Are Treasury Zero's Liquid?

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hirlaw
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Are Treasury Zero's Liquid?

Post by hirlaw » Thu Oct 12, 2017 10:40 am

Hi all: I am considering buying some individual treasuries (within a Fidelity Brokerage account). I want to be able to sell easily if I desire (I know that they may lose principal value if rates rise). I understand that treasuries are very liquid. Is there and liquidity difference between selling regular treasuries and zero treasuries?

Thanks!

lack_ey
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Re: Are Treasury Zero's Liquid?

Post by lack_ey » Thu Oct 12, 2017 11:14 am

Oh yeah, Treasury zeroes are liquid. But no, not as liquid as the regular Treasuries. Just as one measure and indication, you might see spreads more like 15 bp rather than 2 bp. There's more of a market in the regular kind.

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HueyLD
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Re: Are Treasury Zero's Liquid?

Post by HueyLD » Thu Oct 12, 2017 11:27 am

hirlaw wrote:
Thu Oct 12, 2017 10:40 am
Hi all: I am considering buying some individual treasuries (within a Fidelity Brokerage account). I want to be able to sell easily if I desire (I know that they may lose principal value if rates rise). I understand that treasuries are very liquid. Is there and liquidity difference between selling regular treasuries and zero treasuries?
Is the brokerage account an IRA or other tax advantaged types?

If you own zeros in a taxable account, you will have to pay phantom federal income tax.

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Phineas J. Whoopee
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Re: Are Treasury Zero's Liquid?

Post by Phineas J. Whoopee » Thu Oct 12, 2017 1:59 pm

HueyLD wrote:
Thu Oct 12, 2017 11:27 am
...
If you own zeros in a taxable account, you will have to pay phantom federal income tax.
If I may, there's nothing phantom about the tax. The idea, which is misleading, is you have phantom income on which to pay tax each year.

If you owned, for example, a normal Treasury and used all the coupon payments to reinvest, they would not be available as cash to pay taxes with. You'd have to cover tax out of other cash.

A zero coupon bond works as if you were reinvesting coupons. It's no different, except from a cash-centric viewpoint in which nothing has value unless it has George Washington's picture on it.

PJW

hirlaw
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Re: Are Treasury Zero's Liquid?

Post by hirlaw » Thu Oct 12, 2017 5:14 pm

A zero coupon bond works as if you were reinvesting coupons.
OP here...That is why I like them. I have no immediate need for the interest. And to answer the other question: They are in a brokerage IRA.

As to the original question: Can anyone comment on their liquidity vs. regular treasuries?

Thanks

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Artsdoctor
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Re: Are Treasury Zero's Liquid?

Post by Artsdoctor » Thu Oct 12, 2017 5:28 pm

No. Zeros are not as liquid as coupon-bearing treasuries, if you get into looking closely at bid-ask spreads and do your own research (Federal Reserve has some research on this, if I remember correctly). And coupon STRIPS are not as liquid as principal STRIPS. This doesn't mean that they're "illiquid"; you won't have any problem buying or selling.

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HueyLD
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Re: Are Treasury Zero's Liquid?

Post by HueyLD » Thu Oct 12, 2017 5:37 pm

As Lack_ey said above, Treasury zeros are very liquid and can be easily sold. However, they are a lot less zeros outstanding and it may be a bit difficult to trade them in time of distress.

Due to a lack of cash flow, they tend to be very sensitive to changes in interest rates, especially in a rising rate environment. They are ideal instruments to be held to maturity and you earn the truth YTM without having to worry about reinvestment of income.

If held in a taxable account, the annual tax due will reduce the YTM. However, yours will be held in an IRA so taxes should not be a factor.

I would treat zeros as long term investments.

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