Trading Treasuries (nominal and TIPS)

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Electron
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Re: Trading Treasuries (nominal and TIPS)

Post by Electron »

VictoriaF wrote: Thu May 26, 2022 4:05 pmBut is there a solution for buying at auctions via Vanguard, without breaks?
Take a look at this very informative thread.

viewtopic.php?p=4549794#p4549794

It looks like the settlement day of a new T-bill purchased at auction is also the settlement day for a maturing T-bill. This works at Fidelity with auto-roll. The issue may be whether Vanguard allows a manual purchase in the same way. I would also check to see if there are any special cases around holidays or market closings that could create a problem.

In the past I believe Vanguard allowed me to place a stock trade and do a mutual fund exchange into the settlement fund on the same day. That was when I had mutual fund accounts and the previous version of the brokerage account. As I recall there was a warning and message if the settlement fund could not cover the purchase.
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Re: Trading Treasuries (nominal and TIPS)

Post by drzzzzz »

VictoriaF wrote: Thu May 26, 2022 4:37 pm
jeffyscott wrote: Thu May 26, 2022 4:16 pm
VictoriaF wrote: Thu May 26, 2022 4:05 pm For example, I have 13-week T-bills starting on Thursday, May 12th, and maturing on Thursday, August 18th. To get 13-week T-bills starting on Thursday, August 18th, I'd have to order them at Vanguard on Sunday, August 14th. However, on August 14th, I would not have the funds available yet.
It looks like the new bill would be auctioned on Monday, August 22, 2022
There's a 13-Week Bill, announced Thursday, August 18, 2022
https://home.treasury.gov/system/files/ ... hedule.pdf

Also, I believe an order can be submitted as late as the morning of the auction.
Right. I'll collect cash on Thursday, August 18th, and place an order on Sunday, August 21st. My T-Bills will start earning interest on Thursday, August 25th, and I'll have a break in earnings for a week between August 18th and August 25th.

You are right that I can place an order before 9 AM on the day of the auction, but that does not help. I can't place an order on Monday, August 15th, if I won't have the money until Thursday, August 18th. And placing an order on Monday, August 22nd, is not any better than on Sunday August 21st.

Victoria
It's my understanding that the autoroll feature (which is only available at brokerages other than Vanguard) avoids the break
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Electron wrote: Thu May 26, 2022 3:57 pm
Kevin M wrote: Thu May 26, 2022 2:36 pmThe simplified interface shows accrued interest on the order preview screen. The original interface shows accrued interest on the Buy order screen, after you press CALCULATE a couple of times. You can also calculate accrued interest for nominal Treasuries by subtracting the principal amount from the total amount.
I was actually talking about the accrued interest in dollars that I have earned on any of my Treasury note holdings. That would be comparable to the accrued dividends that can be displayed for Vanguard bond funds using the "balances by date" tab. The only method I found was going part way through an actual sell transaction.

I'll take another look at the accrued interest when buying next time I am logged in. The amount was made clear on the two secondary market purchases that I completed earlier.
Ah, gotcha. You can use the spreadsheet ACCRINT function to get the accrued interest. The formula below calculates the accrued interest shown for the 7/15/2023 nominal purchased on 5/18/2022.

=ACCRINT("1/15/2022", "7/15/2022","5/18/2022", 0.125%, 10000, 2, 1).

This returns 4.25, which is indeed the accrued interest shown for the Treasury I bought on 5/18/2022.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Thu May 26, 2022 4:14 pm
protagonist wrote: Thu May 26, 2022 2:39 pm
Kevin M wrote: Thu May 26, 2022 2:23 pm
protagonist wrote: Thu May 26, 2022 2:15 pm
Kevin M wrote: Thu May 26, 2022 11:26 am I don't think we know what we are losing in real terms on nominal investments. I think you are thinking about the year over year (YoY) inflation of 8.2%, but that's the past, not the present, and certainly not the future.

Kevin
Yes, I agree, but that is all we know about. So my assumption is that it can go either up or down, anybody's guess is as good as my own, so we should use the current number. You are right in correcting me that it is the past, not the present (my error), but it is the closest we know, and it is a long shot from 2.7% (matching inflation with nominal T's ) or 3.3% (matching inflation with the best 5 year CD). It would take a lot of change in the right direction to get down to that level in the next year or so.
But the YoY inflation is not the most current number we have. That would be the seasonally-adjusted month over month inflation for April. As I noted, that was 0.33%, which is 4.06% annualized. If you want to use the most current number, that would be it. So it wouldn't take nearly as much change in the direction of March to April to get down to 3% or so. Of course May could swing higher again, but that's the unknown future.

Kevin
Ah...thanks for the clarification. That would explain my confusion. So if the MoM value is 0.33% (4.06 annualized), does that mean that if a TIPS maturing in 3 years with a -0.7 real yield is purchased today, it would currently only be getting 4.06-0.7= 3.36% annualized nominal yield? In other words, the current yield is related to the MoM, not the YoY inflation rate? If so I probably knew that at one time but forgot.
I don't know that we can ever say what we currently are getting in nominal terms, but let's review what we do know about the inflation adjustment for TIPS.

The CPIAUCNS (non-seasonally adjusted) for April set the reference CPI for July 1, so we know the inflation index ratios (IRs) from now through July 1, with the June values based on linear interpolation between the June 1 and July 1 reference CPIs. The reference CPI for each date divided by the reference CPI on the TIPS dated date give us the IR, which is multiplied by the unadjusted price to give us the inflation-adjusted price. So, we already know the inflation adjustments we "are getting" now, and we even know them through July 1. For a more detailed explanation, with examples, see this webpage: http://eyebonds.info/tips/help.html.

I don't know if this helps with your question at all, but it's an important thing to understand about TIPS.

We don't know what we'll earn in nominal terms for a TIPS over the next month, even though we know the inflation adjustments, since we don't know how the TIPS unadjusted price will change over the next month, and we need to know that to calculate the adjusted price. There are no TIPS maturing in June, but there is one maturing on 7/15/2022. Once May CPI is released on 6/10/2022, we will know the nominal return for the 7/15/2022 TIPS from 6/10 to 7/15, since we know the unadjusted price on 7/15 will be 100, so we can multiply 100 by the 7/15 IR to get the adjusted price for 7/15.

Kevin
Thanks, Kevin. I think I get it now.
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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

As someone who is just recently buying treasuries (via Vanguard), is there any real advantage to buying treasuries at auction vs. in the secondary market if the rate being received is equivalent? (Less bookkeeping, easier tax reporting or such? I'm trying to understand the nuances involved.) For the record, I've only purchased in the secondary market thus far.

I understand about being able to place secondary treasuries in tax advantaged accounts. Also, I buy with the intention of holding until maturity as opposed to selling midstream, which is not to rule out selling under specific circumstances.
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Re: Trading Treasuries (nominal and TIPS)

Post by hudson »

protagonist wrote: Tue May 24, 2022 8:04 pm This is great, Kevin. Thanks for doing this. I just subscribed to this thread.
Between July this year and mid- to late-2023 I have a lot of CDs maturing and I will be probably looking at TIPS to buy for the first time in years, because (other than I-bonds) they seem to be the only safe investments that come relatively close to current inflation rates and would only probably result in relatively small real losses in the next few years (I wouldn't look beyond 2-3 years or so).
Currently it does not seem that nominal Treasuries come close, and as I have no idea whether the Fed will be successful in taming inflation in the next couple of years I don't really see the logic in choosing them over TIPS, even in taxable accounts. If I am missing something there please explain.
Of course, the situation might change when I am ready to buy.
We may be in the same boat.
I'm not an expert at all.
My CDs run out in 2024.
I also see the value in TIPS.
I'm thinking that in 2024, I'm considering going 70% TIPS and 30% nominal....for my 20 year spending horizon....from 76 to 96.
Why? As you know, TIPS doesn't always pay out that well. I'll go with nominals if I can get around 3%.
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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

hudson wrote: Thu May 26, 2022 7:56 pm My CDs run out in 2024.
I also see the value in TIPS.
I'm thinking that in 2024, I'm considering going 70% TIPS and 30% nominal....for my 20 year spending horizon....from 76 to 96.
Why? As you know, TIPS doesn't always pay out that well. I'll go with nominals if I can get around 3%.
I like the way you think...it's inspiring. :sharebeer
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

VictoriaF wrote: Thu May 26, 2022 4:05 pm Kevin,

Thank you for starting this thread and for all your other threads and messages.

I have just started buying T-Bills at Treasury auctions using my Vanguard brokerage account. As you say, Vanguard does not have an option to roll maturing T-Bills into new ones. Does it mean that I'll always be missing a week of investing?

For example, I have 13-week T-bills starting on Thursday, May 12th, and maturing on Thursday, August 18th. To get 13-week T-bills starting on Thursday, August 18th, I'd have to order them at Vanguard on Sunday, August 14th. However, on August 14th, I would not have the funds available yet.

I understand your points about using Fidelity and about buying on the secondary market. But is there a solution for buying at auctions via Vanguard, without breaks?

Victoria
Have you tried it? I just placed an order for 1 6-month Tbill currently offered for auction at Vanguard, and I only have about $200 in my settlement fund. I see this:

Image

I thought I could cancel this order, but apparently not online:

Image

I guess I'll move some money into my settlement fund ;-)

Note, this order does not appear in the account order status screen:

Image

To see the order, I navigate back to the "Find brokered CDs and bonds" screen:

Image

Then I can click "My orders and quotes" to get back to the CD and bond order screen, where I can see my order.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Blues wrote: Thu May 26, 2022 7:45 pm As someone who is just recently buying treasuries (via Vanguard), is there any real advantage to buying treasuries at auction vs. in the secondary market if the rate being received is equivalent? (Less bookkeeping, easier tax reporting or such? I'm trying to understand the nuances involved.) For the record, I've only purchased in the secondary market thus far.

I understand about being able to place secondary treasuries in tax advantaged accounts. Also, I buy with the intention of holding until maturity as opposed to selling midstream, which is not to rule out selling under specific circumstances.
The only possible advantage I can think of in buying at auction is that you get the same price/yield as institutional investors buying millions of dollars worth. However, if what I call the large/small-quantity spread is not very big (or even 0 sometimes), you are getting almost the same price/yield on secondary as investors buying millions.

The large/small-quantity spread is the difference in price or yield for large purchases (e.g., qty 100 = $100,000 face value) compared to smaller purchases (e.g., qty 1 or 10). This spread has been less than one basis point for most of my secondary purchases; e.g., if qty 100 (or 1,000) yield is 2.500% I might get 2.495%.

It has been argued that the large quantities bought at auction could result in even better pricing. Maybe so, but the yield could also drop between the secondary purchase and the auction, so you could end up getting less at auction. Of course it also could go the other way.

Another argument is that there are secondary market trading costs that are not visible to us. My response is, "so what?", as long as I get a yield I'm happy with.

I don't recall that tax reporting is any more difficult for secondary than for auction purchases.

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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

Thanks, Kevin. Appreciate it. I guess I'll continue to happily buy on the secondary market as yields prove desirable...and funds are available. :beer
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Blues wrote: Thu May 26, 2022 7:45 pm As someone who is just recently buying treasuries (via Vanguard), is there any real advantage to buying treasuries at auction vs. in the secondary market if the rate being received is equivalent? (Less bookkeeping, easier tax reporting or such?
Kevin M wrote: Thu May 26, 2022 8:32 pm I don't recall that tax reporting is any more difficult for secondary than for auction purchases.
I don't think it's difficult, but accrued interest is one added complication. As discussed here: viewtopic.php?t=376604

There's also some complications, if you buy at a premium: viewtopic.php?p=4183077#p4183077

Both of these may just mean that you would want to be careful to be sure everything from the 1099s gets entered into the tax software, unlike me :) .

I don't plan to go back to buying individual treasuries in taxable, I now keep essentially all of our fixed income investments in IRA accounts.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

hudson wrote: Thu May 26, 2022 7:56 pm
I'm thinking that in 2024, I'm considering going 70% TIPS and 30% nominal....for my 20 year spending horizon....from 76 to 96.
Why? As you know, TIPS doesn't always pay out that well. I'll go with nominals if I can get around 3%.
3% sounds great today. I remember, however, most of my life, when 3% seemed ridiculous, even just for bank interest....

This reference shows historical 10 year Treasury rates. From 1957 through 2008 they never dipped below 3%. https://www.multpl.com/10-year-treasury ... le/by-year

This shows the discount rate for the USA vs. time....it stayed above 3% from 1959 through 2001, and again from 2004 through 2008: https://fred.stlouisfed.org/series/INTDSRUSM193N

Inflation? https://www.macrotrends.net/countries/U ... n-rate-cpi
1968-1985: Over 3% every year
1986: Under 3%
1987-1992: Over 3% every year
And many of the years that inflation was under 3% it was close, in the 2-3% range, whereas there were several years when it was quite a bit higher, with 4 years of double digit inflation in the 70s-80s.

3% may seem very secure for a 20 year horizon today, but beware of recency bias. Since the 2008 crash the Fed has concentrated on stimulating the economy. Those days may be over. A few years of double digit inflation could wreak havoc on your life savings locked in at 3%/yr.
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Re: Trading Treasuries (nominal and TIPS)

Post by Electron »

Kevin M wrote: Thu May 26, 2022 5:52 pm You can use the spreadsheet ACCRINT function to get the accrued interest. The formula below calculates the accrued interest shown for the 7/15/2023 nominal purchased on 5/18/2022.

=ACCRINT("1/15/2022", "7/15/2022","5/18/2022", 0.125%, 10000, 2, 1).

This returns 4.25, which is indeed the accrued interest shown for the Treasury I bought on 5/18/2022.
Thanks for mentioning the Excel ACCRINT function. I just learned about ACCRINT recently along with COUPDAYS and COUPDAYBS.

Another way to determine the accrued interest on a holding might be the following. Start a buy order for the exact same holding and cancel the order before completion. I'd like to see Vanguard display accrued interest similar to what they provide for Vanguard bond and money market funds.

On a related subject, I just had an interesting realization. When I buy a 13 week T-bill at auction at Vanguard, they display a message that the settlement period has been extended.

That must be done to match the settlement day of 13 week T-bills maturing the same week. That is what allows auto-roll at the other brokerages to work.
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Kevin M wrote: Thu May 26, 2022 2:23 pmBut the YoY inflation is not the most current number we have. That would be the seasonally-adjusted month over month inflation for April. As I noted, that was 0.33%, ... If you want to use the most current number, that would be it. (underline added)
Yes, the monthly change is the "most current". But "use" for what? The 0.33% increase from March to April was in the Seasonally-adjusted All Items index. If you want to use it to estimate future inflation, I don't think that's the best choice. Being seasonally adjusted does remove some of the volatility from the Non-seasonally-adjusted All Items index used for TIPS and I Bonds. But it is still All Items and is quite volatile month-to-month. Better, in my opinion, would be to use the seasonally adjusted All Items less food and energy index. Even better would be the seasonally adjusted All Items less energy index.

Here are the three seasonally adjusted indexes (All Items, Ex Food & Energy, and Ex Energy) since May 2020 when inflation started to kick in. Note the February to March 2022 All Items index 1.24% increase versus the 0.80% monthly rise the prior month. But then the increase fell to only a 0.33% the following month. The index excluding energy, on the other hand, has increased a much steadier 0.42% to 0.64% each month over the past seven months.

While even steady historical performance certainly doesn't forecast the future; it makes for a better yardstick if you're going to make that forecast at all. I would use the trend of the Ex Energy index to base my projection and then add in my guess for energy prices weighted by the 8% that they constitute of All Items. (See Relative Importance column of this BLS web page.)

Code: Select all

          --------- Index ---------  --- Monthly Change ---
  Month      All   exFd&En   exEner    All  exFd&En  exEner  ------- All Items -------  -Ex Food & Ener-   -- Ex Energy --

Code: Select all

May 2020  255.944  265.606  265.291
Jun 2020  257.217  266.088  265.898  +0.50%  +0.18%  +0.23%  XXXXXXXXXX                 XXXX               XXXXX
Jul 2020  258.543  267.552  266.990  +0.52%  +0.55%  +0.41%  XXXXXXXXXX                 XXXXXXXXXXX        XXXXXXXX
Aug 2020  259.580  268.662  267.976  +0.40%  +0.41%  +0.37%  XXXXXXXX                   XXXXXXXX           XXXXXXX
Sep 2020  260.190  269.152  268.416  +0.23%  +0.18%  +0.16%  XXXXX                      XXXX               XXX
Oct 2020  260.352  269.332  268.633  +0.06%  +0.07%  +0.08%  X                          X                  XX
Nov 2020  260.721  269.816  269.045  +0.14%  +0.18%  +0.15%  XXX                        XXXX               XXX
Dec 2020  261.564  269.984  269.323  +0.32%  +0.06%  +0.10%  XXXXXX                     X                  XX
Jan 2021  262.200  270.114  269.518  +0.24%  +0.05%  +0.07%  XXXXX                      X                  X
Feb 2021  263.346  270.522  269.922  +0.44%  +0.15%  +0.15%  XXXXXXXXX                  XXX                XXX
Mar 2021  265.028  271.347  270.686  +0.64%  +0.30%  +0.28%  XXXXXXXXXXXXX              XXXXXX             XXXXXX
Apr 2021  266.727  273.669  272.798  +0.64%  +0.86%  +0.78%  XXXXXXXXXXXXX              XXXXXXXXXXXXXXXXX  XXXXXXXXXXXXXXXX

Code: Select all

May 2021  268.599  275.715  274.722  +0.70%  +0.75%  +0.71%  XXXXXXXXXXXXXX             XXXXXXXXXXXXXXX    XXXXXXXXXXXXXX
Jun 2021  270.955  277.922  276.889  +0.88%  +0.80%  +0.79%  XXXXXXXXXXXXXXXXXX         XXXXXXXXXXXXXXXX   XXXXXXXXXXXXXXXX
Jul 2021  272.184  278.794  277.899  +0.45%  +0.31%  +0.36%  XXXXXXXXX                  XXXXXX             XXXXXXX
Aug 2021  273.092  279.306  278.496  +0.33%  +0.18%  +0.21%  XXXXXXX                    XXXX               XXXX
Sep 2021  274.214  280.017  279.472  +0.41%  +0.25%  +0.35%  XXXXXXXX                   XXXXX              XXXXXXX
Oct 2021  276.590  281.705  281.269  +0.87%  +0.60%  +0.64%  XXXXXXXXXXXXXXXXX          XXXXXXXXXXXX       XXXXXXXXXXXXX
Nov 2021  278.524  283.179  282.838  +0.70%  +0.52%  +0.56%  XXXXXXXXXXXXXX             XXXXXXXXXX         XXXXXXXXXXX
Dec 2021  280.126  284.770  284.395  +0.58%  +0.56%  +0.55%  XXXXXXXXXXXX               XXXXXXXXXXX        XXXXXXXXXXX
Jan 2022  281.933  286.431  286.176  +0.65%  +0.58%  +0.63%  XXXXXXXXXXXXX              XXXXXXXXXXXX       XXXXXXXXXXXXX
Feb 2022  284.182  287.878  287.835  +0.80%  +0.51%  +0.58%  XXXXXXXXXXXXXXXX           XXXXXXXXXX         XXXXXXXXXXXX
Mar 2022  287.708  288.811  289.046  +1.24%  +0.32%  +0.42%  XXXXXXXXXXXXXXXXXXXXXXXXX  XXXXXX             XXXXXXXX
Apr 2022  288.663  290.455  290.818  +0.33%  +0.57%  +0.61%  XXXXXXX                    XXXXXXXXXXX        XXXXXXXXXXXX
Electron wrote: Thu May 26, 2022 10:52 pm
Kevin M wrote: Thu May 26, 2022 5:52 pm You can use the spreadsheet ACCRINT function to get the accrued interest. The formula below calculates the accrued interest shown for the 7/15/2023 nominal purchased on 5/18/2022.
=ACCRINT("1/15/2022", "7/15/2022","5/18/2022", 0.125%, 10000, 2, 1).
This returns 4.25, which is indeed the accrued interest shown for the Treasury I bought on 5/18/2022.
Thanks for mentioning the Excel ACCRINT function. I just learned about ACCRINT recently along with COUPDAYS and COUPDAYBS.
I don't use the ACCRINT function. Apart from being a "black box" solution which I dislike, it requires three date parameters the meaning of two ("Issue" and "First_interest") I find unclear. When working with Treasury notes and bonds (including TIPS), I prefer to use the COUPDAYBS and COUPDAYS functions which require only two obvious date parameters: "Settlement" and "Maturity". Here's how they could be used to get the $4.25 value Kevin M mentions:

Code: Select all

Row                    Col A      Col B   Formula in column B
  1               Face value     10,000
  2                   Coupon     0.125%
  3              Index ratio    1.00000  (1.0 unless for TIPS)
  4               Settlement  5/18/2022
  5                 Maturity  7/15/2023
  6   Days before settlement        123  =COUPDAYBS(B4,B5,2,1)
  7  Days in interest period        181  =COUPDAYS(B4,B5,2,1)
  8         Accrued interest       4.25  =B1*(B2/2)*B3*(B6/B7)
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

#Cruncher wrote: Fri May 27, 2022 7:45 am I don't use the ACCRINT function. Apart from being a "black box" solution which I dislike, it requires three date parameters the meaning of two ("Issue" and "First_interest") I find unclear.
Issue date is the day the security issues. As an example the 2-year note just auctioned on Tuesday 5/24/22 has an issue date of 5/31/22. IIRC

The first coupon is exactly what it says. For the same auction the first coupon is the date of the first coupon in this case 6 months from issue date.

I can't give you an example now because all current pending auctions are for bills.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Fri May 27, 2022 10:03 am
#Cruncher wrote: Fri May 27, 2022 7:45 am I don't use the ACCRINT function. Apart from being a "black box" solution which I dislike, it requires three date parameters the meaning of two ("Issue" and "First_interest") I find unclear.
Issue date is the day the security issues. As an example the 2-year note just auctioned on Tuesday 5/24/22 has an issue date of 5/31/22. IIRC

The first coupon is exactly what it says. For the same auction the first coupon is the date of the first coupon in this case 6 months from issue date.

I can't give you an example now because all current pending auctions are for bills.
But that's not the way I used it, and #Cruncher is right about the parameter naming being unclear. I would even say "inaccurate" when using it to calculate accrued interest for existing bonds that have already made an interest payment.

In my example, I used that last coupon payment date as "issue" and the next coupon date as "first_payment" (Google sheets name). It worked.

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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Fri May 27, 2022 11:55 am But that's not the way I used it, ...
So Excel is right and the US Treasury is wrong. :D
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Thu May 26, 2022 5:52 pm <snip>
Ah, gotcha. You can use the spreadsheet ACCRINT function to get the accrued interest. The formula below calculates the accrued interest shown for the 7/15/2023 nominal purchased on 5/18/2022.

=ACCRINT("1/15/2022", "7/15/2022","5/18/2022", 0.125%, 10000, 2, 1).

This returns 4.25, which is indeed the accrued interest shown for the Treasury I bought on 5/18/2022.
I developed a more generic version of this. I added a column to calculate accrued interest to the right of the column where I entered the accrued interest. In the screenshot below, the formula in cell L2 is this:

=ACCRINT(D2-COUPDAYBS(D2,E2,2,1),D2+COUPDAYSNC(D2,E2,2,1),D2,F2,I2,2,1)*N2

Image

Remember that for existing bonds that have already paid a coupon, the parameter named "issue" is the date of the previous coupon payment, and "first_payment" is the date of the next coupon payment.

Column D2 is the settlement date and column E2 is the maturity date.

The previous coupon date is settlement minus number of coupon days before settlement, the latter given by the COUPDAYBS function.

The next coupon date is settlement plus number of coupon days before the next coupon date, the latter given by the COUPDAYNC function.

As you can see, it works perfectly for the Treasuries I've bought lately.

To use this to get accrued interest for a bond you own as of any date, just use that date as the settlement date.

EDIT: To handle the T bill case, where there is no accrued interest, I actually use this (example for row 2):

=IFERROR(ACCRINT(D2-COUPDAYBS(D2,E2,2,1),D2+COUPDAYSNC(D2,E2,2,1),D2,F2,I2,2,1)*N2, 0)

I could check for a non-zero value in the Coupon column, but instead I just wrapped the ACCRINT in an IFERROR, returning 0 if there's an error (which there will be for a 0% coupon rate).

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Re: Trading Treasuries (nominal and TIPS)

Post by Electron »

Kevin M wrote: Fri May 27, 2022 5:40 pm I added a column to calculate accrued interest to the right of the column where I entered the accrued interest.
I liked your suggestion and added accrued interest to my spreadsheet also. As you mentioned, it can check the accrued interest I paid when buying a Treasury note or it can calculate the interest accrued to any date of my choice. Nice feature to have available. :happy

I paid accrued interest on two secondary market purchases and also on a two year note purchased at auction (two days interest).

Two of the values were correct or within one cent. The third calculation was off by about one half of one percent. The security was about five months into the coupon period which may have been a factor. It could be that the brokerage firms use a slightly different method.

Even though T-bills don't accrue interest they would still earn interest on a daily basis. That amount would be needed if a T-bill is sold before maturity along with the calculation of any capital gain or loss.

If anyone has experience selling T-bills before maturity I'd be interested in any details. I assume the brokerage firm would make the necessary calculations which would then be reflected on Form 1099-INT and Form 1099-B.
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Doc wrote: Fri May 27, 2022 10:03 am
#Cruncher wrote: Fri May 27, 2022 7:45 amI don't use the ACCRINT function. ... it requires three date parameters the meaning of two ("Issue" and "First_interest") I find unclear.
Issue date is the day the security issues. ...
The function doesn't work with the actual issue date. Instead of returning the accrued interest due at settlement, it returns the total interest earned since issuance. Take the case of the 10-Year 2% Note issued 2/15/2013. Row 7 using the COUPDAYBS and COUPDAYS functions returns the correct $5.58 accrued interest for the period 2/15/2022 to the 5/27/2022 settlement date. But on row 8 the ACCRINT function returns $185.58 which includes $180 interest paid for the first nine years.

Code: Select all

Row                Col A       Col B   Formula in column B
  1           Face value       1,000
  2               Coupon      2.000%
  3           Settlement   5/27/2022
  4             Maturity   2/15/2023
  5                Issue   2/15/2013  <===
  6       First interest   8/15/2013
  7  Accr interest  (OK)        5.58  =$B1*($B2/2)*(COUPDAYBS($B3,$B4,2,1)/COUPDAYS($B3,$B4,2,1))
  8  Accr interest (BAD)      185.58  =ACCRINT(B5,B6,$B3,$B2,$B1,2,1,TRUE)
Kevin M wrote: Fri May 27, 2022 5:40 pmI developed a more generic version of this. I added a column to calculate accrued interest to the right of the column where I entered the accrued interest. In the screenshot below, the formula in cell L2 is this:
=ACCRINT(D2-COUPDAYBS(D2,E2,2,1) , D2+COUPDAYSNC(D2,E2,2,1), D2, F2, I2, 2, 1) * N2
Here are two lines from your screenshot. The one on row 8 is for the T-Bill.

Code: Select all

Row       Col D       Col E   Col F   Col G   Col H   Col I      Col J     Col K      Col L    Col M     Col N
     Settlement    Maturity  Coupon   Price   Yield     Qty     Amount  Interest  Int(calc)  Term(y) Idx Ratio
  2   6/08/2021   7/15/2023  0.125%  99.921  0.160%  10,000   9,997.07      4.97       4.97     2.10   1.00000
      ...
  8   5/02/2022  11/15/2022  0.000%  99.233  1.440%  20,000  19,846.60      0.00       0.00     0.54   1.00000
It would be more straightforward to replace the red and blue parts as follows using Excel's COUPPCD and COUPNCD functions: the:
1/15/2021 = COUPPCD(DATE(2021, 6, 8), DATE(2023, 7, 15), 2, 1)
7/15/2021 = COUPNCD(DATE(2021, 6, 8), DATE(2023, 7, 15), 2, 1)

Kevin M, in same post, wrote:To handle the T bill case, where there is no accrued interest, I actually use this (example for row 2):
=IFERROR(ACCRINT(D2-COUPDAYBS(D2,E2,2,1),D2+COUPDAYSNC(D2,E2,2,1),D2,F2,I2,2,1)*N2, 0)
Thank you for using the IFERROR function. I didn't know about it. It's simpler than using ISERROR and having to repeat the expression being tested. But why keep putting band-aids on the cranky ACCRINT function? The following using the COUPDAYBS and COUPDAYS functions is simpler and doesn't require a test to handle the T-Bill case:
4.97 = I2 * (F2 / 2) * N2 * (COUPDAYBS(D2, E2, 2, 1) / COUPDAYS(D2, E2, 2, 1))
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

#Cruncher wrote: Sat May 28, 2022 5:52 am
Kevin M wrote: Fri May 27, 2022 5:40 pmI developed a more generic version of this. I added a column to calculate accrued interest to the right of the column where I entered the accrued interest. In the screenshot below, the formula in cell L2 is this:
=ACCRINT(D2-COUPDAYBS(D2,E2,2,1) , D2+COUPDAYSNC(D2,E2,2,1), D2, F2, I2, 2, 1) * N2
Here are two lines from your screenshot. The one on row 8 is for the T-Bill.

Code: Select all

Row       Col D       Col E   Col F   Col G   Col H   Col I      Col J     Col K      Col L    Col M     Col N
     Settlement    Maturity  Coupon   Price   Yield     Qty     Amount  Interest  Int(calc)  Term(y) Idx Ratio
  2   6/08/2021   7/15/2023  0.125%  99.921  0.160%  10,000   9,997.07      4.97       4.97     2.10   1.00000
      ...
  8   5/02/2022  11/15/2022  0.000%  99.233  1.440%  20,000  19,846.60      0.00       0.00     0.54   1.00000
It would be more straightforward to replace the red and blue parts as follows using Excel's COUPPCD and COUPNCD functions: the:
1/15/2021 = COUPPCD(DATE(2021, 6, 8), DATE(2023, 7, 15), 2, 1)
7/15/2021 = COUPNCD(DATE(2021, 6, 8), DATE(2023, 7, 15), 2, 1)
I like it! Don't know why I didn't notice these functions. So here is the generic version for row 2:

=IFERROR(ACCRINT(COUPPCD(D2,E2,2,1),COUPNCD(D2,E2,2,1),D2,F2,I2,2,1)*N2, 0)
#Cruncher wrote: Sat May 28, 2022 5:52 am
Kevin M, in same post, wrote:To handle the T bill case, where there is no accrued interest, I actually use this (example for row 2):
=IFERROR(ACCRINT(D2-COUPDAYBS(D2,E2,2,1),D2+COUPDAYSNC(D2,E2,2,1),D2,F2,I2,2,1)*N2, 0)
Thank you for using the IFERROR function. I didn't know about it. It's simpler than using ISERROR and having to repeat the expression being tested. But why keep putting band-aids on the cranky ACCRINT function? The following using the COUPDAYBS and COUPDAYS functions is simpler and doesn't require a test to handle the T-Bill case:
4.97 = I2 * (F2 / 2) * N2 * (COUPDAYBS(D2, E2, 2, 1) / COUPDAYS(D2, E2, 2, 1))
Thanks for this too. I think using ACCRINT is easier, but I like this solution too.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Electron wrote: Fri May 27, 2022 11:15 pm If anyone has experience selling T-bills before maturity I'd be interested in any details. I assume the brokerage firm would make the necessary calculations which would then be reflected on Form 1099-INT and Form 1099-B.
Good question, and definitely something we should address in this thread, since paying income tax is part of trading Treasuries.

As I think I mentioned earlier, I sold all of my Treasuries at Schwab in 2019 to buy a CD.

On the 1099-INT, it just shows Interest on "U.S. Savings Bonds and Treasury Obligations" as a single item. The supplemental information shows both interest payments and "Accrued Interest from Sale of Treasury Obligations", and the interest reported on 1099-INT is the sum of these. For notes, the interest payments are the coupon payments; for bills, the interest payments are the accrued market discounts. There also is a section on "Accrued Interest Paid on Purchases".

The 1099-B shows Proceeds, Basis, Accrued Market discount, and realized gain. The latter = Proceeds - Basis - Accrued discount. Example from my 1099-B:

Proceeds = 49,849.61
Basis = 49,737.43
Market discount = 96.76
Realized gain = 15.42

You can do the math to verify that the realized gain is Proceeds - Basis - Market discount.

As I recall, you do an adjustment for the market discount when entering 1099-B info, and then add an entry for interest (enter a fake 1099-INT for accrued market discount).

If you want more detail, I can fire up my 2019 tax software and review it in more detail.

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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

Kevin M wrote: Sat May 28, 2022 1:47 pm The 1099-B shows Proceeds, Basis, Accrued Market discount, and realized gain. The latter = Proceeds - Basis - Accrued discount. Example from my 1099-B:

Proceeds = 49,849.61
Basis = 49,737.43
Market discount = 96.76
Realized gain = 15.42

You can do the math to verify that the realized gain is Proceeds - Basis - Market discount.

As I recall, you do an adjustment for the market discount when entering 1099-B info, and then add an entry for interest (enter a fake 1099-INT for accrued market discount).

If you want more detail, I can fire up my 2019 tax software and review it in more detail.

Kevin
I would appreciate that, Kevin, as an admitted newb with the process involving treasuries. Also, could you explain more about the "fake 1099-INT"?

Many thanks...
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Re: Trading Treasuries (nominal and TIPS)

Post by AerialWombat »

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Blues wrote: Sat May 28, 2022 2:06 pm
Kevin M wrote: Sat May 28, 2022 1:47 pm The 1099-B shows Proceeds, Basis, Accrued Market discount, and realized gain. The latter = Proceeds - Basis - Accrued discount. Example from my 1099-B:

Proceeds = 49,849.61
Basis = 49,737.43
Market discount = 96.76
Realized gain = 15.42

You can do the math to verify that the realized gain is Proceeds - Basis - Market discount.

As I recall, you do an adjustment for the market discount when entering 1099-B info, and then add an entry for interest (enter a fake 1099-INT for accrued market discount).

If you want more detail, I can fire up my 2019 tax software and review it in more detail.

Kevin
I would appreciate that, Kevin, as an admitted newb with the process involving treasuries. Also, could you explain more about the "fake 1099-INT"?

Many thanks...
OK, I'll try to get to that. For now, just looking at my 2019 tax return ...

Using tax software, you enter interest into Schedule B by entering it into the software form 1099-INT, since most of your interest is reported this way. So, for example, I created a "fake" 1099-INT titled "Schwab accrued market discount from 1099-B", and I entered as interest the accrued market discount that I subtracted as an adjustment for the 1099-B.

As another example, I see a Schedule B interest entry titled, "Schwab US Tbill interest". Without firing up my 2019 tax software right now, I think this was because the 1099-B reports a short-term capital gain for the Tbills, but it's actually supposed to be reported as interest. I would have made an adjustment for the 1099-B (subtracting the accrued interest), and entered the Tbill "gain" as interest on another fake 1099-INT.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

AerialWombat wrote: Sat May 28, 2022 2:18 pm
Kevin M wrote: Tue May 24, 2022 7:50 pm There has been lots of interest in buying Treasuries (nominal and TIPS) lately, and I thought it would be useful to have a single thread where we could discuss buying (and selling) Treasuries. There hasn't been much talk about selling, but you might want to sell at some point, so I used "Trading" in the title rather than "Buying".
Thank you for starting this thread, Kevin. I always appreciate your fixed income insight.

The past few auctions, I’ve been building a nominal T-Bill ladder. I have 4, 8, 13, and 26 week bills so far. Auto-roll at Fidelity.

I have another slug of cash to invest, and I think two years is the farthest out I want to go on the yield curve.

What do you think of the 2 year Floating Rate Notes, vs the regular 2 year note? I like the idea of the quarterly coupon and the rate adjustment in a rising rate environment, but it could also be trivial.

Thanks!
There was a recent thread on FRNs: Floating Rate Notes.

What I recall from that is that first, you can't find FRNs at Fidelity, for example. When I entered the CUSIP for one of the FRNs held by Vanguard Treasury MM fund, the message was something like "Fidelity does not offer this security".

The consensus was that FRNs are more for institutional investors, like MM funds, than for retail investors.

I would go with a 2-year Treasury that you can actually buy at your broker. Note that the 2-year yield has come down lately, as have other yields beyond 6 mo maturity. Basically the yield curve has flattened a bit this month:

Image

Image

Image

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Re: Trading Treasuries (nominal and TIPS)

Post by Angst »

VictoriaF wrote: Thu May 26, 2022 4:05 pm I have just started buying T-Bills at Treasury auctions using my Vanguard brokerage account. As you say, Vanguard does not have an option to roll maturing T-Bills into new ones. Does it mean that I'll always be missing a week of investing?
Victoria,

I don't think using an "auto-roll" option with any broker (let alone Treasury Direct) can ever improve upon any potential "lost time in the market" that entering the rolling buy orders yourself might incur. "Auto-roll" simply saves you the hassle of having to enter orders yourself, let alone remembering to do so.

But of course, this assumes that a maturing security always matures in time for it to fund your settlement account by the settlement date of the replacement security, and this might well not always be the case. But even "auto-roll" cannot create a "free ride" for you if and when such a situation should occur.

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Re: Trading Treasuries (nominal and TIPS)

Post by Electron »

Kevin M wrote: Sat May 28, 2022 1:47 pm Good question, and definitely something we should address in this thread, since paying income tax is part of trading Treasuries.
Thanks for providing the tax related information and details. That is a great help.

Internet searches have not been very helpful for the case of selling T-bills before maturity. Surprisingly, I found some information on a Canadian site that should be applicable here.

https://www.canada.ca/en/revenue-agency ... bonds.html

The article shows how to calculate the interest that is included in income and the capital gain or loss.

In addition, I believe T-bills are treated the same as OID (original issue discount) instruments.

https://www.irs.gov/publications/p1212

"If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040 or 1040-SR)."

"Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Your basis, generally, is your cost increased by the OID you have included in income each year you held it."

"See chapter 4 of Pub. 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments."

https://www.irs.gov/publications/p550#e ... k100010719

"Market discount bonds. Report the sale or trade of a market discount bond on Part I or Part II of Form 8949, whichever is appropriate. See the table How To Complete Form 8949, Columns (f) and (g), in the Instructions for Form 8949 to help you figure the amounts to report for a sale or trade of a market discount bond. Use the Worksheet for Accrued Market Discount Adjustment in Column (g) in those instructions to figure the adjusted accrued market discount. Also report the amount of accrued market discount as interest income on Schedule B (Form 1040), line 1, and identify it as “Accrued Market Discount.” See the Instructions for Form 8949 for more information."
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Re: Trading Treasuries (nominal and TIPS)

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Re: Trading Treasuries (nominal and TIPS)

Post by hudson »

Kevin M wrote: Tue May 24, 2022 7:50 pm There has been lots of interest in buying Treasuries (nominal and TIPS) lately, and I thought it would be useful to have a single thread where we could discuss buying (and selling) Treasuries.
Kevin
What are the top 5 things you've learned about buying treasuries/TIPS...short and sweet?
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Treasury bill tax reporting

Post by Kevin M »

Here are some more details of my tax reporting for T bills in my 2019 return. This post is for bills only, not notes.

"Interest" for T bills that matured appears only in the 1099-INT; nothing for these on 1099-B.

Tbills that were sold are not included in 1099-INT or on 1099-B! They are reported in a separate section with this header:
YEAR-END SUMMARY INFORMATION IS NOT PROVIDED TO THE IRS. Date Prepared: February 7, 2020
The information in this and all subsequent sections is not provided to the IRS by Charles Schwab. It is provided to you as additional tax reporting information you may need to complete your tax return.
Page 16 of 24
Short-Term Realized Gain or (Loss)
The transactions in this section are not reported on Form 1099-B or to the IRS . Report on Form 8949, in either Part I with Box C checked or Part II with Box F checked, as appropriate.
It shows only proceeds, basis, and gain/loss, nothing about accrued interest.

In HR Block tax software, this is reported in a section called "Sales of collectibles and other capital assets", which is different than 1099-B. In the enter, there is a drop-down for adjustments, and I selected "Other adjustment". There is a box to enter the adjustment, and I enter it as a negative number. Looking at my 2019 tax spreadsheet, I see that I calculated the interest (adjustment) based on the number of days I held the bills; there's a bit more to this, but I can't remember the details, so maybe I'll come back to this later.

These inputs flow to Form 8949 with box C checked: Short-term transactions not reported to you on Form 1099-B. On this form, the negative adjustment and the net capital gain are shown.

As the final step, I start an interest entry as if I received a 1099-INT, but I check the box "Other interest". I enter the total adjustment amount for all T bills as a positive number. I entered it in box 1, but I think maybe it should go in Box 3, since it is USGO interest. I may have missed the state tax deduction on this!

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

I am pretty much indifferent to buying at auction and buying on the secondary market, as long as the auction offers me what I want when I want it.

There is an auction of 26-week Treasury bills on Tuesday 5/31 with settlement on Thursday 6/2. This is CUSIP 912796P94, a reopening of what was originally auctioned as a 52-week bill. So, we could buy this on the secondary market on Tuesday for Wednesday settlement. Close enough.

I entered an order to buy $100K face value of this bill at auction at Vanguard for my parents' taxable account (I am their agent). This will be the first rung of a mostly non-rolling ladder with 6-month rungs out to two or three years. Why so much for such a short term? They are in their 90s and are moving to an upscale retirement facility that is very expensive.

At least $100K will remain in cash, currently mostly in CA muni money market which for them has a taxable-equivalent yield (TEY) of 0.78% (based on 0.61% SEC yield), with some at Ally for shorter-term expenses (APY currently 0.75%).

I think for the rungs maturing in 1 year or more I will split each $100K rung between nominals and TIPS. TIPS of these maturities will of course have to be purchased on the secondary market, since the shortest maturity auctioned is 4-year 10-month (reopening of the 5-year TIPS auctioned 2 months before). The nominal Treasuries will be bought on the secondary market unless there is an auction soon, so probably all on the secondary market.

Liquidity is important, since we don't know what unforeseen expenses might come up, so I think we'll favor Treasuries over brokered CDs, but I'm tempted by the 40 basis point yield advantage of a 2-year CD at 2.85% vs. a 2-year Treasury at 2.45%, but the TEY of the 2-year Treasury for them is 2.74%, so this shrinks the CD TEY advantage to only 13 basis points; I think I'd stick with the Treasury in this case.

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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

Thanks for sharing real world scenarios, Kevin.
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Re: Trading Treasuries (nominal and TIPS)

Post by VictoriaF »

drob wrote: Thu May 26, 2022 5:08 pm
VictoriaF wrote: Thu May 26, 2022 4:37 pm
jeffyscott wrote: Thu May 26, 2022 4:16 pm
VictoriaF wrote: Thu May 26, 2022 4:05 pm For example, I have 13-week T-bills starting on Thursday, May 12th, and maturing on Thursday, August 18th. To get 13-week T-bills starting on Thursday, August 18th, I'd have to order them at Vanguard on Sunday, August 14th. However, on August 14th, I would not have the funds available yet.
It looks like the new bill would be auctioned on Monday, August 22, 2022
There's a 13-Week Bill, announced Thursday, August 18, 2022
https://home.treasury.gov/system/files/ ... hedule.pdf

Also, I believe an order can be submitted as late as the morning of the auction.
Right. I'll collect cash on Thursday, August 18th, and place an order on Sunday, August 21st. My T-Bills will start earning interest on Thursday, August 25th, and I'll have a break in earnings for a week between August 18th and August 25th.

You are right that I can place an order before 9 AM on the day of the auction, but that does not help. I can't place an order on Monday, August 15th, if I won't have the money until Thursday, August 18th. And placing an order on Monday, August 22nd, is not any better than on Sunday August 21st.

Victoria
I normally keep enough funds in a short term treasury fund to buy the replacement bill before the original bill settles but a couple times at Fidelity I've called the bond desk and they have executed the replacement order for me (without fee) before the cash is available since they an see that there is a maturing bill that will settle in time for the purchase settlement.
Yes, I could invest different piles of money on different dates, but it does not solve the main issue: for a period of time some money would be sitting in a money market account. I want to keep a large sum in T-Bills for a potential, but not certain, purchase of a condominium. I started with buying 13-week T-Bills, but in August-September I am planning to switch to 4-week T-Bills. If with 13-week T-Bills, I am missing 1 week out of every 14 weeks, with 4-week T-Bills, I'll be missing 1 week out of every 5 weeks. On the other hand, Vanguard's Federal Money Market now has the same SEC yield as 1-month Treasuries, and so I could just keep the money in the VMFXX.

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Re: Trading Treasuries (nominal and TIPS)

Post by VictoriaF »

Electron wrote: Thu May 26, 2022 5:31 pm
VictoriaF wrote: Thu May 26, 2022 4:05 pmBut is there a solution for buying at auctions via Vanguard, without breaks?
Take a look at this very informative thread.

viewtopic.php?p=4549794#p4549794

It looks like the settlement day of a new T-bill purchased at auction is also the settlement day for a maturing T-bill. This works at Fidelity with auto-roll. The issue may be whether Vanguard allows a manual purchase in the same way. I would also check to see if there are any special cases around holidays or market closings that could create a problem.

In the past I believe Vanguard allowed me to place a stock trade and do a mutual fund exchange into the settlement fund on the same day. That was when I had mutual fund accounts and the previous version of the brokerage account. As I recall there was a warning and message if the settlement fund could not cover the purchase.
Excellent information. Thank you, Electron!

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Re: Trading Treasuries (nominal and TIPS)

Post by VictoriaF »

Kevin M wrote: Thu May 26, 2022 8:17 pm
VictoriaF wrote: Thu May 26, 2022 4:05 pm Kevin,

Thank you for starting this thread and for all your other threads and messages.

I have just started buying T-Bills at Treasury auctions using my Vanguard brokerage account. As you say, Vanguard does not have an option to roll maturing T-Bills into new ones. Does it mean that I'll always be missing a week of investing?

For example, I have 13-week T-bills starting on Thursday, May 12th, and maturing on Thursday, August 18th. To get 13-week T-bills starting on Thursday, August 18th, I'd have to order them at Vanguard on Sunday, August 14th. However, on August 14th, I would not have the funds available yet.

I understand your points about using Fidelity and about buying on the secondary market. But is there a solution for buying at auctions via Vanguard, without breaks?

Victoria
Have you tried it? I just placed an order for 1 6-month Tbill currently offered for auction at Vanguard, and I only have about $200 in my settlement fund. I see this:

Image

I thought I could cancel this order, but apparently not online:

Image

I guess I'll move some money into my settlement fund ;-)

Note, this order does not appear in the account order status screen:

Image

To see the order, I navigate back to the "Find brokered CDs and bonds" screen:

Image

Then I can click "My orders and quotes" to get back to the CD and bond order screen, where I can see my order.

Kevin
Thank you, Kevin, this is very interesting.

I have not tried to buy T-Bills with the money from the settlement of another batch of T-Bills. According to the thread referenced by Electron, viewtopic.php?p=4549794#p4549794 , this should be possible.

But now I have other questions:
Why did not Vanguard allow you to cancel the trade on line?
Is that Vanguard's restriction only for auction purchases or other purchases too?
What happens if you don't have sufficient funds on the day when the trade has to be executed? Partial execution? Failed execution? Penalty?

Victoria
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Re: Treasury bill tax reporting

Post by Electron »

Kevin M wrote: Sat May 28, 2022 7:06 pm Here are some more details of my tax reporting for T bills in my 2019 return. This post is for bills only, not notes.
That is quite a story! It looks like tax reporting for T-bills sold before maturity can be quite complicated and not as easy as many would expect.

You had an interesting case with Schwab. It's possible that other brokerage firms would have done the reporting differently.

If the state return missed some of the Treasury interest an amended return might not be that difficult.
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Re: Trading Treasuries (nominal and TIPS)

Post by VictoriaF »

Angst wrote: Sat May 28, 2022 3:00 pm
VictoriaF wrote: Thu May 26, 2022 4:05 pm I have just started buying T-Bills at Treasury auctions using my Vanguard brokerage account. As you say, Vanguard does not have an option to roll maturing T-Bills into new ones. Does it mean that I'll always be missing a week of investing?
Victoria,

I don't think using an "auto-roll" option with any broker (let alone Treasury Direct) can ever improve upon any potential "lost time in the market" that entering the rolling buy orders yourself might incur. "Auto-roll" simply saves you the hassle of having to enter orders yourself, let alone remembering to do so.

But of course, this assumes that a maturing security always matures in time for it to fund your settlement account by the settlement date of the replacement security, and this might well not always be the case. But even "auto-roll" cannot create a "free ride" for you if and when such a situation should occur.

Angie
Angie,

My issue is not that I might miss a week of investing due to negligence but that Vanguard does not offer auto-roll and that the settlement periods of the maturing T-Bills and new T-Bills overlap. However, in the thread referenced by Electron, viewtopic.php?p=4549794#p4549794 , this issue has been discussed and some people reported that Vanguard takes money from the matured T-Bills and puts them into new T-Bills -- even if, technically, one does not have money in his account when he is placing a Buy order.

Victoria
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

VictoriaF wrote: Sun May 29, 2022 2:54 pm Thank you, Kevin, this is very interesting.

I have not tried to buy T-Bills with the money from the settlement of another batch of T-Bills. According to the thread referenced by Electron, viewtopic.php?p=4549794#p4549794 , this should be possible.
And according to my little experiment, it should be possible. The existing bill will mature on the same day the new bill is issued (which you can verify by looking at auction results), so the funds from the maturing bill will fund purchase of the next bill.
VictoriaF wrote: Sun May 29, 2022 2:54 pm But now I have other questions:
Why did not Vanguard allow you to cancel the trade on line?
Is that Vanguard's restriction only for auction purchases or other purchases too?
What happens if you don't have sufficient funds on the day when the trade has to be executed? Partial execution? Failed execution? Penalty?

Victoria
I don't know why Vanguard does not allow online cancellation. I assume I could cancel it by phone, but I purposely bought only 1 for this test, so it's not a big deal to me.

Normally if you place an order on the secondary market, you can cancel it until it's filled. There will be a message about attempting to cancel, and then unless it happens to get filled before it's cancelled, it will be cancelled.

I don't know what happens if the funds aren't in the settlement fund, and I don't really want to find out. Vanguard could place trading restrictions on you for doing so: https://investor.vanguard.com/investor- ... -penalties.

Kevin
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Re: Treasury bill tax reporting

Post by Kevin M »

Electron wrote: Sun May 29, 2022 2:59 pm
Kevin M wrote: Sat May 28, 2022 7:06 pm Here are some more details of my tax reporting for T bills in my 2019 return. This post is for bills only, not notes.
That is quite a story! It looks like tax reporting for T-bills sold before maturity can be quite complicated and not as easy as many would expect.

You had an interesting case with Schwab. It's possible that other brokerage firms would have done the reporting differently.

If the state return missed some of the Treasury interest an amended return might not be that difficult.
I also bought and sold Treasuries at Fidelity, so I can compare how Fido and Schwab report it, maybe.

Once you know how to use tax software to do it, I think the only complication is figuring out the accrued market discount so that can be entered as interest, with what's left being STCG. It's mostly a matter of dividing hold days by total days in the original term, then multiplying by the difference between face value and your cost. There's just a little tweak to this that I need to go back and figure out, but even without that tweak, I think you'd be close enough.

At the same time I was dealing with tax reporting for individual muni bonds, so those were a couple of fun tax years ;-)

I thought about amending the state return, but at this point, I'm not inclined to do so.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Sun May 29, 2022 3:09 pm And according to my little experiment, it should be possible. The existing bill will mature on the same day the new bill is issued (which you can verify by looking at auction results), so the funds from the maturing bill will fund purchase of the next bill.
If this is a margin account this is an "of course".
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Sun May 29, 2022 4:11 pm
Kevin M wrote: Sun May 29, 2022 3:09 pm And according to my little experiment, it should be possible. The existing bill will mature on the same day the new bill is issued (which you can verify by looking at auction results), so the funds from the maturing bill will fund purchase of the next bill.
If this is a margin account this is an "of course".
The account in which I placed the auction order with only $220 in the Settlement fund is not a margin account.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

Despite a zero balance, I received immediate credit in the settlement fund for funds requested to be transferred over from Ally...and was allowed to buy treasuries up to that limit. (I had only switched over to the brokerage account from the mutual fund side minutes earlier.)

Not exactly the same scenario as above, but does show that there is some latitude built into the system.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Sun May 29, 2022 3:09 pm
VictoriaF wrote: Sun May 29, 2022 2:54 pm Thank you, Kevin, this is very interesting.

I have not tried to buy T-Bills with the money from the settlement of another batch of T-Bills. According to the thread referenced by Electron, viewtopic.php?p=4549794#p4549794 , this should be possible.
And according to my little experiment, it should be possible. The existing bill will mature on the same day the new bill is issued (which you can verify by looking at auction results), so the funds from the maturing bill will fund purchase of the next bill.
VictoriaF wrote: Sun May 29, 2022 2:54 pm But now I have other questions:
Why did not Vanguard allow you to cancel the trade on line?
Is that Vanguard's restriction only for auction purchases or other purchases too?
What happens if you don't have sufficient funds on the day when the trade has to be executed? Partial execution? Failed execution? Penalty?

Victoria
I don't know why Vanguard does not allow online cancellation. I assume I could cancel it by phone, but I purposely bought only 1 for this test, so it's not a big deal to me.

Normally if you place an order on the secondary market, you can cancel it until it's filled. There will be a message about attempting to cancel, and then unless it happens to get filled before it's cancelled, it will be cancelled.

I don't know what happens if the funds aren't in the settlement fund, and I don't really want to find out. Vanguard could place trading restrictions on you for doing so: https://investor.vanguard.com/investor- ... -penalties.

Kevin
Is Vanguard just less flexible about cancelling orders?

I think even with mutual fund orders they say something like: "once placed this order can not be cancelled" on one of the screens.
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Re: Treasury bill tax reporting

Post by Kevin M »

Kevin M wrote: Sun May 29, 2022 3:30 pm Once you know how to use tax software to do it, I think the only complication is figuring out the accrued market discount so that can be entered as interest, with what's left being STCG. It's mostly a matter of dividing hold days by total days in the original term, then multiplying by the difference between face value and your cost. There's just a little tweak to this that I need to go back and figure out, but even without that tweak, I think you'd be close enough.
OK, I figured out the details. I sold 4 T bills at Schwab before maturity in 2019. I had purchased three of them on the secondary market on the days of the auctions, and one the day after. I guess I really preferred the secondary market back then.

To calculate the interest portion of the gain reported in the supplemental info, one thing you need to calculate is the total interest that would be earned if bought at auction and held to maturity. So I looked them up in the auction results, and found the issue price, date, and number of days between issue and maturity. Since I bought on the day of or day after the auction, the prices I paid were close to the auction prices, but slightly different. Subtracting the amount I would have paid at issue from the face value gives me the total interest that would be earned between issue and maturity.

I then multiply that total interest amount by the number of days I held the bill divided by the number of days between issue and maturity.

It sounds kind of complicated, but once you have the calculation in a spreadsheet, it's easy. I also have a spreadsheet with auction results, so I don't even have to look the auction results up online.

Here is the calculation for one of the bills, CUSIP 912796SL4.

I bought 50 on the auction date, 4/4/2019 at a price of 98.796780. The auction price was 98.796778; I labeled this OID price. From the OID price and quantity, I calculated the OID Cost as 49,398.39. Turns out this is the same as my actual cost when rounded to the penny.

I held the bill for 131 days out of the original 182 days to maturity, so I earned 131/182 of the total interest, so my reportable interest is:

131/182 * (50,000 - 49,398.39) = 433 (tax software only accepts values to closest dollar).

The "gain" shown on the Schwab tax form was 462, so I entered an adjustment in the gain/loss section of -433, leaving a STCG of 29. I then include the 433 in the fake 1099-INT I use to report the interest portion.

Remember, this is all done using formulas referencing cells, so once the formula is worked out for one bill, you just copy/paste it for the others.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Sun May 29, 2022 5:08 pm
Kevin M wrote: Sun May 29, 2022 3:09 pm I don't know why Vanguard does not allow online cancellation. I assume I could cancel it by phone, but I purposely bought only 1 for this test, so it's not a big deal to me.
Is Vanguard just less flexible about cancelling orders?

I think even with mutual fund orders they say something like: "once placed this order can not be cancelled" on one of the screens.
Apparently so. I just entered an order for 10 in an IRA at Fidelity, and then cancelled it.

And yeah, I've seen the message about not being able to cancel a mutual fund order once entered at Vanguard.

Kevin
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Re: Treasury bill tax reporting

Post by jeffyscott »

Kevin M wrote: Sun May 29, 2022 3:30 pmOnce you know how to use tax software to do it, I think the only complication is figuring out the accrued market discount so that can be entered as interest, with what's left being STCG. It's mostly a matter of dividing hold days by total days in the original term, then multiplying by the difference between face value and your cost. There's just a little tweak to this that I need to go back and figure out, but even without that tweak, I think you'd be close enough.
Kevin M wrote: Sun May 29, 2022 5:27 pm To calculate the interest portion of the gain reported in the supplemental info, one thing you need to calculate is the total interest that would be earned if bought at auction and held to maturity. So I looked them up in the auction results, and found the issue price, date, and number of days between issue and maturity. Since I bought on the day of or day after the auction, the prices I paid were close to the auction prices, but slightly different. Subtracting the amount I would have paid at issue from the face value gives me the total interest that would be earned between issue and maturity.

I then multiply that total interest amount by the number of days I held the bill divided by the number of days between issue and maturity.

It sounds kind of complicated, but once you have the calculation in a spreadsheet, it's easy.
Sure does sound complicated, I only briefly experimented with buying in taxable (never sold any) and thought it was all just a matter of reporting what was on any 1099s. And I didn't even get that right. I was planning to stick to tax deferred for anything like this and this just adds to my reasons for doing so 8-) .
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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

I'm already starting to dread filing taxes over the next few years... :oops:

(But I'm going to trust that between the software and records, it will all eventually come together as it should. Famous last words.)
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

jeffyscott wrote: Mon May 30, 2022 9:19 am Sure does sound complicated
Not complicated.
Buy Turbo Tax or whatever, download 1099's etc. directly from your broker to tax software and press submit to IRS. :sharebeer
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Re: Trading Treasuries (nominal and TIPS)

Post by Blues »

Doc wrote: Mon May 30, 2022 10:46 am
jeffyscott wrote: Mon May 30, 2022 9:19 am Sure does sound complicated
Not complicated.
Buy Turbo Tax or whatever, download 1099's etc. directly from your broker to tax software and press submit to IRS. :sharebeer
I use FreeTaxUSA...but as long as I can copy and paste the relevant downloaded data into the 1099 fields, (as I've been doing for some years), I'll be happy. (I quit using Turbo Tax and TaxAct a few years ago.) There's usually a few questions needing answering along with the 1099 data.
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