Trading Treasuries (nominal and TIPS)

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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Drew31 wrote: Sat Jun 03, 2023 2:28 pm Is it fair to compare SEC yield of a fund/ETF with what you can buy of equivalent duration on secondary market?

For instance, treasury ETF with 1 year duration and SEC Yield = 4.53%, but secondary market treasury yields can be had >5%. Is this fair comparison or because of the SEC calculation, it's apples and oranges?
You need to be a bit more specific about what you're comparing. For example, all 0-2 year Treasuries outstanding had an average duration of 9.3 months as of Friday at about 2:30 pm ET, while all 0-3 year Ts had an average duration of 14.2 months. So a fund with an average duration of 12 months probably is holding Ts in the 0-3 year range. The average weighted maturity of the fund depends also on the holding weightings.

Here are the yields for Ts from 0-3 years as of Friday:

Image

We can see that the 12-month yield is about 5.20-5.25%. But the average yield of the 0-3 year Ts is 4.87%. Subtract the ER and you're closer. If the fund weights the longer maturities more heavily, that will lower the average maturity and duration.

For example, for the weighted average duration of iShares 1-3 Year Treasury Bond ETF (SHY) is 1.89 years and the weighted average yield is 4.6%. I calculated these from the holdings download. The iShares website lists the duration as 1.89 years and the average yield as 4.45% as of Apr 30, 2023. According to the download, those holdings are as of Jun 2, 2023.

Also, SEC yield for bond funds is a trailing 30-day average, so this also will introduce some error with respect to the current weighted YTM of the fund.

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 Kevin M »

LmG7119 wrote: Sat Jun 03, 2023 9:43 pm I
jeffyscott wrote: Sat Jun 03, 2023 8:44 pm ^ When it matures, the $10K principle will be deposited in your money market settlement fund at Vanguard.
Is it ok to have it in brokerage account for Emergency fund? I believe t-bills interest is state-tax free. Do I need to calculate it myself for taxes or will I get a special 1099 for t-bills?

I assume I can build 3 month ladder. Is it a good idea?
You can hold a money market fund in a brokerage account, and that is pretty much as good as a bank account, especially if it holds only Treasuries. You could hold individual Treasuries, but there will be some fluctuation in the value of your holdings, unlike the MM fund, which maintains a stable $1 per share price.

Yes, all Ts are exempt from state income tax. For a fund, it depends how much they hold in USGO, and in some cases, what state you live in.

Please see Taxation of Treasury bills, notes and bonds - Bogleheads.org for discussion of taxation.

You can build any ladder you want. A 3-month ladder probably will have a slightly higher average yield than a Treasury MM fund (and no ER), but the value will fluctuate.

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 Kevin M »

vaylie wrote: Sat Jun 03, 2023 10:17 pm How are you guys tracking your individual bonds? Right now I've just been manually entering them into google sheets, but of course if there's a convenient function that looks up maturation date, yields by CUSIP that I might be missing, that would make my life much easier.
You can import your holdings into a google sheet from your broker's download--at least you can from any of the big three brokers.

You can extract maturity dates from the description column.

The price is included in the download, and from that and other values included you can calculate latest yield.

Fido includes CUSIP in the download, but Vanguard does not, but I work around this with a little extra work.

You can download all outstanding Treasuries from your broker, and this download includes CUSIP, bid/ask price, bid/ask yield, etc.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

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exodusing wrote: Sun Jun 04, 2023 2:59 pm
Kevin M wrote: Sun Jun 04, 2023 2:41 pm
Mezzinmi wrote: Fri Jun 02, 2023 3:43 pm Next month the first TIPS bond I purchased will mature (CUSIP 912828VM9). Does the current value, as provided in my brok acct, of this bond purchased in the second. mrkt account for the inflation factor to date? Is there a formula for calculating the expected end value of a maturing TIPS?
Thx!
#Cruncher provided a detailed answer.

To put it simply, we cannot yet calculate the value of the July 2023 TIPS because we don't yet know the inflation adjustments for 7/2 through 7/15. However, institutional traders can estimate it based on inflation-related numbers that are already known, and as #Cruncher says, are pricing the 7/15/2023 TIPS to be competitive with the 7/15/2023 nominal. When I pulled quotes from Fido on Friday at 2:25 PM ET the ask yield for the 7/15/2023 Treasury note was 4.964%.
The WSJ is quoting the 7/15/2023 note ask yield at 5.369% and bills at 5.314% for 7/13/2023 and 5.276% for the 7/18/2023. Odd that there would be such a large gap between Friday's WSJ and Fido (or change from 2:25 to close).

Presumably the market is pricing all TIPS to be competitive with similar maturity nominals (nominal minus expected inflation approximately equals TIPS).
All I know is that I cannot buy Treasuries from the WSJ, but I can buy them from Fido or Vanguard, so the WSJ quotes don't mean much to me. Yields definitely change throughout the day, and I don't know the specific sources or methodology WSJ uses.

It's much easier to price a TIPS to be directly competitive with nominals if there are only 14 days of unknown inflation adjustments than if there are more. The longer the maturity, the more uncertainty in any estimates of future inflation. The market certainly prices in expected inflation into all TIPS and nominals.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Drew31 »

Kevin M wrote: Sun Jun 04, 2023 5:06 pm
Drew31 wrote: Sat Jun 03, 2023 2:28 pm Is it fair to compare SEC yield of a fund/ETF with what you can buy of equivalent duration on secondary market?

For instance, treasury ETF with 1 year duration and SEC Yield = 4.53%, but secondary market treasury yields can be had >5%. Is this fair comparison or because of the SEC calculation, it's apples and oranges?
You need to be a bit more specific about what you're comparing. For example, all 0-2 year Treasuries outstanding had an average duration of 9.3 months as of Friday at about 2:30 pm ET, while all 0-3 year Ts had an average duration of 14.2 months. So a fund with an average duration of 12 months probably is holding Ts in the 0-3 year range. The average weighted maturity of the fund depends also on the holding weightings.

Here are the yields for Ts from 0-3 years as of Friday:

Image

We can see that the 12-month yield is about 5.20-5.25%. But the average yield of the 0-3 year Ts is 4.87%. Subtract the ER and you're closer. If the fund weights the longer maturities more heavily, that will lower the average maturity and duration.

For example, for the weighted average duration of iShares 1-3 Year Treasury Bond ETF (SHY) is 1.89 years and the weighted average yield is 4.6%. I calculated these from the holdings download. The iShares website lists the duration as 1.89 years and the average yield as 4.45% as of Apr 30, 2023. According to the download, those holdings are as of Jun 2, 2023.

Also, SEC yield for bond funds is a trailing 30-day average, so this also will introduce some error with respect to the current weighted YTM of the fund.

Kevin

Fair - Here is the specific ETF I was looking at. XONE, 30 day yield as of 5/31 of 4.53%. (It actually went down vs. April, but I didn't write down exact yield, I believe it was roughtly 4.6%). Duration of .98 and is meant to mimic the 1 year.

https://bondbloxxetf.com/bondbloxx-bloo ... nformation

I had been debating using this ETF vs individual bonds (though I've cooled on the idea of using ETFs in general after review), but when I was reviewing the updated yield I was thrown off by how the SEC yield could be 4.53% when bonds of one year maturity on secondary market are in that 5.2% range. To be fair, the ETF has YTM of 5.19% so I was wondering if that was the appropriate comparison?

In essense, trying to figure out why I would ever buy the ETF for a 4.5% yield when I can get 5.2% on secondary market.
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Re: Trading Treasuries (nominal and TIPS)

Post by Drew31 »

Kevin M wrote: Sun Jun 04, 2023 5:18 pm
vaylie wrote: Sat Jun 03, 2023 10:17 pm How are you guys tracking your individual bonds? Right now I've just been manually entering them into google sheets, but of course if there's a convenient function that looks up maturation date, yields by CUSIP that I might be missing, that would make my life much easier.
You can import your holdings into a google sheet from your broker's download--at least you can from any of the big three brokers.

You can extract maturity dates from the description column.

The price is included in the download, and from that and other values included you can calculate latest yield.

Fido includes CUSIP in the download, but Vanguard does not, but I work around this with a little extra work.

You can download all outstanding Treasuries from your broker, and this download includes CUSIP, bid/ask price, bid/ask yield, etc.
I've been downloading my bond holdings for awhile now, but I think I'm going to start downloading the full list of outstanding Treasuries as well on some basis to do look ups for other information I don't get through the holdings download.

I also really like the yield curve graphs you post so would find it helpful to have something like that myself.
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

Kevin M wrote: Sun Jun 04, 2023 5:13 pm
LmG7119 wrote: Sat Jun 03, 2023 9:43 pm I
jeffyscott wrote: Sat Jun 03, 2023 8:44 pm ^ When it matures, the $10K principle will be deposited in your money market settlement fund at Vanguard.
Is it ok to have it in brokerage account for Emergency fund? I believe t-bills interest is state-tax free. Do I need to calculate it myself for taxes or will I get a special 1099 for t-bills?

I assume I can build 3 month ladder. Is it a good idea?
You can hold a money market fund in a brokerage account, and that is pretty much as good as a bank account, especially if it holds only Treasuries. You could hold individual Treasuries, but there will be some fluctuation in the value of your holdings, unlike the MM fund, which maintains a stable $1 per share price.

Yes, all Ts are exempt from state income tax. For a fund, it depends how much they hold in USGO, and in some cases, what state you live in.

Please see Taxation of Treasury bills, notes and bonds - Bogleheads.org for discussion of taxation.

You can build any ladder you want. A 3-month ladder probably will have a slightly higher average yield than a Treasury MM fund (and no ER), but the value will fluctuate.

Kevin
I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

LmG7119 wrote: Sun Jun 04, 2023 5:52 pm I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

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 exodusing »

Kevin M wrote: Sun Jun 04, 2023 5:23 pm All I know is that I cannot buy Treasuries from the WSJ, but I can buy them from Fido or Vanguard, so the WSJ quotes don't mean much to me. Yields definitely change throughout the day, and I don't know the specific sources or methodology WSJ uses.
WSJ is consistent with the Treasury reports of secondary market numbers from the FRBNY https://home.treasury.gov/resource-cent ... nth=202306 The WSJ source is Tullett Prebon which calls itself one of the world's leading interdealer brokers.
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

Kevin M wrote: Sun Jun 04, 2023 6:27 pm
LmG7119 wrote: Sun Jun 04, 2023 5:52 pm I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder?
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

exodusing wrote: Sun Jun 04, 2023 2:59 pm
Kevin M wrote: Sun Jun 04, 2023 2:41 pm
Mezzinmi wrote: Fri Jun 02, 2023 3:43 pm Next month the first TIPS bond I purchased will mature (CUSIP 912828VM9). Does the current value, as provided in my brok acct, of this bond purchased in the second. mrkt account for the inflation factor to date? Is there a formula for calculating the expected end value of a maturing TIPS?
Thx!
#Cruncher provided a detailed answer.

To put it simply, we cannot yet calculate the value of the July 2023 TIPS because we don't yet know the inflation adjustments for 7/2 through 7/15. However, institutional traders can estimate it based on inflation-related numbers that are already known, and as #Cruncher says, are pricing the 7/15/2023 TIPS to be competitive with the 7/15/2023 nominal. When I pulled quotes from Fido on Friday at 2:25 PM ET the ask yield for the 7/15/2023 Treasury note was 4.964%.
The WSJ is quoting the 7/15/2023 note ask yield at 5.369% and bills at 5.314% for 7/13/2023 and 5.276% for the 7/18/2023. Odd that there would be such a large gap between Friday's WSJ and Fido (or change from 2:25 to close).

Presumably the market is pricing all TIPS to be competitive with similar maturity nominals (nominal minus expected inflation approximately equals TIPS).
There are money markets that are competitive with that. FZDXX, where I keep my spare cash, has a 7 day yield of 4.91%. 0.4% more than that would put about $3.33 in your pocket in a month for every $10K invested, or $33 per $100K. Yes, if in taxable, you could avoid state tax on that, and kick the federal tax ball down the road a month or so, but I'm not sure that would be worth my time and effort (and tying up funds).

As Kevin aptly pointed out in another post, as you go further into the future inflation becomes less and less predictable (and that can happen rather rapidly as we saw in 2021-2022). For that reason I have shifted my focus to buying longer term TIPS recently, to lock in positive real yields .I am extending my TIPS ladder from 2027 to 2033 (and focusing first on 2031-2033)....I just hope enough of my CDs mature while yields are still favorable. I am not going into the 2040s because of my age ,trying to balance uncertainty of yield with uncertainty of lifespan. My guess, which is just a guess, is that TIPS yields will decline with time, assuming inflation gets more under control and Fed. rate hikes continue tp slow or cease, so the sooner one buys the better .

It may seem overly conservative to some, but I would rather lock more money in a 1.5% real yield for 10 years than a 3%+ real yield for a bit over a month, not knowing what the future may bring. If I thought I might need the cash sometime soon I would just leave it in FZDXX.

By the way, if anybody has a CD maturing soon with Appalachian FCU, their rep. told me that they mail checks out in a manner that usually arrives within two or three days (I assume first class mail), and a bank wire or overnight delivery is a paid option. I am mentioning this because they offered a hot promotional rate at a time that would have their CDs maturing around now, so maybe others could avert what Kevin and I are going through with long transfer wait periods with Achieva.
protagonist
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Sun Jun 04, 2023 6:27 pm
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
Why Ally and not just FZDXX? Is it for FDIC insurance?
I reduced my funds in external banks to a minimum when FZDXX started posting favorable yields, and transferred all the cash I could to Fidelity to simplify my life, keeping a buck or so in my old external accounts to keep them open. My bills get automatically paid via Fidelity. I think I still have about $2 in Ally.
I don't maintain enough non-invested cash to make fear of the very unlikely loss of it due to lack of insurance an issue major enough to offset the hassle factor- the additional accounting involved with scattered funds leading to a less simple life.

Hopefully, by the end of 2023, all my CDs will have matured and essentially all my investments other than I-bonds will be via Fidelity. I keep a local brick and mortar bank account open with a few bucks for convenience.
Last edited by protagonist on Sun Jun 04, 2023 10:37 pm, edited 1 time in total.
LmG7119
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

protagonist wrote: Sun Jun 04, 2023 9:31 pm
Kevin M wrote: Sun Jun 04, 2023 6:27 pm
LmG7119 wrote: Sun Jun 04, 2023 5:52 pm I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
Why Ally and not just FZDXX? Is it for FDIC insurance?
I reduced my funds in external banks to a minimum when FZDXX started posting favorable yields, and transferred all the cash I could to Fidelity to simplify my life, keeping a buck or so in my old external accounts to keep them open. My bills get automatically paid via Fidelity. I think I still have about $2 in Ally.
I don't maintain enough non-invested cash to make fear of the very unlikely loss of it due to lack of insurance an issue major enough to offset the hassle factor- the additional accounting involved with scattered funds leading to a less simple life.

Hopefully, by the end of 2023, all my CDs will have matured and essentially all my investments other than I-bonds will be via Fidelity. I keep a local brick and mortar bank account open with a few bucks for convenience.
Were you answering my question?
"I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder over VUSXX?"
protagonist
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

LmG7119 wrote: Sun Jun 04, 2023 9:59 pm
protagonist wrote: Sun Jun 04, 2023 9:31 pm
Kevin M wrote: Sun Jun 04, 2023 6:27 pm
LmG7119 wrote: Sun Jun 04, 2023 5:52 pm I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
Why Ally and not just FZDXX? Is it for FDIC insurance?
I reduced my funds in external banks to a minimum when FZDXX started posting favorable yields, and transferred all the cash I could to Fidelity to simplify my life, keeping a buck or so in my old external accounts to keep them open. My bills get automatically paid via Fidelity. I think I still have about $2 in Ally.
I don't maintain enough non-invested cash to make fear of the very unlikely loss of it due to lack of insurance an issue major enough to offset the hassle factor- the additional accounting involved with scattered funds leading to a less simple life.

Hopefully, by the end of 2023, all my CDs will have matured and essentially all my investments other than I-bonds will be via Fidelity. I keep a local brick and mortar bank account open with a few bucks for convenience.
Were you answering my question?
"I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder over VUSXX?"
I was responding to Kevin's comment. That said, I don't believe VUSXX is all that different than FZDXX, and I don't see much if any advantage of a 3-month T-bill over a money market offering a similar yield (unless for tax reasons, if enough money is involved and liquidity is not an issue). As for a T-bill ladder vs. a money market fund, it is like comparing apples and oranges. They serve very different functions, and I think it makes sense to have both.
LmG7119
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

protagonist wrote: Sun Jun 04, 2023 10:31 pm
LmG7119 wrote: Sun Jun 04, 2023 9:59 pm
protagonist wrote: Sun Jun 04, 2023 9:31 pm
Kevin M wrote: Sun Jun 04, 2023 6:27 pm
LmG7119 wrote: Sun Jun 04, 2023 5:52 pm I was holding my emergency funds in Treasury MM fund. Which way do you think is better T-BIlls or VUSXX? I'm not trying to catch every penny, just trying to make more than my bank gives.
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
Why Ally and not just FZDXX? Is it for FDIC insurance?
I reduced my funds in external banks to a minimum when FZDXX started posting favorable yields, and transferred all the cash I could to Fidelity to simplify my life, keeping a buck or so in my old external accounts to keep them open. My bills get automatically paid via Fidelity. I think I still have about $2 in Ally.
I don't maintain enough non-invested cash to make fear of the very unlikely loss of it due to lack of insurance an issue major enough to offset the hassle factor- the additional accounting involved with scattered funds leading to a less simple life.

Hopefully, by the end of 2023, all my CDs will have matured and essentially all my investments other than I-bonds will be via Fidelity. I keep a local brick and mortar bank account open with a few bucks for convenience.
Were you answering my question?
"I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder over VUSXX?"
I was responding to Kevin's comment. That said, I don't believe VUSXX is all that different than FZDXX, and I don't see much if any advantage of a 3-month T-bill over a money market offering a similar yield. As for a T-bill ladder vs. a money market fund, it is like comparing apples and oranges. They serve very different functions, and I think it makes sense to have both.
I'm wondering. What would be the reason? Can you help to understand? It seems in my case for Emergency funds it makes no difference but what about in general? If it is to have a bond position in a brokerage account then I kind of see it but I have 401Ks and Roth IRAs that I could just allocate bond funds there.
Please, help me understand in layman's terms.
vaylie
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Re: Trading Treasuries (nominal and TIPS)

Post by vaylie »

LmG7119 wrote: Sun Jun 04, 2023 10:37 pm I'm wondering. What would be the reason? Can you help to understand? It seems in my case for Emergency funds it makes no difference but what about in general? If it is to have a bond position in a brokerage account then I kind of see it but I have 401Ks and Roth IRAs that I could just allocate bond funds there.
Please, help me understand in layman's terms.
Bond funds vs individual bonds is a huge discussion that I won't go into here, but you can check out the wiki entry on it here.

As for rolling treasury ladder vs money market funds, the way I do it is to split my emergency fund into two portions. A high liquidity portion which covers a month's worth of bills that I want to be able to withdraw with no fuss. Those I put into a money market fund. Then there's the rest of it, the 6 months worth of expenses that I won't really be touching unless something goes really wrong. Those I put into a rolling treasury ladder. If I need it in a pinch, I can sell it on the secondary market - and to be fair, treasuries are fairly liquid too, it's just that you can't guarantee its face value unless you hold to maturity - but otherwise, I just let them sit and collect state tax-free interest.

One of the reasons I highly prefer treasuries over treasury-only money market funds is that it's easier on tax reporting when it comes to excluding state taxes. T-Bills generate 1099-INTs, while money market funds generate 1099-DIVs. And then you have to look up the percentage of US treasuries on that money market fund to determine how much of that is interest-free on a state level. And for my state, I then have to type up a statement explaining why some of my dividends should be excluded from state tax. Just a bit more hassle than holding individual treasuries myself. Of course that point is moot if you go with a non-treasury/prime money market funds.
protagonist
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

LmG7119 wrote: Sun Jun 04, 2023 10:37 pm

I'm wondering. What would be the reason? Can you help to understand? It seems in my case for Emergency funds it makes no difference but what about in general? If it is to have a bond position in a brokerage account then I kind of see it but I have 401Ks and Roth IRAs that I could just allocate bond funds there.
Please, help me understand in layman's terms.
This is the way I use them differently:

For me, emergency funds belong in a money market or bank account where you not only have easy immediate access at any time, but you also know you will not risk losing money if you have to make an emergency withdrawal. Some people also use very short term bond funds which don't fluctuate much in value for that purpose. I don't. I also don't keep emergency funds in a tax deferred account. I suppose you could if you are old enough to have non-penalty access to the funds, but every time you use them you are reducing the total volume of tax deferred assets that are limited and not replaceable.

The purpose of a Treasury ladder, if offering favorable yields, is to lock in those yields over a longer time frame while still providing a degree of liquidity, knowing that at every "rung" of the ladder a certain amount of your Treasuries will mature...plus they are considered safe investments because they have the backing of the US government. It is an intermediate to long term investment tool, whereas a money market account is like a bank account (but hopefully with a better yield).


I hope that sufficiently answers your question (I am off to sleep now...)
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

protagonist wrote: Sun Jun 04, 2023 11:06 pm I also don't keep emergency funds in a tax deferred account. I suppose you could if you are old enough to have non-penalty access to the funds, but every time you use them you are reducing the total volume of tax deferred assets that are limited and not replaceable.
But to avoid depleting tax deferred, you may still spend from taxable, shifting holdings to offset. For example, I can sell stocks in taxable to cover "emergency" spending and then trade a bond fund (or whatever this emergency fund consists of) for stocks in tax deferred to offset.

Regarding the Treasury ladder, there was a question regarding a Treasury bill ladder vs. a money market fund. If bills are really what was specifically meant, then to me there's not much difference. Bills are 1 year or shorter maturities and so a ladder of them would be pretty similar to a Treasury money market fund. VUSXX has an average maturity of about 4 months, so a ladder of something like 1-8 month bills should be more or less equivalent to that.

It may have already been mentioned, but one difference recently is that the money market fund may have moved to repos, losing the state income tax exemption. Vanguard did this, but maybe they'll be moving back now that the debt ceiling has been increased :?: .
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Re: Trading Treasuries (nominal and TIPS)

Post by exodusing »

I'm wondering about the yields of the 4/15/2024 treasuries. TIPS: 3.307%, notes: 5.285%, bills: 5.519% (Vanguard pricing this morning).

This TIPS seems anomalously high (as does the 1/15). It's higher than any other TIPS and I find it hard to believe inflation expectations to April (or Jan) are under 2%, given current inflation, the nominals-TIPS spreads further out and business expectations https://www.atlantafed.org/research/inf ... roject/bie. Of course, when one's model disagrees with the market, the problem is virtually always the model.

Is there something odd going on with these TIPS?
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

^ There is generally less inflation in the second half of the year under the typical seasonal patterns of inflation. I once looked at a decade where (as I recall) inflation averaged about 2% per year, but essentially all of that occured in the first half years. So on average prices when up 2% from Jan-June and then were flat from July-Dec during that period.

April TIPS final value will be based on Jan and Feb CPI, so the current price is based on expectations for non-seasonally adjusted inflation between now and next Jan/Feb.

Edit: Here's where I posted the data for the time period that I looked at, there's also a lot more info on seasonality in that discussion:
viewtopic.php?p=6743782#p6743782
Last edited by jeffyscott on Mon Jun 05, 2023 7:58 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

jeffyscott wrote: Mon Jun 05, 2023 7:06 am
protagonist wrote: Sun Jun 04, 2023 11:06 pm I also don't keep emergency funds in a tax deferred account. I suppose you could if you are old enough to have non-penalty access to the funds, but every time you use them you are reducing the total volume of tax deferred assets that are limited and not replaceable.
But to avoid depleting tax deferred, you may still spend from taxable, shifting holdings to offset. For example, I can sell stocks in taxable to cover "emergency" spending and then trade a bond fund (or whatever this emergency fund consists of) for stocks in tax deferred to offset.

Right, if your purpose is to maintain your AA. All of my stocks are in taxable. I was rather thinking that I want to keep as much total funds in tax deferred for as long as possible. So I would not use tax deferred for emergency spending unless absolutely necessary.
My IRA is all TIPS and CDs. If necessary I have no problem selling stocks in taxable to meet emergency expenses, but because they are in a fund that is subject to large capital gains if I sell, I avoid doing so unless necessary.
I don't think much about my AA. I keep enough funds in safe investments for my retirement and I leave my stocks on autopilot, unless I need to sell them, like when I bought a house a couple of years ago. A certain amount of rebalancing takes place annually on autopilot anyway when my fund distributes its capital gains in December. I use that cash for expenses.
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

From my perspective the 2 year is starting to get interesting again.
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Re: Trading Treasuries (nominal and TIPS)

Post by exodusing »

jeffyscott wrote: Mon Jun 05, 2023 7:42 am ^ There is generally less inflation in the second half of the year under the typical seasonal patterns of inflation. I once looked at a decade where (as I recall) inflation averaged about 2% per year, but essentially all of that occured in the first half years. So on average prices when up 2% from Jan-June and then were flat from July-Dec during that period.

April TIPS final value will be based on Jan and Feb CPI, so the current price is based on expectations for non-seasonally adjusted inflation between now and next Jan/Feb.

Edit: Here's where I posted the data for the time period that I looked at, there's also a lot more info on seasonality in that discussion:
viewtopic.php?p=6743782#p6743782
SA would help explain a TIPS within a year of maturity. I'm not sure if it explains the next few years. What do you think?

Here are Friday's TIPS and notes yield curves from the WSJ:

Image

Image
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

exodusing wrote: Mon Jun 05, 2023 9:58 am SA would help explain a TIPS within a year of maturity. I'm not sure if it explains the next few years. What do you think?
What needs "explaining"?

If you look at April/July 2025 TIPS to get close to two full years, average yield is about 2.3% while nominal is 4.5%. So it seems to me that the market is expecting that the Fed gets it's way and inflation is about at their target over the next two years.
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Re: Trading Treasuries (nominal and TIPS)

Post by exodusing »

jeffyscott wrote: Mon Jun 05, 2023 10:12 am
exodusing wrote: Mon Jun 05, 2023 9:58 am SA would help explain a TIPS within a year of maturity. I'm not sure if it explains the next few years. What do you think?
What needs "explaining"?

If you look at April/July 2025 TIPS to get close to two full years, average yield is about 2.3% while nominal is 4.5%. So it seems to me that the market is expecting that the Fed gets it's way and inflation is about at their target over the next two years.
It just seems odd that the TIPS curve has such a sharp spike, but fair point. Thanks.
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Re: Trading Treasuries (nominal and TIPS)

Post by Mezzinmi »

#Cruncher wrote: Sun Jun 04, 2023 1:00 pm
Mezzinmi wrote: Fri Jun 02, 2023 3:43 pmNext month the first TIPS bond I purchased will mature (CUSIP 912828VM9). Does the current value, as provided in my brok acct, of this bond purchased in the second. mrkt account for the inflation factor to date?
Whether purchased in the secondary market or at auction, the value a broker reports for a TIPS will always reflect the current inflation factor (aka index ratio). You can see your July TIPS' index ratios for every day of 2023 on this web page. (See the first two paragraphs in the left sidebar of this help page for an explanation of how TIPS index ratios are determined.)
Mezzinmi, continuing in same post, wrote:Is there a formula for calculating the expected end value of a maturing TIPS?
The redemption value of your TIPS will equal the face value X the 7/15/2023 index ratio. Once the May 2023 CPI is released on 6/13/2023, we will be able to calculate that index ratio and will know the redemption value precisely. Before then, we can estimate the May 2023 CPI and from that calculate the estimated value.

The bond market is already doing this. It is pricing the July TIPS so that its nominal return is estimated to be about the same as that of a nominal Treasury security maturing about that date. For example, Friday's WSJ Treasury Quotes shows the 1/8% note maturing 7/15/2023 has a 5.369% yield to maturity. Row 10 in the following table shows that if the May CPI is 0.337% higher than April's, the nominal return of the TIPS will also equal 5.369% (in cell D22).

Code: Select all

Row                   Col A        Col B      Col C       Col D  Formula in Column B
  2              Face value       10,000
  3              Value date    6/05/2023
  4                Maturity    7/15/2023
  5                  Coupon       0.375%
  6                   Price  100.0390625                         =100+1.25/32
  7      Base Reference CPI    232.71797
  8        Ref CPI 6/5/2023    302.03960
  9        Ref CPI 7/1/2023    303.36300
 10     Next month increase       0.337% <===

Code: Select all

 11    Est Ref CPI 8/1/2023    304.38529                         =B9*(1+B10)
 12       Ref CPI 7/15/2023    303.82468                         =B9+(B11-B9)*((DAY(B4)-1)/B17)
 13  Interest period starts    1/15/2023                         =COUPPCD(B3,B4,2,1)
 14      Days to settlement          141                         =B3-B13
 15   Days after settlement           40                         =B4-B3
 16    Total days in period          181                         =B4-B13
 17       Days in July 2023           31                         =DATE(YEAR(B4),MONTH(B4)+1,1)-DATE(YEAR(B4),MONTH(B4),1)
 18                               Real $  Idx Ratio   Indexed $
 19        Value on 6/05/23    10,018.51    1.29788   13,002.83  =B2*(B6/100+(B5/2)*(B14/B16))
 20     Proceeds on 7/15/23    10,018.75    1.30555   13,079.97  =B2*(1+B5/2)
 21               Gain/Loss         0.24                  77.14  =B20-B19
 22                   Yield       0.021%                 5.369%  =(B21/B19)*($B16/$B15)*2
 23    Excel YIELD function       0.021%                         =YIELD(B3,B4,B5,B6,100,2,1)
Notes
  • Row 6: I backed into the price so that the yield (cell B22) would equal the 0.021% reported on Friday's WSJ TIPS Quotes.
  • Row 7: The base Reference CPI is as of the TIPS "Dated Date" of 7/15/2013, just before it was first issued.
  • Row 8: All the Reference CPIs for 2023 are shown on this webpage.
  • Row 9: The Ref CPI on 7/1/2023 is the latest we know. It equals the non-seasonally adjusted CPI for April 2023 as shown on this BLS webpage. See the first two paragraphs in the left sidebar of this help page for the relationship between monthly CPI and the daily Reference CPIs used to index TIPS.
  • Row 10: This percent increase is backed into through trial and error so as to make the yield in cell D22 equal 5.369%. It can be done automatically using Excel's Goal Seek tool.
  • Row 12: The Ref CPI on 7/15/2023 is interpolated between the Ref CPIs on 7/1 and 8/1.
  • Rows 13-16: These values are used to calculate the accrued interest included in cell B19 and the yields in cells B22 and D22.
  • Row 17: Used to interpolate the Ref CPI for 7/15/2023 on row 12.
  • Cell B19: Value includes accrued interest for the 141 days from 1/15/2023 to the 6/5/2023 value date.
  • Cell B20: Proceeds include the final semi-annual interest payment.
  • Cells C19:C20: Index ratios equal the Ref CPI on the date divided by the base Reference CPI on row 7. For example
    1.29788 = 302.03960 / 232.71797
  • Cells D19:D20: These values equal the Real $ in column B X the index ratios in column C.
  • Row 22: The yield formula in cell B22 is copied to cell D22.
  • Cell B23: This cell included just to show that the formula in cell B22 produces same result as the Excel YIELD function.
#Cruncher, thanks for the formula. I also found a formula you posted in 2017 on the Model TIPS - Treasury Inflation Protected Securities thread that calculates the end value/yield from purchase to redemption.
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

vaylie wrote: Sun Jun 04, 2023 10:48 pm
LmG7119 wrote: Sun Jun 04, 2023 10:37 pm I'm wondering. What would be the reason? Can you help to understand? It seems in my case for Emergency funds it makes no difference but what about in general? If it is to have a bond position in a brokerage account then I kind of see it but I have 401Ks and Roth IRAs that I could just allocate bond funds there.
Please, help me understand in layman's terms.
Bond funds vs individual bonds is a huge discussion that I won't go into here, but you can check out the wiki entry on it here.

As for rolling treasury ladder vs money market funds, the way I do it is to split my emergency fund into two portions. A high liquidity portion which covers a month's worth of bills that I want to be able to withdraw with no fuss. Those I put into a money market fund. Then there's the rest of it, the 6 months worth of expenses that I won't really be touching unless something goes really wrong. Those I put into a rolling treasury ladder. If I need it in a pinch, I can sell it on the secondary market - and to be fair, treasuries are fairly liquid too, it's just that you can't guarantee its face value unless you hold to maturity - but otherwise, I just let them sit and collect state tax-free interest.

One of the reasons I highly prefer treasuries over treasury-only money market funds is that it's easier on tax reporting when it comes to excluding state taxes. T-Bills generate 1099-INTs, while money market funds generate 1099-DIVs. And then you have to look up the percentage of US treasuries on that money market fund to determine how much of that is interest-free on a state level. And for my state, I then have to type up a statement explaining why some of my dividends should be excluded from state tax. Just a bit more hassle than holding individual treasuries myself. Of course that point is moot if you go with a non-treasury/prime money market funds.
I see the value for tax purposes, thank you
Do you build your t-bill ladder with 3-month T-Bill? I was thinking to buy 3 months t-bill this month and then another 3-month t-biil beginning of the next month. This way I have maturity every month on the 4th month and wash and repeat. Is that enough? Or do I need to 3rd set of T-bills?
Thanks
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Sun Jun 04, 2023 9:31 pm
Kevin M wrote: Sun Jun 04, 2023 6:27 pm
I haven't ever really had something I called an emergency fund, but I do like to maintain good liquidity for short-term expected and unexpected expenses. Of course many such expenses are paid with credit cards.

I keep enough at Ally to cover one calendar month of expected expenses, and I top this off monthly as required.

I hold some cash in FZDXX at Fidelity for 1st tier unexpected expenses, since wire from Fido to Ally is same day or next business day worst case.

I hold 2nd tier cash in VUSXX, and currently most of the rest in taxable is Treasuries. I have Ts maturing every month, and I roll whatever I don't need to top up tier 1.

I still own some bond funds that's I've owned for years.

Kevin
Why Ally and not just FZDXX? Is it for FDIC insurance?
I reduced my funds in external banks to a minimum when FZDXX started posting favorable yields, and transferred all the cash I could to Fidelity to simplify my life, keeping a buck or so in my old external accounts to keep them open. My bills get automatically paid via Fidelity. I think I still have about $2 in Ally.
I don't maintain enough non-invested cash to make fear of the very unlikely loss of it due to lack of insurance an issue major enough to offset the hassle factor- the additional accounting involved with scattered funds leading to a less simple life.

Hopefully, by the end of 2023, all my CDs will have matured and essentially all my investments other than I-bonds will be via Fidelity. I keep a local brick and mortar bank account open with a few bucks for convenience.
Not FDIC insurance. I'm indifferent when it comes to FDIC or USGO, other than the FDIC limits, but those don't usually come into play for me, and I'm almost indifferent to a prime MM fund like FZDXX (not all USGO) and a bank account. The only reason is laziness. As I've mentioned in a post or two, I switched to Fido last time rates were competitive, then switched back to Ally when they weren't, and have been to lazy to switch the bills over again.

What I have done is stop keeping cash at Ally for unexpected expenses, other than $10K in a NP CD at 4.75%, since I can do same day wire from Fido. I even moved DW's excess cash from Ally to Fido, and she just laughs at me when I tell her I'm doing this stuff (but she's thankful I take care of this stuff for her nevertheless).
Last edited by Kevin M on Mon Jun 05, 2023 1:41 pm, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

LmG7119 wrote: Sun Jun 04, 2023 8:17 pm I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder?
The maintenance of a ladder probably is not worth it, especially at Vanguard since you can't auto roll. Even with auto roll at Fido, you can't really maintain a ladder, since you can only roll into the same maturity. For example, if you start with 1, 2, and 3 month, when the 1m rolls into another 1m, you will have 1m, 1m and 2m in the ladder.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by LmG7119 »

Kevin M wrote: Mon Jun 05, 2023 12:28 pm
LmG7119 wrote: Sun Jun 04, 2023 8:17 pm I don't have fidelity, only vanguard. I know VUSXX yield is 5.19% vs T-Bill is 3 months 5.322%. Not much difference in the Emergency fund amount. Is it worth it to build t-bill ladder? What are the advantages of T-bill ladder?
The maintenance of a ladder probably is not worth it, especially at Vanguard since you can't auto roll. Even with auto roll at Fido, you can't really maintain a ladder, since you can only roll into the same maturity. For example, if you start with 1, 2, and 3 month, when the 1m rolls into another 1m, you will have 1m, 1m and 2m in the ladder.
I see what you are saying and this is why I was thinking to buy it next month, so I would always buy 3-month t-bills. I'm ok to control it that way, I was just wondering if it is enough to buy this month and just one more next month or if I would need 3rd time purchase. I feel like I have to do 3rd one. I think from what I understood is to have monthly maturity at the end.
Because VUSXX is not 100% treasury I would have to calculate what is state-tax-free or not. It seems 1099-INT is much simpler.
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VUSXX holdings as of May 31, 2023

Post by Kevin M »

jeffyscott wrote: Mon Jun 05, 2023 7:06 am It may have already been mentioned, but one difference recently is that the money market fund may have moved to repos, losing the state income tax exemption. Vanguard did this, but maybe they'll be moving back now that the debt ceiling has been increased :?: .
Yes. If you really want to maximize your after tax return, considering the state tax exemption in taxable accounts is necessary.

Yikes! I just downloaded the 5/31/2023 holdings, and the repo made up 48.4% of the fund. :!: This doesn't count toward the 50% USGO at end of each quarter requirement for CA, CT and NY, but still, it looks like they're barely keeping USGO above 50%.

Image

The % fund calcs are mine.
Last edited by Kevin M on Tue Jun 06, 2023 11:52 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Mon Jun 05, 2023 12:23 pm I even moved DW's excess cash from Ally to Fido, and she just laughs at me when I tell here I'm doing this stuff (but she's thankful I take care of this stuff for her nevertheless).
*laughing* Sounds like my wife.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Mon Jun 05, 2023 12:41 pm
jeffyscott wrote: Mon Jun 05, 2023 7:06 am It may have already been mentioned, but one difference recently is that the money market fund may have moved to repos, losing the state income tax exemption. Vanguard did this, but maybe they'll be moving back now that the debt ceiling has been increased :?: .
Yes. If you really want to maximize your after tax return, considering the state tax exemption in taxable accounts is necessary.

Yikes! I just downloaded the 5/31/2023 holdings, and the repo made up 48.4% of the fund. :!: This doesn't count toward the 50% USGO at end of each quarter requirement for CA, CT and NY, but still, it looks like they're barely keeping USGO above 50%.

Image

The % fund calcs are mine.

Even at 5% APY (close to FZDXX's current 7 day yield), with 50% subject to state tax, it would amount to state tax on $250 per $10K. If your state tax rate is 5% that would cost you $12.50 in state taxes per $10K invested in the money market- roughly the equivalent of the cost of a glass of wine in a restaurant per year. I suppose if you keep a lot of money in the money market that may be a consideration...for me it is not worth the hassle.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

exodusing wrote: Mon Jun 05, 2023 7:18 am I'm wondering about the yields of the 4/15/2024 treasuries. TIPS: 3.307%, notes: 5.285%, bills: 5.519% (Vanguard pricing this morning).

This TIPS seems anomalously high (as does the 1/15). It's higher than any other TIPS and I find it hard to believe inflation expectations to April (or Jan) are under 2%, given current inflation, the nominals-TIPS spreads further out and business expectations https://www.atlantafed.org/research/inf ... roject/bie. Of course, when one's model disagrees with the market, the problem is virtually always the model.

Is there something odd going on with these TIPS?
As jeffyscott points out, it's mainly a seasonality thing. Here is a chart of ask yields from Fido today, along with the seasonally adjusted (SA) plus outlier factor adjusted yields (this is too complicated to go into details here):

Image

My belief is that the SA+0 adjustments are meaningful to TIPS expected nominal returns, which matter in the short term.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

exodusing wrote: Mon Jun 05, 2023 9:58 am
jeffyscott wrote: Mon Jun 05, 2023 7:42 am ^ There is generally less inflation in the second half of the year under the typical seasonal patterns of inflation. I once looked at a decade where (as I recall) inflation averaged about 2% per year, but essentially all of that occured in the first half years. So on average prices when up 2% from Jan-June and then were flat from July-Dec during that period.

April TIPS final value will be based on Jan and Feb CPI, so the current price is based on expectations for non-seasonally adjusted inflation between now and next Jan/Feb.

Edit: Here's where I posted the data for the time period that I looked at, there's also a lot more info on seasonality in that discussion:
viewtopic.php?p=6743782#p6743782
SA would help explain a TIPS within a year of maturity. I'm not sure if it explains the next few years. What do you think?
Yes. Answered in my previous reply.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by rockstar »

TheTimeLord wrote: Mon Jun 05, 2023 8:43 am From my perspective the 2 year is starting to get interesting again.
I agree. But I have no clue what inflation will look like over the next two years. Core PCE has basically been flat for the last five months. But I wouldn’t be surprised by 3% inflation persisting in the future. Look at the 90s.
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

rockstar wrote: Mon Jun 05, 2023 4:27 pm
TheTimeLord wrote: Mon Jun 05, 2023 8:43 am From my perspective the 2 year is starting to get interesting again.
I agree. But I have no clue what inflation will look like over the next two years. Core PCE has basically been flat for the last five months. But I wouldn’t be surprised by 3% inflation persisting in the future. Look at the 90s.
In my case since we have expenses covered by a TIPS ladder this would just be part of my short or shorter term holdings. Part of the draw is I wanted to accumulate a little more back when the 2 year nominals were around 5%.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Which of these two TIPS would you buy in a tax-deferred account?

1. UNITED STATES TREAS BDS 3.87500% 04/15/2029 coupon 3.875 YTM 1.767 Price 111.886 Adj. price 205.249716
2. UNITED STATES TREAS NTS SER D-2029 0.25000% 07/15/2029 coupon 0.250 YTM 1.598 Price 92.296 Adj. price 108.890362

The first is much more expensive with a much higher coupon, but there is almost a 0.2% difference in yield over a 6 year period.
I'm curious to what extent folks would compromise yield for price and deflation protection.
In taxable I would probably buy #2 for the added benefit of deferring higher taxes, since steady income is not an issue for me. In tax-deferred I'm not so sure...might go with #1.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

protagonist wrote: Tue Jun 06, 2023 9:25 amThe first is much more expensive with a much higher coupon, but there is almost a 0.2% difference in yield over a 6 year period.
I would not call the first one more expensive, I would call it cheaper (since ytm is higher), but with a higher inflation factor.

Since I would see the deflation protection difference between them over a 6 year period to be essentially meaningless, I'd probably choose the higher YTM. But I could also see someone picking the other as being close to a zero coupon and so having little reinvestment risk. I'm assuming that at 6 years any seasonal adjustment would be small (and from Kevin's recent chart it looks like April gets adjusted up a bit more than July does at this time, anyway I misread the chart).

I did choose the higher coupon one, over a year ago. At that time it was also because I wanted the higher coupon, since YTM was only 0.2% and I thought I would either be able to reinvest at higher rates or would not keep it if real yield went well below 0 again. I had and have an alternative investment where I can get a minimum of 2%, so negative real yields were not something that I would want to remain invest in.
In taxable I would probably buy #2 for the added benefit of deferring higher taxes.
I'm not sure exactly what the taxation difference would be, since you have to pay tax on inflation adjustments as well as coupons. But an alternative view for some could be that they want the higher coupon in order to have the funds to pay those taxes on the inflation adjustments.
Last edited by jeffyscott on Tue Jun 06, 2023 12:11 pm, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Tue Jun 06, 2023 9:25 am Which of these two TIPS would you buy in a tax-deferred account?

1. UNITED STATES TREAS BDS 3.87500% 04/15/2029 coupon 3.875 YTM 1.767 Price 111.886 Adj. price 205.249716
2. UNITED STATES TREAS NTS SER D-2029 0.25000% 07/15/2029 coupon 0.250 YTM 1.598 Price 92.296 Adj. price 108.890362

The first is much more expensive with a much higher coupon, but there is almost a 0.2% difference in yield over a 6 year period.
I'm curious to what extent folks would compromise yield for price and deflation protection.
In taxable I would probably buy #2 for the added benefit of deferring higher taxes, since steady income is not an issue for me. In tax-deferred I'm not so sure...might go with #1.
Here's what I see now at Fido:

Image

Here is the chart extended to include the 2029 issues, and truncating the y axis for better resolution of the maturities of interest:

Image

The O adjustments need tweaking in this range--I hadn't looked that closely this far out, and they are all set to 1 (SA adjustment only). Here they are with even more resolution:

Imagehow to capture screen

I probably would choose based only on my coupon and maturity preferences, since the SA yields are so close.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Tue Jun 06, 2023 11:50 am
protagonist wrote: Tue Jun 06, 2023 9:25 am Which of these two TIPS would you buy in a tax-deferred account?

1. UNITED STATES TREAS BDS 3.87500% 04/15/2029 coupon 3.875 YTM 1.767 Price 111.886 Adj. price 205.249716
2. UNITED STATES TREAS NTS SER D-2029 0.25000% 07/15/2029 coupon 0.250 YTM 1.598 Price 92.296 Adj. price 108.890362

The first is much more expensive with a much higher coupon, but there is almost a 0.2% difference in yield over a 6 year period.
I'm curious to what extent folks would compromise yield for price and deflation protection.
In taxable I would probably buy #2 for the added benefit of deferring higher taxes, since steady income is not an issue for me. In tax-deferred I'm not so sure...might go with #1.
Here's what I see now at Fido:

Image

Here is the chart extended to include the 2029 issues, and truncating the y axis for better resolution of the maturities of interest:

Image

The O adjustments need tweaking in this range--I hadn't looked that closely this far out, and they are all set to 1 (SA adjustment only). Here they are with even more resolution:

Imagehow to capture screen

I probably would choose based only on my coupon and maturity preferences, since the SA yields are so close.

Kevin

Thank you for your thorough analyses, Kevin and jeffyscott.

My thinking:
Unless my expenses mount unexpectedly, most likely I will reinvest most if not all of the proceeds from the 2029 TIPS in 2039 TIPS when the 2029 matures. I would think that doing that would offset any benefit from the seasonal adjustment.
I'm not seriously worried about deflation, and even in the unlikely chance that it occurs over 6 years, the same real yield is still guaranteed so I would not lose money in real terms.
I was thinking that I don't need the income from the coupon payments, so tax deferral of larger payments may have a small benefit.
Based on the above, it probably makes sense to me to buy the one with the 3.875% coupon in tax-deferred for the additional YTM.
Whether I receive the funds in April or July is not critical to me.

Does that argument make sense?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Tue Jun 06, 2023 1:22 pm Thank you for your thorough analyses, Kevin and jeffyscott.

My thinking:
Unless my expenses mount unexpectedly, most likely I will reinvest most if not all of the proceeds from the 2029 TIPS in 2039 TIPS when the 2029 matures. I would think that doing that would offset any benefit from the seasonal adjustment.
I'm not seriously worried about deflation, and even in the unlikely chance that it occurs over 6 years, the same real yield is still guaranteed so I would not lose money in real terms.
I was thinking that I don't need the income from the coupon payments, so tax deferral of larger payments may have a small benefit.
Based on the above, it probably makes sense to me to buy the one with the 3.875% coupon in tax-deferred for the additional YTM.
Whether I receive the funds in April or July is not critical to me.

Does that argument make sense?
As of now, I'm only seeing 6 bps of yield difference ask and 4 bps SA+O adjusted diff for the 4/15/29 and 7/15/29, so I still probably would go for the one with the lower coupon to reduce reinvestment risk, but it makes so little difference that your choice if fine too.

If I were really interested that much in reinvestment risk, I would have gone with longer maturities for my purchases today (see next post, which I'll work on next).
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 protagonist PM'd me with some news that prompted me to check to see if the proceeds for my IRA transfer from Achieva had arrived at Fido , and indeed they had. So, I deployed most of the proceeds into more TIPS.

I started with a certain number in mind that I wanted to own for each maturity date, but after the first purchase of the shortest maturity I wanted to buy, I decided to halve that amount so I could extend maturity more. That still only took me out to 10/15/2026 (I own a relatively small amount of 4/15/2027). Here are my TIPS holdings for each maturity as a percent of total TIPS:

Image

The yields ranged from 1.91% to 2.15%, and the SA yields ranged from 1.98% to 2.28% (no outlier factor applied here--I haven't integrated that into my Treasury trades sheet yet), so all in the 2% ballpark.

I probably will do something similar with the proceeds of my 7/15/2023 TIPS when it matures, extending maturity further.

Of my individual Treasuries, I now have 58% TIPS (all in IRAS) and 42% nominal (mostly in taxable).

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Wed Jun 07, 2023 1:14 pm Today protagonist PM'd me with some news that prompted me to check to see if the proceeds for my IRA transfer from Achieva had arrived at Fido , and indeed they had. So, I deployed most of the proceeds into more TIPS.

I started with a certain number in mind that I wanted to own for each maturity date, but after the first purchase of the shortest maturity I wanted to buy, I decided to halve that amount so I could extend maturity more. That still only took me out to 10/15/2026 (I own a relatively small amount of 4/15/2027). Here are my TIPS holdings for each maturity as a percent of total TIPS:

Image

The yields ranged from 1.91% to 2.15%, and the SA yields ranged from 1.98% to 2.28% (no outlier factor applied here--I haven't integrated that into my Treasury trades sheet yet), so all in the 2% ballpark.

I probably will do something similar with the proceeds of my 7/15/2023 TIPS when it matures, extending maturity further.

Of my individual Treasuries, I now have 58% TIPS (all in IRAS) and 42% nominal (mostly in taxable).

Kevin
Hi, Kevin.

I don't have a pretty organized bar graph to show, but when my CD matured this morning I spread the proceeds between 2028 through 2033 maturities.

I now have a ladder stretching from 2024 through 2033 in ten annual rungs with fairly even percentages of the total invested in each rung (with the exception of 2024, where I have only about half as much invested as I do in the other rungs).

My yields are probably pretty much across the board lower than yours. I mostly filled my 2024-2026 rungs when yields were much lower (which made sense at the time), and the 2028-2033 rungs are mostly at yields of approx. 1.5-1.7%. I didn't keep a record of the YTMs of my investments when I invested so I can't provide an overall estimate. My thinking is that, with inflation still high, there is a good chance that yields will be lower in the future across the board, so I have gone for longer maturities at the price of absolute yield to maturity to lock in today's yields. Only time will tell whether this was a good plan.

When more funds come available within the next few months I may spread them fairly evenly between maturities 2024-2033, and maybe add intermittent maturities so as to have 6-month rungs wherever possible rather than just annual rungs. Then again I might overweight the later rungs, or maybe not...I don't know which strategy will prove more effective- maximizing overall yield (as you have done) and hoping for the best when reinvesting, or securing today's yields for longer durations.

I'm very open to a critique of my plan if there are weaknesses. Kevin's strategy is different from mine, and I hope I am proven wrong, because I want yields to remain high when I reinvest all those TIPS maturing in 1-3 years that I invested when yields hovered around zero.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

For those who follow these things closely....
Do you think this so-called "deluge" of T-bills that is alleged to be coming will affect prices and yields of nominals and TIPS within the next month or two in any predictable way, and if so, how? Can we expect lower prices and higher yields? (Or is this just "investment porn"?)
https://www.marketwatch.com/story/a-del ... _headlines
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Re: Trading Treasuries (nominal and TIPS)

Post by billaster »

protagonist wrote: Thu Jun 08, 2023 6:59 pm For those who follow these things closely....
Do you think this so-called "deluge" of T-bills that is alleged to be coming will affect prices and yields of nominals and TIPS within the next month or two in any predictable way, and if so, how? Can we expect lower prices and higher yields? (Or is this just "investment porn"?)
https://www.marketwatch.com/story/a-del ... _headlines
Just this week, since the debt limit was resolved, the Treasury has auctioned $160 billion in T-bills and the market seems to be slurping them right up. Yields have gone back down to their lowest levels since the beginning of May before the Fed's most recent rate hike.

So if there is a liquidity problem, we aren't seeing it yet.
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Re: Trading Treasuries (nominal and TIPS)

Post by kalarama »

billaster wrote: Thu Jun 08, 2023 7:58 pm
So if there is a liquidity problem, we aren't seeing it yet.
"yet" is appropriate.

Today's announcements total $296B for next week's auctions:
https://www.treasurydirect.gov/auctions/upcoming/

I'm certainly curious to see if the funds come primiarily from reverse repo (money markets) or bank reserves....
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

billaster wrote: Thu Jun 08, 2023 7:58 pm
protagonist wrote: Thu Jun 08, 2023 6:59 pm For those who follow these things closely....
Do you think this so-called "deluge" of T-bills that is alleged to be coming will affect prices and yields of nominals and TIPS within the next month or two in any predictable way, and if so, how? Can we expect lower prices and higher yields? (Or is this just "investment porn"?)
https://www.marketwatch.com/story/a-del ... _headlines
Just this week, since the debt limit was resolved, the Treasury has auctioned $160 billion in T-bills and the market seems to be slurping them right up. Yields have gone back down to their lowest levels since the beginning of May before the Fed's most recent rate hike.

So if there is a liquidity problem, we aren't seeing it yet.
For what it is worth, the link I included to the article about the upcoming "deluge" is dated 6/7, just yesterday.
Per the article: "Investors are bracing for an estimated $1 trillion deluge of Treasury issuance to start flowing later this week and continue in the coming months as part of the latest debt-ceiling resolution."
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

All I know is the calendar on my phone says I am suppose to look at placing an order for the upcoming 1 year auction tomorrow. The rates will do what the rates do.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billaster wrote: Thu Jun 08, 2023 7:58 pm
protagonist wrote: Thu Jun 08, 2023 6:59 pm For those who follow these things closely....
Do you think this so-called "deluge" of T-bills that is alleged to be coming will affect prices and yields of nominals and TIPS within the next month or two in any predictable way, and if so, how? Can we expect lower prices and higher yields? (Or is this just "investment porn"?)
https://www.marketwatch.com/story/a-del ... _headlines
Just this week, since the debt limit was resolved, the Treasury has auctioned $160 billion in T-bills and the market seems to be slurping them right up. Yields have gone back down to their lowest levels since the beginning of May before the Fed's most recent rate hike.

So if there is a liquidity problem, we aren't seeing it yet.
The recent volatility in 1m Treasury yields relative to the FFR is unusual since the recent FFR increases began:

Image

If we zoom out we can see kind of similar volatility in the 1m yield vs. FFR in the mid 2000's when the FFR was being raised:

Image

It's pretty unusual.d

If this cycle is somewhat like the one in the 2000's, we should expect increased volatility as the FFR peaks.
If I make a calculation error, #Cruncher probably will let me know.
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