yield spread, by subtracting the YTMs instead of prices.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

As I've mentioned, I only look at the ask yield spread between large quantity and small quantity (I'm usually buying 10 - 30). In your example, that would be 0.398% - 0.393% = 0.005 percentage points, or 0.5 basis points. Half a basis point is a tiny yield spread, so I would happily buy 10 at that yield if I wanted to buy that maturity now.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Today at Fidelity I bought 20 for me and 10 for DW of the 7/15/2024 TIPS at a yield of -0.194%. The seasonal adjustment only knocks about 4 basis points off the yield. The best yield for min qty 100 was -0.184%, so I paid only 1 basis point more than a larger investor. As usual, I ignored the bid/ask spread. Executions were basically immediate. We did not own any of this maturity yet.

Yield curve is fairly steep here, with an additional 51 basis points of seasonally adjusted yield compared to the 7/15/2023.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by mikeyzito22 »

One more question for this thread:

Treasuries are not taxed by the state, they are available to sell, and they have a duration you can pick. Plus, they have higher yields than HYSA's or comparable at times. So why the large focus on banks like Ally or Marcus at Bogleheads, when you could simply run 3 to 6 month treasuries and keep a credit union account plus your brokerage and retirement accounts? I guess I'm wondering why I didn't think of this before and just keep the fixed income or "cash like" monies or even emergency monies at the brokerage and swap in and out of treasuries (even when yields aren't that great). Am I missing something here?
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Re: Trading Treasuries (nominal and TIPS)

Post by zak42 »

mikeyzito22 wrote: Tue Jul 26, 2022 3:09 pm One more question for this thread:

Treasuries are not taxed by the state, they are available to sell, and they have a duration you can pick. Plus, they have higher yields than HYSA's or comparable at times. So why the large focus on banks like Ally or Marcus at Bogleheads, when you could simply run 3 to 6 month treasuries and keep a credit union account plus your brokerage and retirement accounts? I guess I'm wondering why I didn't think of this before and just keep the fixed income or "cash like" monies or even emergency monies at the brokerage and swap in and out of treasuries (even when yields aren't that great). Am I missing something here?
Until recently TBill rates were very low, and HYSA were better deals. Now that rates are moving so fast HYSA are way behind the curve.
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Re: Trading Treasuries (nominal and TIPS)

Post by mikeyzito22 »

zak42 wrote: Tue Jul 26, 2022 3:37 pm
mikeyzito22 wrote: Tue Jul 26, 2022 3:09 pm One more question for this thread:

Treasuries are not taxed by the state, they are available to sell, and they have a duration you can pick. Plus, they have higher yields than HYSA's or comparable at times. So why the large focus on banks like Ally or Marcus at Bogleheads, when you could simply run 3 to 6 month treasuries and keep a credit union account plus your brokerage and retirement accounts? I guess I'm wondering why I didn't think of this before and just keep the fixed income or "cash like" monies or even emergency monies at the brokerage and swap in and out of treasuries (even when yields aren't that great). Am I missing something here?
Until recently TBill rates were very low, and HYSA were better deals. Now that rates are moving so fast HYSA are way behind the curve.
So is the suggestion to keep a HYSA open in case it reverses at some point? Also, the settlement account at Vanguard is paying more than Ally. So, should that also be another option that stays constant with HYSA?
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Re: Trading Treasuries (nominal and TIPS)

Post by zak42 »

That's what i did. I kept my HYSA open, but moved most of the funds to a combo of a tbill ladder and the VG settlement fund (which should also track the rate changes faster than a HYSA).
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Re: Trading Treasuries (nominal and TIPS)

Post by buckeye7983 »

MisterMister wrote: Tue Jul 26, 2022 11:18 am
buckeye7983 wrote: Tue Jul 26, 2022 9:29 am How do I determine the bid-ask spread when buying TIPS on the secondary market at Schwab?

For example, if I wanted to purchase 1 bond of the TIPs as shown here, what is the bid-ask spread? What is a reasonable spread for a small TIPS purchase?
The best price when selling is the highest bid price for your quantity. When buying it is the lowest ask price for your quantity. The difference is the spread. From the chart you included, for quantity 1 that is 97.513-97.399 = a spread of .114 per $100 of purchase. That means if you sell a $1,000 bond you would net $1.14 less than it would cost you to buy that bond (but see my closing note about TIPS).

Spreads are typically lower for treasuries than other securities. As for what's reasonable, that's a judgment call.

For TIPS, the actual prices will need to be adjusted by the current inflation factor for the bond; for simplicity I've not included that in the calculation.
MisterMister-

Thank you. Maybe typical is a better term than reasonable. Would it be fair to say that the bid-ask spread on a smaller TIPS purchase is typically around 10-20 bps?

Thanks again!
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

buckeye7983 wrote: Tue Jul 26, 2022 4:35 pm
MisterMister wrote: Tue Jul 26, 2022 11:18 am
buckeye7983 wrote: Tue Jul 26, 2022 9:29 am How do I determine the bid-ask spread when buying TIPS on the secondary market at Schwab?

For example, if I wanted to purchase 1 bond of the TIPs as shown here, what is the bid-ask spread? What is a reasonable spread for a small TIPS purchase?
The best price when selling is the highest bid price for your quantity. When buying it is the lowest ask price for your quantity. The difference is the spread. From the chart you included, for quantity 1 that is 97.513-97.399 = a spread of .114 per $100 of purchase. That means if you sell a $1,000 bond you would net $1.14 less than it would cost you to buy that bond (but see my closing note about TIPS).

Spreads are typically lower for treasuries than other securities. As for what's reasonable, that's a judgment call.

For TIPS, the actual prices will need to be adjusted by the current inflation factor for the bond; for simplicity I've not included that in the calculation.
MisterMister-

Thank you. Maybe typical is a better term than reasonable. Would it be fair to say that the bid-ask spread on a smaller TIPS purchase is typically around 10-20 bps?

Thanks again!
I still don't know why you care about this. Did you want to get an idea of how much you'd lose to bid/ask if you sold before maturity?

At any rate, here is a chart of bid/ask percentage point spreads for price and yield for all outstanding TIPS based on quotes pulled from Fidelity today:

Image

So 0.20 percentage points is 20 basis points.

This is for best (large quantity) prices and yields, but since the large/small-quantity spread is small for TIPS, this should be similar for smaller quantities too.

As we can see, there really is no typical or average that makes sense, since it varies a lot with maturity. Note that although the price spread is larger for longer maturities, the yield spread is smaller.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by buckeye7983 »

Kevin M wrote: Tue Jul 26, 2022 5:01 pmI still don't know why you care about this. Did you want to get an idea of how much you'd lose to bid/ask if you sold before maturity?

At any rate, here is a chart of bid/ask percentage point spreads for price and yield for all outstanding TIPS based on quotes pulled from Fidelity today:

Image

So 0.20 percentage points is 20 basis points.

This is for best (large quantity) prices and yields, but since the large/small-quantity spread is small for TIPS, this should be similar for smaller quantities too.

As we can see, there really is no typical or average that makes sense, since it varies a lot with maturity. Note that although the price spread is larger for longer maturities, the yield spread is smaller.

Kevin
Kevin-
Thanks! :sharebeer
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Re: Trading Treasuries (nominal and TIPS)

Post by buckeye7983 »

jeffyscott wrote: Tue Jul 26, 2022 11:44 amThe inflation factor would be the same for both prices, so the percentage spread would remain about 0.114% (exact figure would be a little higher, since price is not 100).

The large/small quantity spread would just look at ask for 1 (or some other small quantity) vs. the lowest ask. So here that's 97.513-97.469 = 0.044 or about 0.044%, again actually a bit higher.

You can also look at both of them as a (real) yield spread, by subtracting the YTMs instead of prices.
Jeffyscott-

Thank you. A little nervous about buying on secondary market, so trying to get a better understanding so I don't mess up or get taken advantage of.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

buckeye7983 wrote: Tue Jul 26, 2022 5:28 pm
jeffyscott wrote: Tue Jul 26, 2022 11:44 amThe inflation factor would be the same for both prices, so the percentage spread would remain about 0.114% (exact figure would be a little higher, since price is not 100).

The large/small quantity spread would just look at ask for 1 (or some other small quantity) vs. the lowest ask. So here that's 97.513-97.469 = 0.044 or about 0.044%, again actually a bit higher.

You can also look at both of them as a (real) yield spread, by subtracting the YTMs instead of prices.
Jeffyscott-

Thank you. A little nervous about buying on secondary market, so trying to get a better understanding so I don't mess up or get taken advantage of.
I would not worry about getting taken advantage of at any of the big three: Fidelity, Vanguard or Schwab. But, I check the large/small-qty spread just to make sure.

In terms of messing up, why don't you start by just buying 1 TIPS ($1,000 face value)? Typically you will get the same price as for 10 or 20.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by buckeye7983 »

Kevin M wrote: Tue Jul 26, 2022 5:34 pm I would not worry about getting taken advantage of at any of the big three: Fidelity, Vanguard or Schwab. But, I check the large/small-qty spread just to make sure.

In terms of messing up, why don't you start by just buying 1 TIPS ($1,000 face value)? Typically you will get the same price as for 10 or 20.

Kevin
Kevin-

Thanks for your help! I think this thread has been useful for a lot of people.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Kevin M wrote: Tue Jul 26, 2022 2:57 pm Today at Fidelity I bought 20 for me and 10 for DW of the 7/15/2024 TIPS at a yield of -0.194%. The seasonal adjustment only knocks about 4 basis points off the yield. The best yield for min qty 100 was -0.184%, so I paid only 1 basis point more than a larger investor. As usual, I ignored the bid/ask spread. Executions were basically immediate. We did not own any of this maturity yet.

Yield curve is fairly steep here, with an additional 51 basis points of seasonally adjusted yield compared to the 7/15/2023.

Kevin
From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea. I have an IRA with a ton in VMFXX at 1.5% yield which just won't do. I felt good about having moved out of bonds in early January but now what to do with the proceeds?

Some TIPS possibilities are:
1) 2 year TIPS at around -0.16%
2) 5yr year TIPS at around +0.3%
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Re: Trading Treasuries (nominal and TIPS)

Post by squirrel1963 »

Kevin M wrote: Tue Jul 26, 2022 2:57 pm As usual, I ignored the bid/ask spread.
So you mention several times you usually look at the spread between small quantity and large quantity. So I understand correctly that would tell us the premium we pay over institutional trades, which in turn informs us how good of a deal we are getting.

I'm curious though why you ignore the bid/ask spread, naively I would think that (bid-ask)/2 is roughly the cost of the transaction that we all pay.

I confess I am a bit confused by this, I would super appreciate some clarification. Thanks :-)
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

squirrel1963 wrote: Tue Jul 26, 2022 9:48 pm
Kevin M wrote: Tue Jul 26, 2022 2:57 pm As usual, I ignored the bid/ask spread.
So you mention several times you usually look at the spread between small quantity and large quantity. So I understand correctly that would tell us the premium we pay over institutional trades, which in turn informs us how good of a deal we are getting.

I'm curious though why you ignore the bid/ask spread, naively I would think that (bid-ask)/2 is roughly the cost of the transaction that we all pay.

I confess I am a bit confused by this, I would super appreciate some clarification. Thanks :-)
Consider brokered CDs bought on the secondary market (I have bought many that way in the past). There's a good chance there will not even be a bid quote, in which case, what is the bid/ask spread?

When there is a bid quote, there's a good chance it's a full percentage point lower in yield than the ask quote. But if I can get a higher net yield than for a new issue (where there is no bid, so no bid/ask spread), why would I not do it? You can only get what you can get. Are you getting as good a deal as a primary broker? No, but are you getting a better deal than you can get on a comparable investment available to you? If yes, it's a good deal.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
[ quote fixed by admin LadyGeek]

TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Doc wrote: Wed Jul 27, 2022 7:28 am
BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
Yes, I agree. I guess I don't have a lot of faith in the market's inflation models. Even the Fed, with all their expertise seems to have misjudged this.

At this moment I see for 2 years out:
1) 7/15/24 Treasury is at 3.039% YTM
2) 7/15/24 TIPS is at -0.179% YTM
Last edited by BlueEars on Wed Jul 27, 2022 11:39 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by user9532 »

I purchased some 2-year T-Note at auction on 7/25/22 thru Fidelity (coupon rate 3%). The purchase was at a price of 99.97105 not $100.00. Why is it not at $100 but at a lower value? I thought when you buy T-Note at auction you always buy at the face value.

Settlement is on 8/1/22. Do I get interest for 7/25 - 8/1/22, or interest accrual starts only on 8/1/22?
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

The coupon payment amounts are set in increments of 0.125%.

Determining the interest rate for new note and bond issues. We set the interest rate at a 1/8 of one percent increment.
https://www.law.cornell.edu/cfr/text/31/356.20

Your yield is 3.015%: https://www.treasurydirect.gov/instit/a ... 0725_3.pdf
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Re: Trading Treasuries (nominal and TIPS)

Post by user9532 »

jeffyscott wrote: Wed Jul 27, 2022 9:56 am The coupon payment amounts are set in increments of 0.125%.

Determining the interest rate for new note and bond issues. We set the interest rate at a 1/8 of one percent increment.
https://www.law.cornell.edu/cfr/text/31/356.20

Your yield is 3.015%: https://www.treasurydirect.gov/instit/a ... 0725_3.pdf
Thank you
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Re: Trading Treasuries (nominal and TIPS)

Post by Average Investor »

Doc wrote: Mon Jul 25, 2022 2:45 pm
Average Investor wrote: Mon Jul 25, 2022 1:30 pm Hi everyone,

I just recently started buying new issue treasury bills on Schwab to build a rolling ladder out to 12 months. I understand I am going to get whatever rate is determined by auction. This seems sufficient to me (simple and easy to administer), is there any compelling reason I should look at secondary issues?

Thank you.
There may be a very small price disadvantage for small quantities. You can see the info on Schwab's site.

The main difference is that if you buy up to 26 weeks at auction you set them to auto roll if that's what you want.
Thank you.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Wed Jul 27, 2022 7:28 am
BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
[ quote fixed by admin LadyGeek]

TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
In theory, yes, but not necessarily for short term nominal yields when the Fed is holding them down. The 1 month yield is about 2%. Do you really expect annualized inflation over the next month will be only 2% (giving a real yield of 0%)?
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Wed Jul 27, 2022 1:37 pm
Doc wrote: Wed Jul 27, 2022 7:28 am
BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
[ quote fixed by admin LadyGeek]

TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
In theory, yes, but not necessarily for short term nominal yields when the Fed is holding them down. The 1 month yield is about 2%. Do you really expect annualized inflation over the next month will be only 2% (giving a real yield of 0%)?
No I don't expect annualized inflation to be only 2%. But I can get my short term inflation protection by buying 8 week T-bills rather than commit to 5 or 10 years of low real rates by buying longer TIPS.

It costs very little if I am wrong.

I don't understand where the "short term nominal yields when the Fed is holding them down". The Fed is raising the discount rate and short term yields are not going down as a result.

I sure hope we have a "word" problem here and not a "math" problem.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Doc wrote: Wed Jul 27, 2022 2:20 pm
Kevin M wrote: Wed Jul 27, 2022 1:37 pm
Doc wrote: Wed Jul 27, 2022 7:28 am
BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
[ quote fixed by admin LadyGeek]

TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
In theory, yes, but not necessarily for short term nominal yields when the Fed is holding them down. The 1 month yield is about 2%. Do you really expect annualized inflation over the next month will be only 2% (giving a real yield of 0%)?
No I don't expect annualized inflation to be only 2%. But I can get my short term inflation protection by buying 8 week T-bills rather than commit to 5 or 10 years of low real rates by buying longer TIPS.

It costs very little if I am wrong.

I don't understand where the "short term nominal yields when the Fed is holding them down". The Fed is raising the discount rate and short term yields are not going down as a result.

I sure hope we have a "word" problem here and not a "math" problem.
Trying to see your reasoning on the very short T-bills. The 8 week T-bills are currently at 2.3%. Seems that is far off the current inflation. But maybe a series of these transactions would work out? Is that what you are saying?

The shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

BlueEars wrote: Wed Jul 27, 2022 3:56 pmThe shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
Those are annualized rates, so since it is about a 6 month period a 2.4% change in the non-seasonally adjusted CPI would be the approximate break-even point. But we already know that the reference CPI rises by about 1.55% from today through Sept. 1. So there would need to be about another 0.9% increase from Sept. 1 to Jan. 15.

Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

jeffyscott wrote: Wed Jul 27, 2022 4:26 pm
BlueEars wrote: Wed Jul 27, 2022 3:56 pmThe shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
Those are annualized rates, so since it is about a 6 month period a 2.4% change in the non-seasonally adjusted CPI would be the approximate break-even point. But we already know that the reference CPI rises by about 1.55% from today through Sept. 1. So there would need to be about another 0.9% increase from Sept. 1 to Jan. 15.

Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
Thanks. So assuming your figures are correct what do you think is the best short term investment, TIPS or Treasuries? I have never bought short term TIPS, just longer term.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Wed Jul 27, 2022 2:20 pm
Kevin M wrote: Wed Jul 27, 2022 1:37 pm
Doc wrote: Wed Jul 27, 2022 7:28 am
BlueEars wrote: Tue Jul 26, 2022 9:32 pm From what I have casually read some bond people are talking of going to a 3% inflation rate at the end of 2023. Seems buying a portion of short term TIPS might be a decent idea.
[ quote fixed by admin LadyGeek]

TIPS offer protection from UNEXPECTED inflation. Short term inflation is already built into nominals.
In theory, yes, but not necessarily for short term nominal yields when the Fed is holding them down. The 1 month yield is about 2%. Do you really expect annualized inflation over the next month will be only 2% (giving a real yield of 0%)?
No I don't expect annualized inflation to be only 2%. But I can get my short term inflation protection by buying 8 week T-bills rather than commit to 5 or 10 years of low real rates by buying longer TIPS.

It costs very little if I am wrong.
Again, you don't get any inflation protection with 8-week T bills. Today's yield on the 2-month CMT (which will be close to an 8-week bill) is 2.30%. Yield on the 1/15/2023 TIPS is about -2%. So if inflation runs at say 8.3% over the next two months, you will earn an annualized -6% (nominal) on the 8-week bill, and an annualized +6.3% nominal on the TIPS. I'd say that's a significant cost.

You don't need to commit to 5 or 10 years with TIPS. I have been buying mostly in the 6-month to 4-year maturity range.
Doc wrote: Wed Jul 27, 2022 2:20 pm I don't understand where the "short term nominal yields when the Fed is holding them down". The Fed is raising the discount rate and short term yields are not going down as a result.
Fed raised it's target rate by 75 basis points today, and the yield on the 2-month CMT fell from 2.35% yesterday to 2.30% today (maybe because the Fed did not do a 100 bp increase). I would say that 2.30% does not incorporate annualized inflation expectations for the next two months.

As I've said before, I'm continuing to buy nominal Treasuries, or box spreads with a yield premium over Treasuries, in case inflation drops way more than seems to be expected. I just don't have any illusions about what I am likely to lose compared to TIPS if inflation continues at a rate anywhere near what it's been lately.

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Re: Trading Treasuries (nominal and TIPS)

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jeffyscott wrote: Wed Jul 27, 2022 4:26 pm Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
High ask yield at Fidelity today for 1/15/2023 TIPS was -2.02% at 3:36 PM ET.
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Re: Trading Treasuries (nominal and TIPS)

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Kevin M wrote: Wed Jul 27, 2022 4:37 pm Again, you don't get any inflation protection with 8-week T bills.
Right and I do not care. Eight weeks inflation is not enough to even think about. I expect to roll the T-bills for a while until the FOMC stops raising rates by 75 bps every month. That's 900 bps or an average of 4.5% annually. That's a lot of "inflation". After that I will move it to a 1-3 ETF or something else with about a 2 year maturity. Maybe a 0-3 ladder. Besides if the FED's rate increases do slow down inflation a lot we won't need TIPS at all.

In NORMAL times I use a 1-3 ETF and a 4-7 ladder as the Treasury part of my fixed income. These are not normal times.

If I was only 50 years old and trying to establish a liability matching portfolio for retirement I would take another approach. Maybe even a TIPS ladder. But that would be hard to accept given the FED's current rate hiking direction.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

BlueEars wrote: Wed Jul 27, 2022 3:56 pm Trying to see your reasoning on the very short T-bills. The 8 week T-bills are currently at 2.3%. Seems that is far off the current inflation. But maybe a series of these transactions would work out? Is that what you are saying?
You would have to roll a 2-month Treasury twice over a 6-month holding period. It's possible that the 2-month yield could increase enough, combined with rapidly decreasing inflation, that you would earn more by rolling 2-month (or 8-week) Treasuries than by buying the 6-month TIPS. It's also possible that that would not happen, and the TIPS could far outperform the nominal Treasuries (as it has happened over the last 6 months). Because of this uncertainty, I am buying both (or box spreads instead of nominals if I can get a good yield spread, as I did today).

If we use the seasonally-adjusted BEI of 3.1% (see below) as the market expectation for average inflation over the next six months, then yeah, expected inflation is included in the 6-month nominal yield of about 2.8%. The feedback I've been receiving is that most people don't believe inflation will be as low as 3% over the next 6 months; I have no strong opinion on this.
BlueEars wrote: Wed Jul 27, 2022 3:56 pm The shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
The 4.8% value is from the conventional BEI calculation (nominal minus TIPS yield). If you factor in the known inflation adjustment through Sep 1, and use seasonally adjusted TIPS yield, the BEI is only 3.10%. I would use the latter number in my decisions (to the extent BEI factors into one's decisions).

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Re: Trading Treasuries (nominal and TIPS)

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Kevin M wrote: Wed Jul 27, 2022 4:49 pm
jeffyscott wrote: Wed Jul 27, 2022 4:26 pm Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
High ask yield at Fidelity today for 1/15/2023 TIPS was -2.02% at 3:36 PM ET.
Thanks, I wonder where the WSJ is getting -2.4%?
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

What is the inflation equivalent to the FEDs 75 bps hike today?

75 bps times 11 meeting in the next year is a lot of "inflation".

(Aside: I have misspelled inflation so many time that my computer thinks my spelling is correct. :D )
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

BlueEars wrote: Wed Jul 27, 2022 4:35 pm
jeffyscott wrote: Wed Jul 27, 2022 4:26 pm
BlueEars wrote: Wed Jul 27, 2022 3:56 pmThe shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
Those are annualized rates, so since it is about a 6 month period a 2.4% change in the non-seasonally adjusted CPI would be the approximate break-even point. But we already know that the reference CPI rises by about 1.55% from today through Sept. 1. So there would need to be about another 0.9% increase from Sept. 1 to Jan. 15.

Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
Thanks. So assuming your figures are correct what do you think is the best short term investment, TIPS or Treasuries? I have never bought short term TIPS, just longer term.
I agree with Kevin, "no strong opinion". A non-seasonally adjusted ~1% change in 4.5 months would be about a 2.7% annualized rate during a period that includes some months that, historically, tend to be below average (hence the 3.1% SA figure) and we also seem to have moved to declining gas prices now.

But were I in the market for a short term investment, I'd definitely buy the nominal Treasury, because Schwab would require a phone call to buy the TIPS with negative real yield. :mrgreen:
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Re: Trading Treasuries (nominal and TIPS)

Post by squirrel1963 »

jeffyscott wrote: Wed Jul 27, 2022 5:20 pm
BlueEars wrote: Wed Jul 27, 2022 4:35 pm
jeffyscott wrote: Wed Jul 27, 2022 4:26 pm
BlueEars wrote: Wed Jul 27, 2022 3:56 pmThe shortest TIPS maturity I could find is 1/15/23 TIPS at -2.0%. Might compare that to the 1/12/23 T-bills at 2.8%. I guess the market expects around 4.8% inflation for that period. I don't have an opinion how realistic that is.
Those are annualized rates, so since it is about a 6 month period a 2.4% change in the non-seasonally adjusted CPI would be the approximate break-even point. But we already know that the reference CPI rises by about 1.55% from today through Sept. 1. So there would need to be about another 0.9% increase from Sept. 1 to Jan. 15.

Note that TIPS rates fell today and WSJ is now showing -2.4% for the 1/15/23 TIPS, I also see 2.93% as the 6 month rate on treasury yield curve site. Using those the BEI would be 5.33% and the necessary change to reference CPI for Sept. 1 to Jan 15 would be about a 1.1% increase, in order to break-even.
Thanks. So assuming your figures are correct what do you think is the best short term investment, TIPS or Treasuries? I have never bought short term TIPS, just longer term.
I agree with Kevin, "no strong opinion". A non-seasonally adjusted ~1% change in 4.5 months would be about a 2.7% annualized rate during a period that includes some months that, historically, tend to be below average (hence the 3.1% SA figure) and we also seem to have moved to declining gas prices now.

But were I in the market for a short term investment, I'd definitely buy the nominal Treasury, because Schwab would require a phone call to buy the TIPS with negative real yield. :mrgreen:
That's what I had to do for the 2023 TIP and 2024 TIP, the Schwab rep was surprised I wanted to buy a bond with a negative yield and ask me why, so I told him I'm more interested in guaranteeing real yield than chasing positive yield on nominals, but that in any case if you believe that inflation in 2023 will be greater than BEI you should favor a TIP all things being equal.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

squirrel1963 wrote: Wed Jul 27, 2022 5:40 pm
jeffyscott wrote: Wed Jul 27, 2022 5:20 pm But were I in the market for a short term investment, I'd definitely buy the nominal Treasury, because Schwab would require a phone call to buy the TIPS with negative real yield. :mrgreen:
That's what I had to do for the 2023 TIP and 2024 TIP, the Schwab rep was surprised I wanted to buy a bond with a negative yield and ask me why, so I told him I'm more interested in guaranteeing real yield than chasing positive yield on nominals, but that in any case if you believe that inflation in 2023 will be greater than BEI you should favor a TIP all things being equal.
First, it's sad that Schwab makes you call, when you don't have to at Fidelity at Vanguard (who just throw up big, scary warning screens about it). Second, it's sad that a rep of any broker does not understand that a nominal of the same maturity as a TIPS with a negative real yield also has a negative real expected return.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Wed Jul 27, 2022 5:12 pm What is the inflation equivalent to the FEDs 75 bps hike today?
I don't understand the question.

Since all Treasury yields fell today, aside from the 30-year which was flat, we can conclude that an increase of 75 bps or more today was already incorporated into Treasury yields. The market's expectation of future Fed rate hikes is incorporated into prices and yields already.
Doc wrote: Wed Jul 27, 2022 5:12 pm 75 bps times 11 meeting in the next year is a lot of "inflation".
There is no certainty at all that the Fed will continue 75 bps hikes at each meeting over the next year (I think there are 8 meetings, not 11).
The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed.
Source: Meeting calendars, statements, and minutes (2017-2022)

As I said in an earlier post, it's possible that short-term nominal yields could increase enough relative to inflation that rolling short-term nominals will do as well or better than TIPS, but it is very uncertain. That's why I'm taking both sides of the bet.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Today I wanted to try and buy a box spread expiring on 10/21/2022. In setting up for this, I always check the yield for a Treasury maturing on or close to the expiration date, which in this case was the bill maturing on 10/20/2022, since I want to get a decent yield premium over the Treasury. Since I wanted an expiration value of $50K, I used the yield for minimum quantity 1, since the next highest min qty was 100. Here is the depth of book for this Treasury:

Image

So I used 2.365% as my comparison yield. Note that this is less than 2 bps more than the high yield of 2.381%.

I was successful in buying the box spread at a gross yield of 2.81%, which is net 2.79% after the small commission. So that's a net yield spread of 42 bps over the Treasury yield, which I consider quite good.

But the main point for this thread is that the large/small-quantity spread was tiny compared to the additional yield I got on the box. Sometimes the large/small-qty spread is even smaller, but in this context < 2 bps was more than acceptable to me.

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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Wed Jul 27, 2022 6:13 pm
Doc wrote: ↑Wed Jul 27, 2022 5:12 pm
75 bps times 11 meeting in the next year is a lot of "inflation".
There is no certainty at all that the Fed will continue 75 bps hikes at each meeting over the next year (I think there are 8 meetings, not 11).
My bad. I knew there was no July meeting and I assumed that was the only month they skipped.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

We've seen more than one question about which maturity to buy when yields are slightly different, what a reasonable large/small-qty spread is, as well as about bid/ask spreads. Here is a purchase I did today in my Roth IRA at Fidelity, in which I'll explain my thinking on these things.

I bought 50 of the 8/23/2022 bill at a yield of 2.1%. Here are the yields for August maturities sorted by yield:

Image

Note that the 8/23 yield is higher than the 8/30, 8/31 or 8/25, all longer maturities. Just an example of the "noise" in the yield curve. I don't care about whatever is causing the slight inversion in this short maturity range--I just chose the one with the highest yield.

Here is depth of book for the 8/23/2022:

Image

So the high yield is 2.126% for min qty 3,000, and the yield for min qty 50 is 2.105%, so a large/small-qty spread of slightly more than 2 basis points, which is fine with me. Looking at price large/small-qty spread, for min qty 3,000, you would pay $99,855 per 100, compared to $99,856 per 100 for min qty 50, so $1 difference per $100K face. Tiny.

Although I ignore bid/ask spread when buying, the bid yield for min qty 50 is 2.155%, so a bid/ask yield spread of 5 basis points, which is pretty small. Looking at the price bid/ask spread for min qty 50, you would pay $99,856 to buy 100, and receive $99,852 to sell 100, so only $4 difference.

The reason I bought this short maturity in the Roth is that I'm market timing relatively small VTI trades in this account, but I have more than enough cash to cover any such trades in the next month, and 2.1% is significantly more than the 1.48% yield of FZDXX (premium MM fund); so more than 60 basis points for extending maturity for less than one month. Also, I don't have margin for this account, so can't buy box spreads in it.

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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Fed Funds Implied Rate. Peak rate of 3.4% by Feb 2003

https://www.schwab.com/learn/story/fomc ... cmp=em-QYC

See the "Fed Funds Implied Rate" chart
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Re: Trading Treasuries (nominal and TIPS)

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Doc wrote: Fri Jul 29, 2022 9:51 am Fed Funds Implied Rate. Peak rate of 3.4% by Feb 2003

https://www.schwab.com/learn/story/fomc ... cmp=em-QYC

See the "Fed Funds Implied Rate" chart
And then already declining from that peak shortly after reaching it, back down to 3.1% just over a year from now.

So what are you going to do with that information?

Schwab's conclusion is:
We suggest investors consider adding some duration—exposure to interest rate risk—to their portfolios rather than waiting for the Fed to keep hiking rates.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

jeffyscott wrote: Fri Jul 29, 2022 11:04 am Schwab's conclusion is:
We suggest investors consider adding some duration—exposure to interest rate risk—to their portfolios rather than waiting for the Fed to keep hiking rates.
I missed that part.

When I saw the curve going down I stopped looking. :oops:

Now I have more work to do. Thanks Jeffy. I think?

"We suggest investors consider adding some duration—exposure to interest rate risk—to their portfolios rather than waiting for the Fed to keep hiking rates. Bond ladders can be an effective way to invest today." Schwab
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Re: Trading Treasuries (nominal and TIPS)

Post by mikeyzito22 »

zak42 wrote: Tue Jul 26, 2022 4:25 pm That's what i did. I kept my HYSA open, but moved most of the funds to a combo of a tbill ladder and the VG settlement fund (which should also track the rate changes faster than a HYSA).
Great, my plan is similar moving forward with the cash portion.
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Fri Jul 29, 2022 11:04 am
Doc wrote: Fri Jul 29, 2022 9:51 am Fed Funds Implied Rate. Peak rate of 3.4% by Feb 2003

https://www.schwab.com/learn/story/fomc ... cmp=em-QYC

See the "Fed Funds Implied Rate" chart
And then already declining from that peak shortly after reaching it, back down to 3.1% just over a year from now.

So what are you going to do with that information?

Schwab's conclusion is:
We suggest investors consider adding some duration—exposure to interest rate risk—to their portfolios rather than waiting for the Fed to keep hiking rates.
Thanks jeffyscott, defintely like the ladder approach as we have a 5-year established CD/MYGA ladder in place but now need to see what rungs we should look to fill in with additional funds in light of the yield curve.
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