Trading Treasuries (nominal and TIPS)

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FactualFran
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Re: Fidelity Treasury auto roll

Post by FactualFran »

Kevin M wrote: Thu Jun 30, 2022 11:41 am The yield (investment rate) is 1.258%, which seems surprisingly high, based on secondary market, but see the last paragraph below about this.

Now, when I enter the CUSIP into the search screen, I'm taken to the issue on the secondary market (lass time it went to the auction screen). The best bid and ask prices are 99.904 and 99.914 respectively, and yields are shown as 1.088% and 0.976% respectively.

Note that the secondary bid price is the same as the auction price when rounded. The yields are different because of the different settlement dates, with the secondary based on 7/1 settlement, and the auction based on 7/5 settlement.
1.258% is the investment rate in the auction results. That rate is based on the competitive bids of the auction. The secondary market rate can coincidentally be the same.
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

jeffyscott wrote: Thu Jun 30, 2022 2:25 pm
indexfundfan wrote: Thu Jun 30, 2022 1:19 pm
jeffyscott wrote: Thu Jun 30, 2022 12:35 pm
indexfundfan wrote: Thu Jun 30, 2022 10:39 am
jeffyscott wrote: Thu Jun 30, 2022 8:51 am I spoke too soon. I just got an email informing me of a trading violation. It says, in part:
To clarify the sequence of events

6/23 TIPS auction
6/27 Sale of mutual fund (to pay for TIPS)
6/28 Mutual fund sale settled
6/30 TIPS settlement

So Schwab is saying you have a trading violation for the TIPS transaction. To avoid the violation, you need to sell the mutual fund on 6/23 or earlier?
Except that the MF sale was on the 28th so settled on 29th (I put the order in on the 27th but after close), that was the sequence of events.

And that's my interpretation of what the actual violation was and what they would allow. So were I to buy at auction again, I'd first submit a sell order sometime after market close the day before and then submit my auction order.

If you carry a money market balance or have a margin account, the rules may differ.
OK, so 6/28 and 6/29 will make no difference to the scenario.

I would have thought what you did should be fine since your money is available by the TIPS settlement date. Or is this just Schwab trying to make you give free float of your cash to them?

By the way, is this an IRA or non-margin taxable account?
IRA

At a link they included in the email, they say:
Liquidation violations are based on trade dates rather than settlement dates.
and
A cash liquidation violation occurs when you sell a security and use the proceeds to cover the purchase of a different security you bought on a prior trade date.
But then the only example they give is where it's a violation due to the settlement date.
https://www.schwab.com/learn/story/stoc ... 2-timeline

If they really mean that the trade dates need to match, independently of whether or not the settlement dates do, they should give an example like: Buy stock ABC on Monday, sell a treasury bond on Tuesday to cover the trade. This is a violation due to the different trade dates, even though both trades will settle on Wednesday.
Just realized I had the same sort of violation 3+ years ago. That one was a CD purchase covered by MF sale the next day, so like this one, the settlement dates matched but trade dates did not:

viewtopic.php?p=4170507#p4170507

From discussions around that, this may just be a Schwab thing. Other brokers, e.g. Vanguard, apparently would allow it?
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Kevin M
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Re: Fidelity Treasury auto roll

Post by Kevin M »

FactualFran wrote: Thu Jun 30, 2022 3:25 pm
Kevin M wrote: Thu Jun 30, 2022 11:41 am The yield (investment rate) is 1.258%, which seems surprisingly high, based on secondary market, but see the last paragraph below about this.

Now, when I enter the CUSIP into the search screen, I'm taken to the issue on the secondary market (lass time it went to the auction screen). The best bid and ask prices are 99.904 and 99.914 respectively, and yields are shown as 1.088% and 0.976% respectively.

Note that the secondary bid price is the same as the auction price when rounded. The yields are different because of the different settlement dates, with the secondary based on 7/1 settlement, and the auction based on 7/5 settlement.
1.258% is the investment rate in the auction results. That rate is based on the competitive bids of the auction. The secondary market rate can coincidentally be the same.
I understand auctions. The secondary rate is not the same; the secondary bid price is the same, coincidence or not. The point is that the different settlement dates result in different yields for the same price.

Of course the secondary ask price was higher today; looks like it closed at 99.908 for min qty 100, and that's a yield of 1.045%.

Kevin
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mikeyzito22
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Re: Trading Treasuries (nominal and TIPS)

Post by mikeyzito22 »

A few questions:

I see this at the Vanguard Treasury order site today: United States Treas Note 1.625% due 8/31/2022. If I buy $100,000 of this note,

1) Am I guaranteed 101,625 on 8/31?

2) I will not have to pay state taxes on it but Vanguard will issue me a 1099, which will include this note and pay federal taxes on it?

3) If I choose not to keep the money in my brokerage settlement account and deposit it back into my HYSA, that is also a non taxable or very minimal taxable event in the fact that it was in the settlement account for a day or two?

4) When choosing the length, bid, ask, and all the other: If i wanted to just pull the trigger, am I guaranteed the 1.625%? Also, with differing time frames, obviously it seems like the rates go up. I'm a newbie at buying these through Vanguard.

5) This note is liquid, meaning I could sell it before maturity? It is August, so that's not going to happen, just wondering.

Thank you Kevin for this thread
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

jeffyscott wrote: Thu Jun 30, 2022 2:25 pm A cash liquidation violation occurs when you sell a security and use the proceeds to cover the purchase of a different security you bought on a prior trade date.
But then the only example they give is where it's a violation due to the settlement date.
https://www.schwab.com/learn/story/stoc ... 2-timeline

If they really mean that the trade dates need to match, independently of whether or not the settlement dates do, they should give an example like: Buy stock ABC on Monday, sell a treasury bond on Tuesday to cover the trade. This is a violation due to the different trade dates, even though both trades will settle on Wednesday.
Duh. Settlement or trade date. Not clear at all.
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm A few questions:

I see this at the Vanguard Treasury order site today: United States Treas Note 1.625% due 8/31/2022. If I buy $100,000 of this note,

1) Am I guaranteed 101,625 on 8/31?

No. The interest is paid semi-annually, so you will receive 812.50 interest payment along with the $100K principal at maturity.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 2) I will not have to pay state taxes on it but Vanguard will issue me a 1099, which will include this note and pay federal taxes on it?

The 1099-INT will show the interest as US government interest, which is not taxable by the state.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 3) If I choose not to keep the money in my brokerage settlement account and deposit it back into my HYSA, that is also a non taxable or very minimal taxable event in the fact that it was in the settlement account for a day or two?

It doesn't matter what you do with the money after the Treasury matures. Moving cash around taxable accounts is not taxable.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 4) When choosing the length, bid, ask, and all the other: If i wanted to just pull the trigger, am I guaranteed the 1.625%? Also, with differing time frames, obviously it seems like the rates go up. I'm a newbie at buying these through Vanguard.

You are guaranteed the 1.625% annualized interest payments. What is more important is the yield to maturity, which was 1.48% ask (if buying) for min qty 250, and 1.82% bid (if you're selling) or min qty 250.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 5) This note is liquid, meaning I could sell it before maturity? It is August, so that's not going to happen, just wondering.

Yes, Treasuries are very liquid, so you could sell before maturity. You will lose some to the bid/ask spread, and if yields increase, you could lose more. Or, yields could fall and you could make more.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm Thank you Kevin for this thread
You're welcome!

Kevin
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mikeyzito22
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Re: Trading Treasuries (nominal and TIPS)

Post by mikeyzito22 »

Kevin M wrote: Thu Jun 30, 2022 6:21 pm
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm A few questions:

I see this at the Vanguard Treasury order site today: United States Treas Note 1.625% due 8/31/2022. If I buy $100,000 of this note,

1) Am I guaranteed 101,625 on 8/31?

No. The interest is paid semi-annually, so you will receive 812.50 interest payment along with the $100K principal at maturity.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 2) I will not have to pay state taxes on it but Vanguard will issue me a 1099, which will include this note and pay federal taxes on it?

The 1099-INT will show the interest as US government interest, which is not taxable by the state.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 3) If I choose not to keep the money in my brokerage settlement account and deposit it back into my HYSA, that is also a non taxable or very minimal taxable event in the fact that it was in the settlement account for a day or two?

It doesn't matter what you do with the money after the Treasury matures. Moving cash around taxable accounts is not taxable.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 4) When choosing the length, bid, ask, and all the other: If i wanted to just pull the trigger, am I guaranteed the 1.625%? Also, with differing time frames, obviously it seems like the rates go up. I'm a newbie at buying these through Vanguard.

You are guaranteed the 1.625% annualized interest payments. What is more important is the yield to maturity, which was 1.48% ask (if buying) for min qty 250, and 1.82% bid (if you're selling) or min qty 250.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm 5) This note is liquid, meaning I could sell it before maturity? It is August, so that's not going to happen, just wondering.

Yes, Treasuries are very liquid, so you could sell before maturity. You will lose some to the bid/ask spread, and if yields increase, you could lose more. Or, yields could fall and you could make more.
mikeyzito22 wrote: Thu Jun 30, 2022 4:45 pm Thank you Kevin for this thread
You're welcome!

Kevin
Great!

Let's examine this then:
1 - 3 months Change
Purchasing CD from: Merchants Bnk Of Indiana 2.00% Matures 10/12/2022
Payment frequency: Interest at maturity Settles 7/12/2022


So, in this case, for a 100,000 purchase it would or would not payout 102,000 on 10/12/2022 and settle to the settlement in account in the taxable brokerage? I realize it is not liquid.
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

mikeyzito22 wrote: Thu Jun 30, 2022 7:32 pm Great!

Let's examine this then:
1 - 3 months Change
Purchasing CD from: Merchants Bnk Of Indiana 2.00% Matures 10/12/2022
Payment frequency: Interest at maturity Settles 7/12/2022

So, in this case, for a 100,000 purchase it would or would not payout 102,000 on 10/12/2022 and settle to the settlement in account in the taxable brokerage? I realize it is not liquid.
No. The rate is an annual rate (what you would earn on a 1-year CD), and this is only 3 months, so you would earn about 1/4 of the annual yield, so about 0.5%. That would be about $500 in interest on $100K.

But, this is a thread about trading Treasuries, so would prefer not to get into CDs much.
If I make a calculation error, #Cruncher probably will let me know.
jmmec
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Re: Trading Treasuries (nominal and TIPS)

Post by jmmec »

Admittedly I'm ignorant, but this is an awesome discussion thread, so please enlighten me:

I've purchased nominal short term treasuries at auction so have a little experience. I planned to purchase the 7-year nominal on Tuesday of this week, but missed it, where CUSPIP 91282CEV9 auctioned at 3.25% coupon at a $99.813719 price. It settled today.

I just looked at the secondary market on Fidelity and saw the asking price is now at $101.172 an increase of 1.36% from auction. :oops:

How come the price is so high? Is it because the 7Y / 10Y took a dive today? Is it going to come down anytime soon - anyone's guess?

I was interested in buying this issue for income due to the 3.25% coupon and wanted a longer 7 year duration; also to avoid state income tax in a taxable account.

Thank you!
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

jmmec wrote: Thu Jun 30, 2022 9:51 pm Admittedly I'm ignorant, but this is an awesome discussion thread, so please enlighten me:

I've purchased nominal short term treasuries at auction so have a little experience. I planned to purchase the 7-year nominal on Tuesday of this week, but missed it, where CUSPIP 91282CEV9 auctioned at 3.25% coupon at a $99.813719 price. It settled today.

I just looked at the secondary market on Fidelity and saw the asking price is now at $101.172 an increase of 1.36% from auction. :oops:

How come the price is so high? Is it because the 7Y / 10Y took a dive today? Is it going to come down anytime soon - anyone's guess?

I was interested in buying this issue for income due to the 3.25% coupon and wanted a longer 7 year duration; also to avoid state income tax in a taxable account.

Thank you!
Treasury yield curve has 7 year yield at 3.04% for today. Using an online bond value calculator, for the yield to go from 3.25% to 3.04% the price would have go from $99.8137 to $101.1264. So, yes the change in market yields explains the price increase.

No one knows what the future price/yield will be, of course.
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Drew31
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Re: Trading Treasuries (nominal and TIPS)

Post by Drew31 »

Help me understand the impact of the coupon rate when buying on secondary market...

Specifically I'm look to buy a treasury maturing in April 2023.

Looking at two in particular

- 912828ZH6 4/15/2023 with .25% coupon current yield of 2.676

- 912796V48 4/20/2023 zero coupon current yield of 2.459


Why does the bond with a coupon yield more or what am I missing?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Drew31 wrote: Fri Jul 01, 2022 9:18 am Help me understand the impact of the coupon rate when buying on secondary market...

Specifically I'm look to buy a treasury maturing in April 2023.

Looking at two in particular

- 912828ZH6 4/15/2023 with .25% coupon current yield of 2.676

- 912796V48 4/20/2023 zero coupon current yield of 2.459

Why does the bond with a coupon yield more or what am I missing?
Yields are higher today, but the yield spread is about 20 basis points in favor of the 0.25% coupon issue.

This is interesting, because not only does the 0-coupon bond have a slighly longer maturity, it has a slightly longer duration due to the lower coupon rate, so one would think the yield should be higher. I think it must be a liquidity deal. The zero coupon is a Treasury bill issued recently (dated date 4/21/2022), so more recently issued than the note (dated date 4/15/2020). There generally is more demand for recently issued (on the run) Treasuries, driving the price higher and the yield lower. This is all I can think of.

If you plan to hold to maturity, I would buy the one with the higher yield.

Kevin
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Drew31
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Re: Trading Treasuries (nominal and TIPS)

Post by Drew31 »

Kevin M wrote: Fri Jul 01, 2022 12:04 pm
Drew31 wrote: Fri Jul 01, 2022 9:18 am Help me understand the impact of the coupon rate when buying on secondary market...

Specifically I'm look to buy a treasury maturing in April 2023.

Looking at two in particular

- 912828ZH6 4/15/2023 with .25% coupon current yield of 2.676

- 912796V48 4/20/2023 zero coupon current yield of 2.459

Why does the bond with a coupon yield more or what am I missing?
Yields are higher today, but the yield spread is about 20 basis points in favor of the 0.25% coupon issue.

This is interesting, because not only does the 0-coupon bond have a slighly longer maturity, it has a slightly longer duration due to the lower coupon rate, so one would think the yield should be higher. I think it must be a liquidity deal. The zero coupon is a Treasury bill issued recently (dated date 4/21/2022), so more recently issued than the note (dated date 4/15/2020). There generally is more demand for recently issued (on the run) Treasuries, driving the price higher and the yield lower. This is all I can think of.

If you plan to hold to maturity, I would buy the one with the higher yield.

Kevin
Thanks again Kevin. What you said made sense so bought a few of the .25% at @ 2.72% yield so it went up slightly since I posted. I just wasn't sure if there was some concept I was missing on this one.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jmmec wrote: Thu Jun 30, 2022 9:51 pm Admittedly I'm ignorant, but this is an awesome discussion thread, so please enlighten me:

I've purchased nominal short term treasuries at auction so have a little experience. I planned to purchase the 7-year nominal on Tuesday of this week, but missed it, where CUSPIP 91282CEV9 auctioned at 3.25% coupon at a $99.813719 price. It settled today.

I just looked at the secondary market on Fidelity and saw the asking price is now at $101.172 an increase of 1.36% from auction. :oops:
How come the price is so high? Is it because the 7Y / 10Y took a dive today? Is it going to come down anytime soon - anyone's guess?

I was interested in buying this issue for income due to the 3.25% coupon and wanted a longer 7 year duration; also to avoid state income tax in a taxable account.

Thank you!
Auction price was 99.813719 and yield was 3.280%. Ask price now for min qty 250 is 102.011 and ask yield is 2.930%. Bid price is 102.000 and yield is 2.931. Price up, yield down.

By "7Y / 10Y", I assume you mean the CMT yields published by Treasury. On the auction date, 6/28, the 7-year CMT yield was 3.27%, so very close to auction yield of 3.28%. On 6/29 and 6/30, CMT yield was 3.17% and 3.04% respectively. Price and yield the actual 7-year that was just issued should be very close to the CMT yield, since it is the closest thing to a par note out there, and the CMT yields are based on actual bid prices (bid yield is 2.933%, so very small bid/ask spread). I would expect the CMT yield today to be close to 2.93%.

The recent peak of the 7 Yr CMT was 3.60% on 6/14/2022, so it's down more than 60 basis points since then.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Drew31 wrote: Fri Jul 01, 2022 12:10 pm
Kevin M wrote: Fri Jul 01, 2022 12:04 pm
Drew31 wrote: Fri Jul 01, 2022 9:18 am Help me understand the impact of the coupon rate when buying on secondary market...

Specifically I'm look to buy a treasury maturing in April 2023.

Looking at two in particular

- 912828ZH6 4/15/2023 with .25% coupon current yield of 2.676

- 912796V48 4/20/2023 zero coupon current yield of 2.459

Why does the bond with a coupon yield more or what am I missing?
Yields are higher today, but the yield spread is about 20 basis points in favor of the 0.25% coupon issue.

This is interesting, because not only does the 0-coupon bond have a slighly longer maturity, it has a slightly longer duration due to the lower coupon rate, so one would think the yield should be higher. I think it must be a liquidity deal. The zero coupon is a Treasury bill issued recently (dated date 4/21/2022), so more recently issued than the note (dated date 4/15/2020). There generally is more demand for recently issued (on the run) Treasuries, driving the price higher and the yield lower. This is all I can think of.

If you plan to hold to maturity, I would buy the one with the higher yield.

Kevin
Thanks again Kevin. What you said made sense so bought a few of the .25% at @ 2.72% yield so it went up slightly since I posted. I just wasn't sure if there was some concept I was missing on this one.
That's the yield for min qty 1 I see at Fidelity now, 2.720%. Yield for min qty 250 is 2.726%, so the large/small-qty yield spread is less than 1 basis point. Good deal for the smaller investor.

Kevin
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Drew31
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Re: Trading Treasuries (nominal and TIPS)

Post by Drew31 »

Kevin M wrote: Fri Jul 01, 2022 12:26 pm
Drew31 wrote: Fri Jul 01, 2022 12:10 pm
Kevin M wrote: Fri Jul 01, 2022 12:04 pm
Drew31 wrote: Fri Jul 01, 2022 9:18 am Help me understand the impact of the coupon rate when buying on secondary market...

Specifically I'm look to buy a treasury maturing in April 2023.

Looking at two in particular

- 912828ZH6 4/15/2023 with .25% coupon current yield of 2.676

- 912796V48 4/20/2023 zero coupon current yield of 2.459

Why does the bond with a coupon yield more or what am I missing?
Yields are higher today, but the yield spread is about 20 basis points in favor of the 0.25% coupon issue.

This is interesting, because not only does the 0-coupon bond have a slighly longer maturity, it has a slightly longer duration due to the lower coupon rate, so one would think the yield should be higher. I think it must be a liquidity deal. The zero coupon is a Treasury bill issued recently (dated date 4/21/2022), so more recently issued than the note (dated date 4/15/2020). There generally is more demand for recently issued (on the run) Treasuries, driving the price higher and the yield lower. This is all I can think of.

If you plan to hold to maturity, I would buy the one with the higher yield.

Kevin
Thanks again Kevin. What you said made sense so bought a few of the .25% at @ 2.72% yield so it went up slightly since I posted. I just wasn't sure if there was some concept I was missing on this one.
That's the yield for min qty 1 I see at Fidelity now, 2.720%. Yield for min qty 250 is 2.726%, so the large/small-qty yield spread is less than 1 basis point. Good deal for the smaller investor.

Kevin
That is what I saw as well at time of purchase. That different is so tiny won't make a difference at all.
KeepinItPositive
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Re: Trading Treasuries (nominal and TIPS)

Post by KeepinItPositive »

Beginner question:

I’m looking into purchasing tips on the secondary market at fidelity. On the website it lists yield to worst. Is this the guaranteed real yield if I hold the bond until maturity?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

KeepinItPositive wrote: Fri Jul 01, 2022 10:02 pm Beginner question:

I’m looking into purchasing tips on the secondary market at fidelity. On the website it lists yield to worst. Is this the guaranteed real yield if I hold the bond until maturity?
Yes!
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dollarsaver
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Re: Trading Treasuries (nominal and TIPS)

Post by dollarsaver »

Looking at 6 mo treasuries on the secondary market just now on Vanguard. I entered a 1/23 maturity date and three came up. Can you explain why the first one has the highest yield. Comparing this to the auction for the 6 mo that is being offered now. Thanks.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

dollarsaver wrote: Sat Jul 02, 2022 3:35 pm Looking at 6 mo treasuries on the secondary market just now on Vanguard. I entered a 1/23 maturity date and three came up. Can you explain why the first one has the highest yield. Comparing this to the auction for the 6 mo that is being offered now. Thanks.
Different maturity dates, different coupons, not sure if any are "on-the-run", but that can be another factor.

Also the market is not open, so it's unclear what those quotes are based on and you can't buy any of them until Tuesday at which time the quotes may be different from what you see now. In any case, you can't compare to the auction, since that yield will not be determined until it actually occurs on Tuesday.
protagonist
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Currently the 7/15/22 TIPS is trading at a yield to maturity of -14.218.
I'm curious....how did that happen?
Why would anybody even consider buying that bond?
Am I missing something? Is this just a wild inefficiency in the market?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Sat Jul 02, 2022 9:59 pm Currently the 7/15/22 TIPS is trading at a yield to maturity of -14.218.
I'm curious....how did that happen?
Why would anybody even consider buying that bond?
Am I missing something? Is this just a wild inefficiency in the market?
The value on 7/15/2022 is known exactly, because we already have the reference CPI and index ratios to August 1. So, this TIPS trades like a nominal Treasury of same maturity.

I pulled quotes from Fidelity on Thursday for Friday settlement (7/1). Using those quotes, I calculate that both the nominal and TIPS maturing 7/15/2022 will earn 0.01 per 100. The TIPS is priced so that this is so, and the yield is what it is.

Image

I use the seasonally adjusted price on 7/1, which 100.494 (unadjusted price was 100.507).

For 7/1 settlement, I saw ask yield of -12.91%. This is a seasonally adjusted -12.58%.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Error: The 0.20% TIPS return in cell B13 below is wrong! (I forgot to apply the index ratio to the accrued interest.) Thanks to Kevin M for pointing this out in the next post. See this post below for the table with the correct return of -0.10%.
Kevin M wrote: Sat Jul 02, 2022 11:07 pmThe value on 7/15/2022 is known exactly, because we already have the reference CPI and index ratios to August 1. So, this TIPS trades like a nominal Treasury of same maturity.
Indeed. Since the May CPI was released on June 10th, bond traders have treated this TIPS as a nominal bond. In bidding for a July 1 settlement they factor in the 0.498% increase in its index ratio from 1.25720 on 7/1 to 1.26346 on 7/15. (See this TreasuryDirect webpage.) When this is done, as shown on row 13 below, the nominal return of the TIPS (0.20%) is roughly comparable to that of the regular Treasury (0.25%) maturing on the same date.
Kevin M, in same post, wrote:I use the seasonally adjusted price on 7/1, which [is] 100.494 (unadjusted price was 100.507).
In this case, Kevin, you should use the raw price without any adjustment for seasonality of the CPI. Using 100.494 in row 9 below instead of 100.507 would make the annual return of the TIPS in cell B13 jump up to 0.54%, twice the yield on the regular treasury in cell C13.

Code: Select all

  1              Settlement  7/01/2022
  2                 Matures  7/15/2022
  3  Days 1/15/22 - 7/15/22        181             =COUPDAYS(B1,B2,2,1)
  4  Days before settlement        167             =COUPDAYBS(B1,B2,2,1)
  5   Days after settlement         14             =COUPDAYSNC(B1,B2,2,1)
  6                  Coupon     0.125%     1.750%
  7    Index ratio - settle    1.25720    1.00000
  8    Index ratio - mature    1.26346    1.00000
  9                   Price    100.507    100.058
 10        Accrued interest      0.058      0.807  =100*(B6/2)*($B4/$B3)
 11              Total cost    126.415    100.865  =B7*B9+B10
 12       Value at maturity    126.425    100.875  =B8*100*(1+B6/2)
 13           Annual return      0.20%      0.25%  =2*((B12/B11)^($B3/$B5)-1)
Formulas in rows 3-5 use the Excel functions: COUPDAYS, COUPDAYBS, and COUPDAYSNC. Formulas in rows 10-13 are copied right from column B to column C.
Last edited by #Cruncher on Mon Jul 04, 2022 5:13 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

#Cruncher wrote: Sun Jul 03, 2022 5:46 am
Kevin M, in same post, wrote:I use the seasonally adjusted price on 7/1, which [is] 100.494 (unadjusted price was 100.507).
In this case, Kevin, you should use the raw price without any adjustment for seasonality of the CPI. Using 100.494 in row 9 below instead of 100.507 would make the annual return of the TIPS in cell B13 jump up to 0.54%, twice the yield on the regular treasury in cell C13.
Yeah, that's what I thought, but when I used unadjusted price, I got a return of -0.01 instead of +0.01. See next comment.
#Cruncher wrote: Sun Jul 03, 2022 5:46 am

Code: Select all

  1              Settlement  7/01/2022
  2                 Matures  7/15/2022
  3  Days 1/15/22 - 7/15/22        181             =COUPDAYS(B1,B2,2,1)
  4  Days before settlement        167             =COUPDAYBS(B1,B2,2,1)
  5   Days after settlement         14             =COUPDAYSNC(B1,B2,2,1)
  6                  Coupon     0.125%     1.750%
  7    Index ratio - settle    1.25720    1.00000
  8    Index ratio - mature    1.26346    1.00000
  9                   Price    100.507    100.058
 10        Accrued interest      0.058      0.807  =100*(B6/2)*($B4/$B3)
 11              Total cost    126.415    100.865  =B7*B9+B10
 12       Value at maturity    126.425    100.875  =B8*100*(1+B6/2)
 13           Annual return      0.20%      0.25%  =2*((B12/B11)^($B3/$B5)-1)
Formulas in rows 3-5 use the Excel functions: COUPDAYS, COUPDAYBS, and COUPDAYSNC. Formulas in rows 10-13 are copied right from column B to column C.
In cell B10 you do not adjust the interest with the IR, and in cell B11 you do not either. With your approach, shouldn't cell B11 be:

B7*(B9+B10)

?

I think this then results in a return of 0.00, which is close to mine with unadjusted price considering rounding : -0.0053 vs -0.0049.

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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Kevin M wrote: Sun Jul 03, 2022 1:23 pmIn cell B10 you do not adjust the interest with the IR, and in cell B11 you do not either.
Yep, good catch, Kevin. I goofed. :oops:
Here is the corrected table.

Code: Select all

  1              Settlement  7/01/2022
  2                 Matures  7/15/2022
  3  Days 1/15/22 - 7/15/22        181             =COUPDAYS(B1,B2,2,1)
  4  Days before settlement        167             =COUPDAYBS(B1,B2,2,1)
  5   Days after settlement         14             =COUPDAYSNC(B1,B2,2,1)
  6                  Coupon     0.125%     1.750%
  7    Index ratio - settle    1.25720    1.00000
  8    Index ratio - mature    1.26346    1.00000
  9                   Price    100.507    100.058
 10        Accrued interest      0.072      0.807  =B7*100*(B6/2)*($B4/$B3)
 11              Total cost    126.430    100.865  =B7*B9+B10
 12       Value at maturity    126.425    100.875  =B8*100*(1+B6/2)
 13           Annual return     (0.10%)     0.25%  =2*((B12/B11)^($B3/$B5)-1)
But I maintain that the correct TIPS price to use in the comparison is the actual raw price that a buyer would pay even though it produces a nonsensical loss. Could your quotes possibly have been for a day earlier, with settlement on 6/30, not 7/1? This would produce reasonable returns of +0.38% for the TIPS and +0.35% for the regular Treasury.

Code: Select all

  1              Settlement  6/30/2022
  2                 Matures  7/15/2022
  3  Days 1/15/22 - 7/15/22        181             =COUPDAYS(B1,B2,2,1)
  4  Days before settlement        166             =COUPDAYBS(B1,B2,2,1)
  5   Days after settlement         15             =COUPDAYSNC(B1,B2,2,1)
  6                  Coupon     0.125%     1.750%
  7    Index ratio - settle    1.25696    1.00000
  8    Index ratio - mature    1.26346    1.00000
  9                   Price    100.507    100.058
 10        Accrued interest      0.072      0.802  =B7*100*(B6/2)*($B4/$B3)
 11              Total cost    126.405    100.860  =B7*B9+B10
 12       Value at maturity    126.425    100.875  =B8*100*(1+B6/2)
 13           Annual return      0.38%      0.35%  =2*((B12/B11)^($B3/$B5)-1)
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Re: Trading Treasuries (nominal and TIPS)

Post by rossington »

Kevin,
Impressive thread.

I have not read the whole thing so if this question has been addressed please point me to it...

Is this purely an educational thread or is it your strategy to squeeze more earnings out by trading as opposed to holding the various securities to maturity (after taxes are taken in to consideration either way).

Thanks.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

rossington wrote: Sun Jul 03, 2022 2:58 pm Kevin,
Impressive thread.

I have not read the whole thing so if this question has been addressed please point me to it...

Is this purely an educational thread or is it your strategy to squeeze more earnings out by trading as opposed to holding the various securities to maturity (after taxes are taken in to consideration either way).

Thanks.
As with all investment theory threads, the purpose is to share our learning with each other, and to learn more ourselves.

I mostly plan to hold to maturity, but I'm not tied to it. If something much better comes along, I might sell Treasuries to invest in it, as I did in 2019 to buy a great CD.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

#Cruncher wrote: Sun Jul 03, 2022 2:50 pm
Kevin M wrote: Sun Jul 03, 2022 1:23 pmIn cell B10 you do not adjust the interest with the IR, and in cell B11 you do not either.
Yep, good catch, Kevin. I goofed. :oops:
A rare event, but I might have to tweak my signature a bit ;-)
#Cruncher wrote: Sun Jul 03, 2022 2:50 pm Here is the corrected table.

Code: Select all

  1              Settlement  7/01/2022
  2                 Matures  7/15/2022
  3  Days 1/15/22 - 7/15/22        181             =COUPDAYS(B1,B2,2,1)
  4  Days before settlement        167             =COUPDAYBS(B1,B2,2,1)
  5   Days after settlement         14             =COUPDAYSNC(B1,B2,2,1)
  6                  Coupon     0.125%     1.750%
  7    Index ratio - settle    1.25720    1.00000
  8    Index ratio - mature    1.26346    1.00000
  9                   Price    100.507    100.058
 10        Accrued interest      0.072      0.807  =B7*100*(B6/2)*($B4/$B3)
 11              Total cost    126.430    100.865  =B7*B9+B10
 12       Value at maturity    126.425    100.875  =B8*100*(1+B6/2)
 13           Annual return     (0.10%)     0.25%  =2*((B12/B11)^($B3/$B5)-1)
But I maintain that the correct TIPS price to use in the comparison is the actual raw price that a buyer would pay even though it produces a nonsensical loss. Could your quotes possibly have been for a day earlier, with settlement on 6/30, not 7/1?
Nope: "Date downloaded 06/30/2022 3:37 PM", a Thursday, so settlement Friday 7/1.

I think of the seasonal adjustment as a way to rationalize TIPS nominal expected returns as they get closer to maturity. With this in mind, why wouldn't the the seasonally-adjusted price be the one to use? Not only might this makes some sense thinking about it this way, but it produces a more sensible result, with both TIPS and nominal earning 0.01 per 100.

Since we're so close to maturity, the SA adjustment is quite small, but it still makes a small difference.

We already know the terminal value of the 7/15/2022 TIPS, but we don't for the 1/15/2023 TIPS, so it seems that the seasonal adjustment still applies to rationalize the expected nominal return of these two TIPS, for example.

Thanks,

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

#Cruncher wrote: Sun Jul 03, 2022 2:50 pm But I maintain that the correct TIPS price to use in the comparison is the actual raw price that a buyer would pay...
Unless I am missing something here, I would agree. Once you know exactly what you will be getting, it has become just like a nominal treasury (with a bit less liquidity, perhaps).

Once the final index ratio is known, it is no longer offering protection against unexpected inflation, which is what TIPS do. Instead all the (past) inflation that will impact the value is now known and it is simply offering $Y on the day it matures in exchange for $X now.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Sun Jul 03, 2022 4:05 pm
#Cruncher wrote: Sun Jul 03, 2022 2:50 pm But I maintain that the correct TIPS price to use in the comparison is the actual raw price that a buyer would pay...
Unless I am missing something here, I would agree. Once you know exactly what you will be getting, it has become just like a nominal treasury (with a bit less liquidity, perhaps).

Once the final index ratio is known, it is no longer offering protection against unexpected inflation, which is what TIPS do. Instead all the (past) inflation that will impact the value is now known and it is simply offering $Y on the day it matures in exchange for $X now.
Right, we all know that and agree on it, but it doesn't address this part of my thinking:
Kevin M wrote: Sun Jul 03, 2022 3:43 pm We already know the terminal value of the 7/15/2022 TIPS, but we don't for the 1/15/2023 TIPS, so it seems that the seasonal adjustment still applies to rationalize the expected nominal return of these two TIPS, for example.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

I'm not sure what is meant by "rationalize the expected nominal returns"?

The July TIPS nominal return is known, so why would there be anything "expected" aside from that known return?
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Seasonal adjustment: rationalizing expected nominal returns of TIPS

Post by Kevin M »

jeffyscott wrote: Sun Jul 03, 2022 10:04 pm I'm not sure what is meant by "rationalize the expected nominal returns"?

The July TIPS nominal return is known, so why would there be anything "expected" aside from that known return?
You may be right, but I'll try to explain my thinking a bit more.

Here is the definition of rationalize that I am thinking of:
to bring into accord with reason or cause something to seem reasonable
The sawtooth pattern we sometimes see in the unadjusted TIPS yield curve is not reasonable--other yield curves just don't look like this, and applying the seasonal adjustments makes it more reasonable (smoother, like other yield curves).

The SA price adjustment for 7/1 settlement lowers the price (raises the yield), and the SA adjustment for 1/15 raises the price (lowers the yield). A sophisticated TIPS trader will consider this in comparing the 7/1 and 1/15 maturity dates.

Since the real yield is what it is, and is approximately what you will earn in real terms, why would TIPS traders not always buy the TIPS with the higher real yield for adjacent maturities? They must be looking at something else besides just the expected real return, and all that is left is the expected nominal return. So my hypothesis is that they are considering the expected nominal returns as well. This is what I mean by "rationalize the expected nominal returns."

In other words, the seasonal adjustments are not just relevant to a single TIPS, but also to comparing two TIPS of adjacent maturities, for example, like 7/15 and 1/15 of the following year.

Having said all of this, we should keep in mind that we're talking about such small numbers that there could be other effects at play, and some of the simplifying assumptions in the Canty method I'm using might cause enough error to be relevant. We are talking about a change in returns 0.01% to -0.01%.

FYI, the two main simplifying assumptions are annual coupon payments (instead of semi-annual) and ignoring the impact of real accrued interest (because at low coupon rates, it is close enough to 0 to not impact the result much at all). More complicated formulas can be used to get more accurate results, but generally it doesn't change the result enough to be worth it.

I agree that the non-adjusted price is relevant in what the actual return will be once we know the index ratios through maturity, but am wondering if TIPS traders still aren't adjusting the price to produce a more valid comparison with the 1/15/2023 TIPS (for example). I am not proposing this with a high degree of certainty, but thought it would be interesting to explore it, especially since using the SA price results in a more reasonable return compared to the nominal Treasury maturing on the same date.

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Re: Seasonal adjustment: rationalizing expected nominal returns of TIPS

Post by jeffyscott »

Kevin M wrote: Mon Jul 04, 2022 4:40 pmThe SA price adjustment for 7/1 settlement lowers the price (raises the yield), and the SA adjustment for 1/15 raises the price (lowers the yield). A sophisticated TIPS trader will consider this in comparing the 7/1 and 1/15 maturity dates.
I still can't understand what the reasoning would be for why a TIPS trader to be comparing the 7/15/22 TIPS to any other TIPS at this time? That would make sense to me only up to the point where the final value of the 7/15/22 TIPS becomes known. Once that happens, I would think it is only going to be compared to nominals.

But then, I would expect that the pricing of the 7/15 TIPS would be such that the amount gained by purchasing it would be similar to the amount that would be gained by buying a nominal that matures on the same day, something like +0.38% for the TIPS and +0.35% for the regular Treasury as #cruncher thought might be the correct results. But if, instead, the correct result is that the TIPS is earning 0.54%, I can't guess at what the explanation for the difference would be.
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

Added another 6 months to my TIPS ladder this morning. 8-)
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

The discussion on TIPS seasonal adjustment is interesting to at least a few of us, but we're getting too deep into it for this thread, so per private message agreement, #Cruncher will continue the discussion with a reply in this thread: TIPS yield curve and seasonal adjustment update.

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Re: Sold some T bills

Post by Kevin M »

I was looking over my Treasury holdings today, and noticed that my nominal 7/12/2022 bills at Vanguard had a gain, and the current bid yield was 1.19%, which is lower than the Fed MM fund yield which was 1.41% last Friday, so I decided to sell them and let the proceeds sit in the Fed MM fund for now. After doing so, I saw a reminder in my calendar to buy 10 4-week bills at auction, and realized I had just sold the 10 that I was going to use to pay for them as an experiment to see if everything would be OK if I didn't have enough in my settlement fund before the settlement date to cover the purchase. Sorry Victoria :oops:

So instead, I'll walk through the sale of these T bills, since most of the discussion so far as been about buying.

Here is the issue as shown in my Balances & holdings screen:

Image

I click the Sell link at the far right, and then see the screen below. I've highlighted the Sell (bid) row, since that's now what's relevant.

Image

Note that the min qty is 1, so I don't need to look at the depth of book to sell. I click Sell at the far left, then see the next screen after entering the quantity and clicking CALCULATE.

Image

I click CONTINUE, then SUBMIT on the next screen after reviewing the order. I then check order status, and see this:

Image

Note that the price I got was slightly higher than what was shown in my balances & holdings screen.

That money will now earn the higher Fed MM yield instead of the lower T bill yield until 7/12/2022. The cash from the sale is immediately available to trade, but not to withdraw.

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Re: Sold some T bills

Post by protagonist »

Kevin M wrote: Tue Jul 05, 2022 1:51 pm I was looking over my Treasury holdings today, and noticed that my nominal 7/12/2022 bills at Vanguard had a gain, and the current bid yield was 1.19%, which is lower than the Fed MM fund yield which was 1.41% last Friday, so I decided to sell them and let the proceeds sit in the Fed MM fund for now. After doing so, I saw a reminder in my calendar to buy 10 4-week bills at auction, and realized I had just sold the 10 that I was going to use to pay for them as an experiment to see if everything would be OK if I didn't have enough in my settlement fund before the settlement date to cover the purchase. Sorry Victoria :oops:

So instead, I'll walk through the sale of these T bills, since most of the discussion so far as been about buying.

Here is the issue as shown in my Balances & holdings screen:

Image

I click the Sell link at the far right, and then see the screen below. I've highlighted the Sell (bid) row, since that's now what's relevant.

Image

Note that the min qty is 1, so I don't need to look at the depth of book to sell. I click Sell at the far left, then see the next screen after entering the quantity and clicking CALCULATE.

Image

I click CONTINUE, then SUBMIT on the next screen after reviewing the order. I then check order status, and see this:

Image

Note that the price I got was slightly higher than what was shown in my balances & holdings screen.

That money will now earn the higher Fed MM yield instead of the lower T bill yield until 7/12/2022. The cash from the sale is immediately available to trade, but not to withdraw.

Kevin
Kevin, as a novice at this I am curious....If my understanding is correct you bought at a YTM of 1.41% and now the current bid YTM is 1.19%....
So what motivated you to sell and take the profits rather than holding to maturity?
Is it because you were thinking the yield will once again increase and the price will fall back, and thus you can buy at a better price in the future while keeping your profits?
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Re: Trading Treasuries (nominal and TIPS)

Post by ThisTimeItsDifferent »

Correct me if I am wrong here, but the two TIPS below have the same maturity, slightly different yields but very different coupons and therefore very different prices.

Is it the case that the second issue, with the price much closer to par, provides more deflation protection over its life because if there is deflation, then at maturity it still receives the $100 face value, but the first issue with the higher coupon and therefore the higher purchase price does not provide the deflation protection because you pay more for it but its redemption value will still be the same face $100?

Also, the first issue has the much higher coupon so one has re-investment risk, i.e. you get the coupon and would be able/have to reinvest it at whatever rates or choices are available then but the second with the lower coupon includes more of the return in the TIPS itself so it has a lower coupon to reinvest elsewhere?

Also, in a taxable account, won't the tax treatment be similar/the same because yearly income taxes on TIPS are applied against both the coupon and the change in value?

Are these the reasons that the second one's yield (YTM) is lower?

Code: Select all

Description						Coupon	Maturity	Yield 	Adjusted Price	Price	Inflation Factor
				
						
UNITED STATES TREAS BDS 2.37500% 01/15/2027 TIPS	2.375	1/15/2027	0.314	156.901916	109.251	1.43616
					4,000(100)	
						
						
UNITED STATES TREAS NTS TIPS 0.37500% 01/15/2027	0.375	1/15/2027	0.301	120.295058	100.332	1.19897
					2,000(100)	
To be clear, I have not decided whether to include TIPS (I already do I bonds) in my Fixed Income (fixed in real not nominal terms) allocation. I don't want to chase returns/yield and I understand that "the market's" expectation of future inflation and interest rates are already baked into the price of TIPs, so buying them gives you the published yield to maturity if held until then but otherwise is bet of whether inflation is higher or lower than expected, and the opposite bet of buying nominal bonds.
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Re: Sold some T bills

Post by Kevin M »

protagonist wrote: Tue Jul 05, 2022 5:15 pm Kevin, as a novice at this I am curious....If my understanding is correct you bought at a YTM of 1.41% and now the current bid YTM is 1.19%....
So what motivated you to sell and take the profits rather than holding to maturity?
Is it because you were thinking the yield will once again increase and the price will fall back, and thus you can buy at a better price in the future while keeping your profits?
Not really.

The 1.41% was the SEC yield of the Vanguard Fed MM fund last Friday (today it's 1.42%).

The only reason I originally bought the issue I sold today was to experiment with a simulated auto roll at Vanguard, which I temporarily forgot about before pulling the sell trigger. Normally I wouldn't have bought it, because the MM yields were increasing so fast. I paid 9,991.91, which was a yield of 1.05%. I sold at 9,998.06, so a gain of 6.15. If I waited till maturity on 7/12/2022, I would have received $10,000 for a gain of 8.09.

But the important thing is not how much I made or lost, but what the forward looking yield of the Treasury is compared to the MM fund. Even if I had lost money, I will make more in the 6 days between the settlement date of 7/6 and the maturity date of 7/12 at 1.42% than I would by remaining in the Treasury bill for 6 days at 1.19%.

Still, I earned an IRR of 1.03% compared to the original yield of 1.05%, so not bad.

Another important point that this sale exemplifies is that the liquidity of Treasuries makes it more likely that you will be able to sell at a good price than with other fixed income, like brokered CDs.

On a related note, the $25K of bills I bought by accident in my Fidelity IRA (instead of wife's, as intended) were down $15.00 from my purchase amount when I checked the bid price today, but the bid yield was 2.42% for 5.4 months remaining to maturity. That's much higher than any MM fund, and there is nothing else at that maturity that I want to buy now, so I'll continue to hold them for now. I might sell them at some point to buy more TIPS, which I prefer to hold in the IRA, but I still have IRA cash I want to invest in TIPS first, preferably at higher yields than now.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Correct me if I am wrong here, but the two TIPS below have the same maturity, slightly different yields but very different coupons and therefore very different prices.

Is it the case that the second issue, with the price much closer to par, provides more deflation protection over its life because if there is deflation, then at maturity it still receives the $100 face value, but the first issue with the higher coupon and therefore the higher purchase price does not provide the deflation protection because you pay more for it but its redemption value will still be the same face $100?
This is true, but most people seem to think that net deflation over five years is highly unlikely. And there's already 20% of inflation adjustment in the lower coupon issue, so there would have to be more than 20% net deflation over 5 years before this became a concern. Still, it could be a factor that has a small impact on price.
ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Also, the first issue has the much higher coupon so one has re-investment risk, i.e. you get the coupon and would be able/have to reinvest it at whatever rates or choices are available then but the second with the lower coupon includes more of the return in the TIPS itself so it has a lower coupon to reinvest elsewhere?
Actually, it should go the other way. The issue with the higher coupon has a shorter duration, so with an upward sloping yield curve, I'd think the yield would be lower, but it's not, so I don't think it can be a duration thing.
ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Also, in a taxable account, won't the tax treatment be similar/the same because yearly income taxes on TIPS are applied against both the coupon and the change in value?
The stated interest on the higher price/coupon issue will be higher, because the semi-annual interest payment is the coupon rate divided by 2 times the face value times the index ratio on the coupon date, and both coupon rate and index ratio are higher for the higher price issue. The increase in ref CPI used to calculate the index ratios will be the same from here on. But, there also will be more amortized bond premium for the higher price issue, which offsets some of the stated interest payments, perhaps enough so the net interest is about the same; I haven't done that calculation.

Kevin
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ThisTimeItsDifferent
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Re: Trading Treasuries (nominal and TIPS)

Post by ThisTimeItsDifferent »

Kevin M wrote: Tue Jul 05, 2022 8:03 pm
ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Also, the first issue has the much higher coupon so one has re-investment risk, i.e. you get the coupon and would be able/have to reinvest it at whatever rates or choices are available then but the second with the lower coupon includes more of the return in the TIPS itself so it has a lower coupon to reinvest elsewhere?
Actually, it should go the other way. The issue with the higher coupon has a shorter duration, so with an upward sloping yield curve, I'd think the yield would be lower, but it's not, so I don't think it can be a duration thing.
Right. I see that the issue with the higher coupon has a shorter duration and normally a shorter duration has a lower yield. Borrowers pay a higher annual yield to reduce their risk and keep the money longer. Lenders demand more yield to give up use of their money longer. Even for TIPs, if you go out to the decades long issues, the yields are higher than the shorter maturity issues. Maybe in the case of TIPs, the "inflation insurance" component means that the lower coupon has more inflation insurance since it reduces re-investment risk for a given maturity?
Kevin M wrote: Tue Jul 05, 2022 8:03 pm
ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Also, in a taxable account, won't the tax treatment be similar/the same because yearly income taxes on TIPS are applied against both the coupon and the change in value?
The stated interest on the higher price/coupon issue will be higher, because the semi-annual interest payment is the coupon rate divided by 2 times the face value times the index ratio on the coupon date, and both coupon rate and index ratio are higher for the higher price issue. The increase in ref CPI used to calculate the index ratios will be the same from here on. But, there also will be more amortized bond premium for the higher price issue, which offsets some of the stated interest payments, perhaps enough so the net interest is about the same; I haven't done that calculation.

Kevin
Thanks for the info on how the taxable components are calculated. I see on Treasury Direct:
Form 1099-INT shows the sum of the semiannual interest payments made in a given year.
Form 1099-OID shows the amount by which the principal of your TIPS increased due to inflation or decreased due to deflation. Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured, so you haven't yet received a payment of principal.
so if you had two issues with the same yield and maturity but different coupons and therefore purchase prices, the 1099-INT and 1099-OID would each have different amounts for the two issues but for a given issue, the total of the the 1099-INT and 1099-OID gains would be the same as the total for the other issue, at least over the life off the TIPs if not each year?
The question is, is there a tax advantage to the higher coupon or to the lower coupon issue, if the yield is the same?
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

ThisTimeItsDifferent wrote: Tue Jul 05, 2022 8:38 pm
Kevin M wrote: Tue Jul 05, 2022 8:03 pm
ThisTimeItsDifferent wrote: Tue Jul 05, 2022 5:19 pm Also, the first issue has the much higher coupon so one has re-investment risk, i.e. you get the coupon and would be able/have to reinvest it at whatever rates or choices are available then but the second with the lower coupon includes more of the return in the TIPS itself so it has a lower coupon to reinvest elsewhere?
Actually, it should go the other way. The issue with the higher coupon has a shorter duration, so with an upward sloping yield curve, I'd think the yield would be lower, but it's not, so I don't think it can be a duration thing.
Right. I see that the issue with the higher coupon has a shorter duration and normally a shorter duration has a lower yield. Borrowers pay a higher annual yield to reduce their risk and keep the money longer. Lenders demand more yield to give up use of their money longer. Even for TIPs, if you go out to the decades long issues, the yields are higher than the shorter maturity issues. Maybe in the case of TIPs, the "inflation insurance" component means that the lower coupon has more inflation insurance since it reduces re-investment risk for a given maturity?
FWIW, that same pattern occurs for Jan 15 TIPS maturing in 2025-2029, based on WSJ quotes. For each of those maturities there are two TIPS and the higher coupon one also has a slightly higher real yield in each case.

At the time of the WSJ quotes the biggest gap that I see is for 1/15/26, where the 0.625% coupon one is at a real yield of 0.125% and the 2% coupon one is at 0.150%.
https://www.wsj.com/market-data/bonds/tips
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TheTimeLord
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

I was looking at TIPS maturing in 2025 this morning and they are pretty close to 0% yield. That seems attractive to me. Am I missing something?
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

TheTimeLord wrote: Wed Jul 06, 2022 8:35 am I was looking at TIPS maturing in 2025 this morning and they are pretty close to 0% yield. That seems attractive to me. Am I missing something?
Looks good. Shortest maturity with >0% ask yield at Fidelity is 1/15/25 at 0.08% (but seasonally adjusted -0.02%). The 10/15/2024 has ask yield of -0.05%, but seasonally adjusted it's the same at -0.02%. This is only 2.28-year maturity.

I just bought 10 more each of the 1/15/2023 (0.53-year) in my wife's and my Fidelity IRAs. Yield at about -2.29% is more than 1 percentage point higher than last purchases of this issue on 7/1/2022. Got slightly different prices, even though the trades were within a couple of minutes of each other: 101.273 and 101.281.

With the 1/15/2023 nominal yield at 2.54%, the conventional BEI is 4.81%, and the seasonally-adjusted #Cruncher method BEI is 4.45%. Seems pretty good for 6-month maturity.

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

Post by FactualFran »

ThisTimeItsDifferent wrote: Tue Jul 05, 2022 8:38 pm so if you had two issues with the same yield and maturity but different coupons and therefore purchase prices, the 1099-INT and 1099-OID would each have different amounts for the two issues but for a given issue, the total of the the 1099-INT and 1099-OID gains would be the same as the total for the other issue, at least over the life off the TIPs if not each year?
The question is, is there a tax advantage to the higher coupon or to the lower coupon issue, if the yield is the same?
The amount reported on a 1099-INT of two different issues of TIPS would almost certainly be different. It is possible, but very unlikely, for two issues of TIPS with different interest (coupon) rates to pay the same amount of interest for a year. The interest amount for each (semiannual) coupon payment is one-half of the (annual) interest rate times the inflation-adjusted principal on which the interest is paid. It is possible that the interest rate times the inflation-adjusted principal could be the same for two different issues.

The amount reported on a 1099-OID of the two issues of TIPS would almost certainly be different. The OID amount for a year is the change in the inflation-adjusted principal between the days of the year that the security was owned, for a security held for the whole year the difference between the inflation-adjusted principal on the first day of a year and the first day of the next year. It is possible that the difference in inflation-adjusted principal of two holdings could be the same for two different issues.

The sum on the 1099-INT forms and on the 1099-DIV forms over the life of two issues of TIPS would almost certainly not be the same.

There is likely little, if any, tax advantage between two debt securities with different interest rates but the same yield and maturity date. The difference in the interest payment amounts for a year will likely be offset by the difference in the premium amorization or discount accrual for the year.
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TheTimeLord
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

Kevin M wrote: Wed Jul 06, 2022 12:26 pm
TheTimeLord wrote: Wed Jul 06, 2022 8:35 am I was looking at TIPS maturing in 2025 this morning and they are pretty close to 0% yield. That seems attractive to me. Am I missing something?
Looks good. Shortest maturity with >0% ask yield at Fidelity is 1/15/25 at 0.08% (but seasonally adjusted -0.02%). The 10/15/2024 has ask yield of -0.05%, but seasonally adjusted it's the same at -0.02%. This is only 2.28-year maturity.

I just bought 10 more each of the 1/15/2023 (0.53-year) in my wife's and my Fidelity IRAs. Yield at about -2.29% is more than 1 percentage point higher than last purchases of this issue on 7/1/2022. Got slightly different prices, even though the trades were within a couple of minutes of each other: 101.273 and 101.281.

With the 1/15/2023 nominal yield at 2.54%, the conventional BEI is 4.81%, and the seasonally-adjusted #Cruncher method BEI is 4.45%. Seems pretty good for 6-month maturity.

Kevin
Added 3 more months of expenses, getting fairly close to completing my TIPS Ladder/SS Bridge.
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Doc
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

TheTimeLord wrote: Wed Jul 06, 2022 2:02 pm Added 3 more months of expenses, getting fairly close to completing my TIPS Ladder/SS Bridge.
I finished my TIPS ladder just in time for the 2008 market crash.

Bogleheads philosophy at the time was "TIPS are just like nominals except for the inflation protection".

NOT In '08 nominal price were up and TIPS down. :annoyed Do any of you rebalance in a stock market crash?
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TheTimeLord
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

Doc wrote: Wed Jul 06, 2022 2:27 pm
TheTimeLord wrote: Wed Jul 06, 2022 2:02 pm Added 3 more months of expenses, getting fairly close to completing my TIPS Ladder/SS Bridge.
I finished my TIPS ladder just in time for the 2008 market crash.

Bogleheads philosophy at the time was "TIPS are just like nominals except for the inflation protection".

NOT In '08 nominal price were up and TIPS down. :annoyed Do any of you rebalance in a stock market crash?
First let me say I have no expectations that TIPS will outperform, just that they will provide me with a 0% real return if held to maturity. I have no plans to rebalance my Pre-SS portfolio since it is 0/100, but I expect my Post-SS portfolio to have a rising glide path.
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Doc
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

TheTimeLord wrote: Wed Jul 06, 2022 2:36 pm I have no plans to rebalance my Pre-SS portfolio ...
Makes sense but if doubles the variables I think. Aarrgghh.
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TheTimeLord
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

Doc wrote: Wed Jul 06, 2022 3:34 pm
TheTimeLord wrote: Wed Jul 06, 2022 2:36 pm I have no plans to rebalance my Pre-SS portfolio ...
Makes sense but if doubles the variables I think. Aarrgghh.
It is 0/100, all liability matching, so I guess you can say it rebalances daily.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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