Buying a bond ladder not as easy as I thought

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randomizer
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Buying a bond ladder not as easy as I thought

Post by randomizer »

In this topic I asked about where to park some money I have in a brokerage account at Interactive Brokers, money which I'll need later this year.

Roughly speaking, my plan was to take about $50,000 and buy a non-rolling ladder of T-Bills such that I have about $5,000 maturing each month over the coming 10 months. This money is to be spent on booze and potato chips (just joking).

I thought treasury bills were relatively liquid, but it seems like they are fairly thinly traded indeed. I did some paper trading and my simulated orders filled quickly enough, but when I put in some real limit orders (at the current ask price), none of the orders filled (I think most or all of them had minimums far above the order size I was placing). I did this a couple hours before market close, but none of the orders filled and the market closed.

Were my expectations realistic, and if not, where do they fall down? (Is liquidity way less than I'd thought? Are order size limits the issue? etc).

Is it worth trying again tomorrow or should I be caving and buying an ultra-short duration bond ETF, or a (maybe) municipal money market fund etc? At this point I am doing this as a learning exercise*, as the total return after fees on the quantity I am investing over this time period is of the order of a few hundred dollars, which is not a life-changing amount.

(*Interactive Brokers charges a hefty $7.50 commission on each of these trades; it would certainly be cheaper to buy an ETF, even if I had to pay each month as I liquidated a portion to get back the cash.)
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sport
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Re: Buying a bond ladder not as easy as I thought

Post by sport »

Perhaps CDs would meet your needs instead of bonds.
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randomizer
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Re: Buying a bond ladder not as easy as I thought

Post by randomizer »

I don't think I can buy those via Interactive Brokers, can I? (I don't want to get off into the weeds, but for various reasons, the money is pretty much stuck there.)
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livesoft
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Re: Buying a bond ladder not as easy as I thought

Post by livesoft »

BIL is an ETF of 1-3 month T-bills. You can calculate how much of a hit that the spread and commissions will cost you.

While you will get an effectively lower interest rate, the liquidity is there in case you need to sell and buy something else instantly.

I own T-bills and just buy them without a limit order through my brokerage web site. The other thread on T-bills lists the commissions. It only makes sense to me to buy in batches of $100,000, so I would not try just $5,000 per batch.

I want the money to stay at the brokerage, so going to Vanguard or TreasuryDirect is not an option for this money. So while a Vanguard MM fund wold pay more, there are no-commission MM funds of any reputation at TDAmeritrade, so BIL and T-bills are the investments I'm using. CDs are available, but not as instantly liquid as BIL.
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lack_ey
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Re: Buying a bond ladder not as easy as I thought

Post by lack_ey »

I've bought and sold individual Treasury bills at other brokerages but not InteractiveBrokers. Maybe their bond platform is relatively poor. At Fidelity, Schwab, and Vanguard (maybe some others, but have not looked) you get access to a decently wide selection and $0 commissions. Others I've seen commissions hidden in the price quotes (you get as-quoted prices which result in yields worse than you see on the Treasury site, rather than about in line with that).

What's the order book look like? If the best ask requires a minimum bid higher than what you're bidding, then increase the price on your limit order to whatever will get execution. Or place a market order. You're not going to move the Treasury market with trade sizes like that.

At InteractiveBrokers I think using short-term ETFs might be better. Here are some options with different levels of risk, particularly credit risk:
BIL - SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
SHV - iShares Short Treasury Bond ETF
GSY - Guggenheim Ultra Short Duration ETF
NEAR - iShares Short Maturity Bond ETF
MINT - PIMCO Enhanced Short Maturity Active ETF
FLOT - iShares Floating Rate Bond ETF
FLRN - SPDR Bloomberg Barclays Investment Grade Floating Rate ETF

Those all have duration under 1 year, AUM over $1 billion, and spreads typically 0.03% or less.
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randomizer
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Re: Buying a bond ladder not as easy as I thought

Post by randomizer »

lack_ey wrote: Thu Feb 22, 2018 7:49 pm BIL - SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
SHV - iShares Short Treasury Bond ETF
GSY - Guggenheim Ultra Short Duration ETF
NEAR - iShares Short Maturity Bond ETF
MINT - PIMCO Enhanced Short Maturity Active ETF
FLOT - iShares Floating Rate Bond ETF
FLRN - SPDR Bloomberg Barclays Investment Grade Floating Rate ETF

Those all have duration under 1 year, AUM over $1 billion, and spreads typically 0.03% or less.
Thanks for that, that's super helpful. What are you using to find those? My search fu isn't very powerful. I go to Morningstar and end up guessing what words to put in the search box and not finding too much.
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Re: Buying a bond ladder not as easy as I thought

Post by saver007 »

You know IB pays interest on idle cash feds fund rate -50 basis point? This rate is about .92% now but will go up as fed is expected to hike multiple times this year.
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Re: Buying a bond ladder not as easy as I thought

Post by saver007 »

saver007 wrote: Thu Feb 22, 2018 9:39 pm You know IB pays interest on idle cash feds fund rate -50 basis point? This rate is about .92% now but will go up as fed is expected to hike multiple times this year.
Btw interest is paid only if net equity is greater than 100k and not paid on first 10k cash.
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Re: Buying a bond ladder not as easy as I thought

Post by sport »

randomizer wrote: Thu Feb 22, 2018 7:17 pm I don't think I can buy those via Interactive Brokers, can I? (I don't want to get off into the weeds, but for various reasons, the money is pretty much stuck there.)
I would think you can buy CDs at any broker. They are not very liquid, so they are not advisable if you think you will need the money before they mature. However, you indicated that you want to cash them on a predetermined schedule, so liquidity would not be concern.
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Re: Buying a bond ladder not as easy as I thought

Post by Kevin M »

Haven't had an IB account in years, and don't recall buying bonds there.

At Fidelity, you can see the "depth of book" for Treasuries, meaning the price/yield for various minimum quantities. Today I bought a 2-year Treasury, quantity 25 (25,000 face value). When I just look at the main search screen, the minimum quantity is at least 100. When I click the depth of book link for a particular bond, I see the price/yield for smaller quantities, so I scan down to the quantity I'm interested in, and click "buy". The yield for 25 was only a couple basis points lower than the yield for 100.

A fill or kill limit order is then entered at that ask price/yield, and it is filled immediately. I've been buying munis for a couple of months, and it works exactly the same. The order is always filled immediately at the ask price. A couple of times I tried entering a slightly lower limit price, and the order was always cancelled after a few minutes.

So, I would guess that you're using the ask price for a larger quantity than you're bidding on. I would think IB would have a capability to see the minimum quantity for various prices. Both Vanguard and Fidelity have this functionality (and neither charge commissions for Treasuries, but it may be factored into the bid/ask spreads).

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lack_ey
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Re: Buying a bond ladder not as easy as I thought

Post by lack_ey »

randomizer wrote: Thu Feb 22, 2018 8:00 pm Thanks for that, that's super helpful. What are you using to find those? My search fu isn't very powerful. I go to Morningstar and end up guessing what words to put in the search box and not finding too much.
Well, I knew of most of them offhand and just had to look up the exact fund names and ticker symbols, but you might have better luck screening and searching categories on ETF.com and ETFdb.com. That's how I picked up on GSY and FLRN.

One of the ETFs originally mentioned was BIL, so you can look that up at www.etf.com/BIL and www.etfdb.com/etf/BIL (simple enough URLs, thankfully). On an ETF page at ETF.com, there's a list of "top competing ETFs" that would show some relevant alternatives. Also near the top there's a list of "related ETF channels" that includes "Ultra-Short Term" that seems promising, and sends you here on a click. Unfortunately, the categorization is maybe not the best all the time. There are some like NEAR, MINT, and a lot of competitors that are not included there but instead in "short term" even though these are more like ultrashort. Also, you don't find floating-rate bonds there either, which have their own category.

However, if you just look through the list of bond ETFs and sort by AUM (you probably don't want to be in a $20M ETF anyway), it wouldn't be that hard to see something that sounds like it would fit.
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Re: Buying a bond ladder not as easy as I thought

Post by randomizer »

So in the end I went with market orders. This pushed my bids up enough to actually transact, roughly on the order or $1 or $2 on each $5,000 batch. Each order took about 5 to 30 seconds to actually fill.

The "Market Depth" view in Interactive Broker's "Trader Workstation" app kept locking up for me when I tried to open it, and the "Book Trader" showed no order size information (the columns are there, they were just empty), so I gave up on trying to do it all manually myself.
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