CIT MM Now 1.85% [Money Market]

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VinhoVerde
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CIT MM Now 1.85% [Money Market]

Post by VinhoVerde » Sat May 26, 2018 4:24 pm

CIT bank now pays 1.85% rate for Money Market accounts. I've used this bank since 2014 and they consistently have the most competitive high yield or MM rates. However, they do play games so you must check periodically to see if you are receiving their newest best interest rate. CIT will occasionally create new classes for the highest yield that don't apply to existing customers.
VinhoVerde

Streamer
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Re: CIT MM Now 1.85%

Post by Streamer » Sat May 26, 2018 4:32 pm

VinhoVerde wrote:
Sat May 26, 2018 4:24 pm
CIT bank now pays 1.85% rate for Money Market accounts. I've used this bank since 2014 and they consistently have the most competitive high yield or MM rates. However, they do play games so you must check periodically to see if you are receiving their newest best interest rate. CIT will occasionally create new classes for the highest yield that don't apply to existing customers.
VinhoVerde
CIT does play games with existing customers. I have some step up CDs there. They never step up the rate. They are good at adding different products. Very deceptive. As soon as I get out of the CDs I am done with them.

billfromct
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Re: CIT MM Now 1.85%

Post by billfromct » Sat May 26, 2018 5:20 pm

Since the Vanguard MM Fund now pays 1.88% interest, why would you use CIT Bank?

I believe you can write checks for $250 & above as well as electronically transfer money between your credit union/bank checking account. It takes 2 days to effect those transfers (either way).

bill

VinhoVerde
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Re: CIT MM Now 1.85%

Post by VinhoVerde » Sat May 26, 2018 7:45 pm

The 1.88% rate is for the Vanguard Prime MM Fund. About 30% of the assets of this fund are US government obligations. The rest are repos, foreign bank obligations, commercial paper, and domestic bank loans. Cit Money Market is FDIC insured, which carries little counterparty risk.
99.9% of the time this makes no difference. The fall of 2008 showed that funds like Prime Money Market could "break the buck."
VinhoVerde

HAWK23
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Re: CIT MM Now 1.85%

Post by HAWK23 » Sat May 26, 2018 9:56 pm

Vinho:

I signed up at the 1.75% rate. Do I need to do anything to get the new rate, or will it most likely automatically change to the new rate? Do you suggest to call?

manedark
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Re: CIT MM Now 1.85%

Post by manedark » Sat May 26, 2018 10:33 pm

Why not consider 6 month T-bill giving ~2‰

libralibra
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Re: CIT MM Now 1.85%

Post by libralibra » Sat May 26, 2018 11:35 pm

billfromct wrote:
Sat May 26, 2018 5:20 pm
Since the Vanguard MM Fund now pays 1.88% interest, why would you use CIT Bank?
FDIC coverage?
manedark wrote:
Sat May 26, 2018 10:33 pm
Why not consider 6 month T-bill giving ~2‰
Liquidity?

manedark
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Re: CIT MM Now 1.85%

Post by manedark » Sat May 26, 2018 11:42 pm

libralibra wrote:
Sat May 26, 2018 11:35 pm
Liquidity?
You can sell a T-bill before its term too.

libralibra
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Re: CIT MM Now 1.85%

Post by libralibra » Sun May 27, 2018 12:00 am

manedark wrote:
Sat May 26, 2018 11:42 pm
libralibra wrote:
Sat May 26, 2018 11:35 pm
Liquidity?
You can sell a T-bill before its term too.
When people talk about liquidity of an investment, they mean without the risk of taking a haircut or even losing accrued interest. (You probably knew that and were just being facetious though.) E.g. my house is not very liquid, but I could sell it in a day if I offered it for $1000 cash.

It's also a problem if you want to pay bills from the account.

manedark
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Re: CIT MM Now 1.85%

Post by manedark » Sun May 27, 2018 12:52 am

Actually my response was a question. What's the haircut on a T-bill, decided by secondary matket?

VinhoVerde
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Re: CIT MM Now 1.85%

Post by VinhoVerde » Sun May 27, 2018 5:32 am

To Hawk23:
I called CIT on Thursday after I saw their new rate in an ad as I have the Money Market account at 1.75%. The representative said they would be changing existing customers to 1.85% on Friday. I plan to recheck my account online on Monday. If I were you I'd double-check as well.
VinhoVerde

HAWK23
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Re: CIT MM Now 1.85%

Post by HAWK23 » Sun May 27, 2018 6:16 am

Thank you Vinhro - do they show the percentage we're currently getting on our account log in page anywhere?

EyeDee
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CIT MM Interest Rate

Post by EyeDee » Sun May 27, 2018 1:42 pm

.
HAWK23,

To get percentage one is getting on CIT MM account, one needs to log on their CIT MM account and click on Activity option near top of page. On left of the Activity page it should show current Interest rate and Last statement APY earned. The current interest rate will be a couple of basis points below the current APY rate, for example it currently should show 1.83% for 1.85% APY being talked about here.
HAWK23 wrote:
Sun May 27, 2018 6:16 am
Thank you Vinhro - do they show the percentage we're currently getting on our account log in page anywhere?
Randy

Sidney
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Re: CIT MM Now 1.85%

Post by Sidney » Sun May 27, 2018 1:56 pm

libralibra wrote:
Sun May 27, 2018 12:00 am
manedark wrote:
Sat May 26, 2018 11:42 pm
libralibra wrote:
Sat May 26, 2018 11:35 pm
Liquidity?
You can sell a T-bill before its term too.
When people talk about liquidity of an investment, they mean without the risk of taking a haircut or even losing accrued interest. (You probably knew that and were just being facetious though.) E.g. my house is not very liquid, but I could sell it in a day if I offered it for $1000 cash.

It's also a problem if you want to pay bills from the account.
T-Bills don't typically have much of a bid-ask spread. They are highly liquid.
I always wanted to be a procrastinator.

manedark
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Re: CIT MM Now 1.85%

Post by manedark » Sun May 27, 2018 6:39 pm

Sidney wrote:
Sun May 27, 2018 1:56 pm
libralibra wrote:
Sun May 27, 2018 12:00 am
manedark wrote:
Sat May 26, 2018 11:42 pm
libralibra wrote:
Sat May 26, 2018 11:35 pm
Liquidity?
You can sell a T-bill before its term too.
When people talk about liquidity of an investment, they mean without the risk of taking a haircut or even losing accrued interest. (You probably knew that and were just being facetious though.) E.g. my house is not very liquid, but I could sell it in a day if I offered it for $1000 cash.

It's also a problem if you want to pay bills from the account.
T-Bills don't typically have much of a bid-ask spread. They are highly liquid.
Thanks. Does it mean that you are not penalized like a CD?

HAWK23
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Re: CIT MM Interest Rate

Post by HAWK23 » Mon May 28, 2018 9:38 am

EyeDee wrote:
Sun May 27, 2018 1:42 pm
.
HAWK23,

To get percentage one is getting on CIT MM account, one needs to log on their CIT MM account and click on Activity option near top of page. On left of the Activity page it should show current Interest rate and Last statement APY earned. The current interest rate will be a couple of basis points below the current APY rate, for example it currently should show 1.83% for 1.85% APY being talked about here.
HAWK23 wrote:
Sun May 27, 2018 6:16 am
Thank you Vinhro - do they show the percentage we're currently getting on our account log in page anywhere?
Thank you very much EyeDee!

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Kevin M
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Re: CIT MM Now 1.85% [Money Market]

Post by Kevin M » Mon May 28, 2018 12:12 pm

libralibra wrote:
Sun May 27, 2018 12:00 am
manedark wrote:
Sat May 26, 2018 11:42 pm
libralibra wrote:
Sat May 26, 2018 11:35 pm
Liquidity?
You can sell a T-bill before its term too.
When people talk about liquidity of an investment, they mean without the risk of taking a haircut or even losing accrued interest.
manedark wrote:
Sun May 27, 2018 12:52 am
Actually my response was a question. What's the haircut on a T-bill, decided by secondary matket?
Sidney wrote:
Sun May 27, 2018 1:56 pm
T-Bills don't typically have much of a bid-ask spread. They are highly liquid.
It's true that Treasury Bills, and Treasuries in general, have low bid/ask spreads relative to other brokered products, like other types of bonds or CDs. However, as libralibra said, it's not just the trading costs that are a factor in liquidity, but also the ability to sell without taking a loss or not earning as much as you expected.

If you bought a 6-month T-bill 3 months ago, the yield was 1.87%. Here I'm using constant maturity yields from Treasury.gov, and making other approximations (e.g., a 6-month T-bill is actually a 26-week T-bill, but I'll assume six months for illustration purposes). T-bills don't have coupon interest payments, but are sold at a discount, so your interest comes in the form of receiving face value at maturity. The price of a 6-month T-bill at 1.87% yield (and coupon rate = 0%) is 99.08 (Bonds are priced as a percentage of face value, so price at maturity is 100). So buying 10 bills ($10,000 face value) would have cost about $9,908.

We can roughly verify this by calculating your 6-month return as 100/99.08 - 1 = 0.93%, then multiply by 2 to annualize it to 1.86%. So close enough to the initial 1.87% yield.

On 5/25/2018, your 6-month T-bill is now a 3-month T-bill, and let's say you want to sell it. Yield of a 3-month Treasury on 5/25/2018 was 1.90%, which comes to a price for a bill of 99.53. So your 10 bills are now worth 9,953. Your 3-month return is roughly 99.53/99.08-1 = 0.45%. Multiply by 4 for rough annualized return of 1.80%. Not bad, but not quite as much as the 1.87% annualized return you expected to earn.

Then there's the bid/ask spread to consider. Looking at Fidelity for Treasuries that mature 8/2018 and 9/2018, I see an average bid/ask spread of 0.03. So you might receive 99.50 instead of 99.53 if you sell. But that's the bid/ask for large quantities, like 400 ($400,000 face value). Picking one that matures 8/31/2018 and has a bid/ask of about 0.03 for large quantity, I see a bid/ask of closer to 0.12 for quantity 10 ($10,000 face value), so the bid/ask is significantly higher for small quantities. So maybe you only get 99.41 instead of 99.53.

The larger bid/ask spread for smaller quantities would reduce your 3-month return to 99.41/99.08-1 = 0.33%, for an annualized return of about 4 * 0.33% = 1.33%. This is quite a bit less than the expected annualized return of 1.87%.

The bid/ask calculations are pretty hypothetical, and assume you bought on the secondary market instead of at auction, and that the bid/ask spread when you bought the 6-month was about the same as when you sold the 3-month. If you buy at auction, you get institutional pricing, so maybe you cut the 0.12 bid/ask for small quantities in half in your round-trip transaction.

Kevin
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Sidney
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Re: CIT MM Now 1.85% [Money Market]

Post by Sidney » Mon May 28, 2018 12:20 pm

I tend to view liquidity in a pure sense of being able to convert the asset to cash quickly with minimal impact on the asset value as a result of the sale.

I personally don't mess with individual assets (Treasuries) unless the amount is significant. A fund is perfectly fine for me up to 7 figures. After that, individual Treasuries start to make sense in terms of ER savings.
I always wanted to be a procrastinator.

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Kevin M
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Re: CIT MM Now 1.85%

Post by Kevin M » Mon May 28, 2018 12:22 pm

manedark wrote:
Sun May 27, 2018 6:39 pm
Thanks. Does it mean that you are not penalized like a CD?
You are thinking of a direct CD (bought directly from a bank or credit union), for which there usually is an early withdrawal option where you pay an early withdrawal penalty (EWP). For longer-term CDs a low EWP is more of a benefit than a "penalty", since it limits your downside if rates were to increase a lot rapidly.

With a brokered CD (issued by a bank but bought through a broker like Vanguard or Fidelity), there is no early withdrawal option. You still can sell before maturity, but what you get depends on the rates for CDs of that maturity at the time, as well as the bid/ask spread. For example, if you buy a 5-year CD and sell it two years later, what you get will depend on 3-year CD rates at the time, as well as the bid/ask spread. In other words, the price of a brokered CD varies inversely with interest rates just as the price of a T-bill or any other bond does.

Bid/ask spreads for brokered CDs are highly variable, but on average are much higher than for Treasuries. Averages I've calculated recently have been in the ballpark of 0.7 (70 basis points), which obviously is much higher than the average bid/ask of the Treasuries I just looked at of 3 basis points, and even much higher than the 12 basis point bid/ask for smaller quantities.

Also, there may not even be an active bid for your CD when you want to sell it, so you will have to request a bid. In recent searches I've done, I might see bids for 75% of the CDs in my search results.

Bottom line is that you probably don't want to buy a brokered CD unless you plan to hold it to maturity.

Kevin
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manedark
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Re: CIT MM Now 1.85% [Money Market]

Post by manedark » Mon May 28, 2018 12:45 pm

Kevin M wrote:
Mon May 28, 2018 12:12 pm
It's true that Treasury Bills, and Treasuries in general, have low bid/ask spreads relative to other brokered products, like other types of bonds or CDs. However, as libralibra said, it's not just the trading costs that are a factor in liquidity, but also the ability to sell without taking a loss or not earning as much as you expected.

If you bought a 6-month T-bill 3 months ago, the yield was 1.87%. Here I'm using constant maturity yields from Treasury.gov, and making other approximations (e.g., a 6-month T-bill is actually a 26-week T-bill, but I'll assume six months for illustration purposes). T-bills don't have coupon interest payments, but are sold at a discount, so your interest comes in the form of receiving face value at maturity. The price of a 6-month T-bill at 1.87% yield (and coupon rate = 0%) is 99.08 (Bonds are priced as a percentage of face value, so price at maturity is 100). So buying 10 bills ($10,000 face value) would have cost about $9,908.

We can roughly verify this by calculating your 6-month return as 100/99.08 - 1 = 0.93%, then multiply by 2 to annualize it to 1.86%. So close enough to the initial 1.87% yield.

On 5/25/2018, your 6-month T-bill is now a 3-month T-bill, and let's say you want to sell it. Yield of a 3-month Treasury on 5/25/2018 was 1.90%, which comes to a price for a bill of 99.53. So your 10 bills are now worth 9,953. Your 3-month return is roughly 99.53/99.08-1 = 0.45%. Multiply by 4 for rough annualized return of 1.80%. Not bad, but not quite as much as the 1.87% annualized return you expected to earn.

Then there's the bid/ask spread to consider. Looking at Fidelity for Treasuries that mature 8/2018 and 9/2018, I see an average bid/ask spread of 0.03. So you might receive 99.50 instead of 99.53 if you sell. But that's the bid/ask for large quantities, like 400 ($400,000 face value). Picking one that matures 8/31/2018 and has a bid/ask of about 0.03 for large quantity, I see a bid/ask of closer to 0.12 for quantity 10 ($10,000 face value), so the bid/ask is significantly higher for small quantities. So maybe you only get 99.41 instead of 99.53.

The larger bid/ask spread for smaller quantities would reduce your 3-month return to 99.41/99.08-1 = 0.33%, for an annualized return of about 4 * 0.33% = 1.33%. This is quite a bit less than the expected annualized return of 1.87%.

The bid/ask calculations are pretty hypothetical, and assume you bought on the secondary market instead of at auction, and that the bid/ask spread when you bought the 6-month was about the same as when you sold the 3-month. If you buy at auction, you get institutional pricing, so maybe you cut the 0.12 bid/ask for small quantities in half in your round-trip transaction.

Kevin
Thanks Kevin. My takeaway is that for small quantities of T-bills it is better to buy them at auction and then hold them for their term, right?

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Kevin M
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Re: CIT MM Now 1.85% [Money Market]

Post by Kevin M » Mon May 28, 2018 1:13 pm

manedark wrote:
Mon May 28, 2018 12:45 pm
Thanks Kevin. My takeaway is that for small quantities of T-bills it is better to buy them at auction and then hold them for their term, right?
That would be my strategy. However, if short-term Treasury yields were to fall during the holding period, you could end up earning a higher annualized return than the initial yield. We just happen to have been in a period of rising yields lately, which is why it would have worked out the other way.

The bottom line is that if you don't match the maturity or duration of your asset to the maturity or duration of your liability, your return from the asset may or may not be sufficient to cover your liability when it comes due.

So if you have a nominal liability (expense) in six months, a 6-month Treasury is a relatively risk-free way to meet the liability. If the liability is in real terms, then you still have inflation risk with nominal Treasuries, in which case I Bonds or TIPS are a better fit for risk-free real liability matching.

Even though a savings account or money market fund has no term risk, it does have reinvestment risk; the rate your savings account is paying could decrease. Currently NorthPointe bank is offering 2.05% on their savings account for a minimum of $25K. So at first glance, assuming no state income tax, this would appear to be a better deal than a 3-month Treasury at 1.90%. But the savings account rate could drop at any time, and you could end up earning less than 1.9% over the next three months. So the 3-month Treasury is more of a risk-free investment for a 3-month holding period.

But risk has upside as well as downside, so you could end up earning even more with the savings account if the rate were to increase in less than three months.

Kevin
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manedark
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Re: CIT MM Now 1.85% [Money Market]

Post by manedark » Mon May 28, 2018 1:48 pm

Kevin M wrote:
Mon May 28, 2018 1:13 pm
That would be my strategy. However, if short-term Treasury yields were to fall during the holding period, you could end up earning a higher annualized return than the initial yield. We just happen to have been in a period of rising yields lately, which is why it would have worked out the other way.
How would I get higher annualized return if short-term yields fall? I know that happens for bonds, as NAV rises with falling rates, but how does it happen with a T-bill which has no NAV?

I like the point about treasury being safer and locked in compared to a savings account, which can change anytime under the hood (sometimes without you noticing).

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Kevin M
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Re: CIT MM Now 1.85% [Money Market]

Post by Kevin M » Mon May 28, 2018 2:16 pm

manedark wrote:
Mon May 28, 2018 1:48 pm
Kevin M wrote:
Mon May 28, 2018 1:13 pm
That would be my strategy. However, if short-term Treasury yields were to fall during the holding period, you could end up earning a higher annualized return than the initial yield. We just happen to have been in a period of rising yields lately, which is why it would have worked out the other way.
How would I get higher annualized return if short-term yields fall? I know that happens for bonds, as NAV rises with falling rates, but how does it happen with a T-bill which has no NAV?
NAV is a term that applies to mutual funds. For a bond fund, the per share NAV basically represents the per share price of all the bonds in the fund.

The same inverse relationship between yield and bond price applies. Bond price and yield are really just two sides of the same coin--either one can be used to express the value of the bond if you know the other parameters, like maturity date and coupon rate. There is a mathematical formula that relates bond price and yield, so you can calculate one from the other (again, knowing the other relevant parameters).

So the way I came up with the prices for the Treasuries in my example was to use the spreadsheet PRICE function, with the yield as one parameter, 0% as the coupon rate, and the settlement date (date the bond is purchased or valued) and maturity date for each example.

Kevin
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manedark
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Re: CIT MM Now 1.85% [Money Market]

Post by manedark » Mon May 28, 2018 5:12 pm

Thanks Kevin. Just to rephrase you simply, if the rates fall you are going to sell your treasury at a higher rate (just like it happens for bonds and bond funds).

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Re: CIT MM Now 1.85% [Money Market]

Post by manedark » Mon May 28, 2018 5:12 pm

That said, I thought we were in a rising interest rate environment right now.

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Kevin M
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Re: CIT MM Now 1.85% [Money Market]

Post by Kevin M » Mon May 28, 2018 7:05 pm

manedark wrote:
Mon May 28, 2018 5:12 pm
Thanks Kevin. Just to rephrase you simply, if the rates fall you are going to sell your treasury at a higher rate (just like it happens for bonds and bond funds).
Roughly speaking, yes, when bond yield falls, bond price increases. That is just bond math.

But it's not quite that simple, because what matters is the price/yield for the term remaining to maturity when you want to sell compared to the yield/price when you purchased the bond. So if you purchase a 5-year bond and want to sell it two years later, what matters is the price/yield of 3-year bonds compared to the price/yield you paid for the 5-year bond.

Even if the yield curve was exactly the same two years after you bought the 5-year bond, your bond would be worth more in two years, assuming a positively sloped yield curve. This is because you will be getting the 5-year coupon but with only three years left to maturity, so people will pay more than they would for a 3-year bond with the lower 3-year coupon. At least that's one way to explain it.
manedark wrote:
Mon May 28, 2018 5:12 pm
That said, I thought we were in a rising interest rate environment right now.
All we can say is that we have been in a rising rate environment. We don't really know how long it will continue or high yields will go for any particular maturity. Sticking with 6-month Treasuries, here's a previous period when we were in a rising rate environment:

Image

But if we extend the period by one year, here's what we see:

Image

So the yield stopped rising, and even fell a bit. If you bought in late June 2006 assuming a rising rate environment, you would have been wrong.

Of course if we were to extend the chart through the end of 2008, the 6-month yield fell to barely above 0%.

Kevin
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Re: CIT MM Now 1.85% [Money Market]

Post by GrowthSeeker » Fri Jun 29, 2018 3:44 pm

manedark wrote:
Sun May 27, 2018 12:52 am
Actually my response was a question. What's the haircut on a T-bill, decided by secondary market?
What I have been searching for is a rule-of-thumb style calculation representing the penalty or "haircut" for early sale of a Treasury bought at auction, similar to the idea that if you sell a CD early the penalty is maybe 5 months worth of interest (which may or may not be true, I never bought a CD because of this belief). Many thanks to Kevin M for the information provided in this thread.

Question 1: Is the following statement accurate: It seems from the following discussion that the haircut we take is mainly from the spread and not from the market fluctuation of interest rates / bond prices.
Question 2: for a bill or note bought at auction then sold on the secondary market should we be concerned with half the spread or the entire spread?
Question 3: Is there a rule of thumb that suggests how big a haircut (in basis points, in weeks/months of interest) when you sell a Treasury early? How does it vary with the duration of the bill / note / bond?

Kevin M wrote:
Mon May 28, 2018 12:12 pm

It's true that Treasury Bills, and Treasuries in general, have low bid/ask spreads relative to other brokered products, like other types of bonds or CDs. However, as libralibra said, it's not just the trading costs that are a factor in liquidity, but also the ability to sell without taking a loss or not earning as much as you expected.

If you bought a 6-month T-bill 3 months ago, the yield was 1.87%. Here I'm using constant maturity yields from Treasury.gov, and making other approximations (e.g., a 6-month T-bill is actually a 26-week T-bill, but I'll assume six months for illustration purposes). T-bills don't have coupon interest payments, but are sold at a discount, so your interest comes in the form of receiving face value at maturity. The price of a 6-month T-bill at 1.87% yield (and coupon rate = 0%) is 99.08 (Bonds are priced as a percentage of face value, so price at maturity is 100). So buying 10 bills ($10,000 face value) would have cost about $9,908.

We can roughly verify this by calculating your 6-month return as 100/99.08 - 1 = 0.93%, then multiply by 2 to annualize it to 1.86%. So close enough to the initial 1.87% yield.

On 5/25/2018, your 6-month T-bill is now a 3-month T-bill, and let's say you want to sell it. Yield of a 3-month Treasury on 5/25/2018 was 1.90%, which comes to a price for a bill of 99.53. So your 10 bills are now worth 9,953. Your 3-month return is roughly 99.53/99.08-1 = 0.45%. Multiply by 4 for rough annualized return of 1.80%. Not bad, but not quite as much as the 1.87% annualized return you expected to earn.

Then there's the bid/ask spread to consider. Looking at Fidelity for Treasuries that mature 8/2018 and 9/2018, I see an average bid/ask spread of 0.03. So you might receive 99.50 instead of 99.53 if you sell. But that's the bid/ask for large quantities, like 400 ($400,000 face value). Picking one that matures 8/31/2018 and has a bid/ask of about 0.03 for large quantity, I see a bid/ask of closer to 0.12 for quantity 10 ($10,000 face value), so the bid/ask is significantly higher for small quantities. So maybe you only get 99.41 instead of 99.53.

The larger bid/ask spread for smaller quantities would reduce your 3-month return to 99.41/99.08-1 = 0.33%, for an annualized return of about 4 * 0.33% = 1.33%. This is quite a bit less than the expected annualized return of 1.87%.

The bid/ask calculations are pretty hypothetical, and assume you bought on the secondary market instead of at auction, and that the bid/ask spread when you bought the 6-month was about the same as when you sold the 3-month. If you buy at auction, you get institutional pricing, so maybe you cut the 0.12 bid/ask for small quantities in half in your round-trip transaction.

Kevin
Kevin: so in your example above, we theoretically bought $9,908 of 6 mo T bills expecting an extra $92 (= 1.87%) 6 mo later.
We sold at 3 months expecting to get $9,953, i.e. $45 (= 1.80%) which is almost the same.
Actually due to spread got $9,941, i.e. $33 (= 1.33%).

to summarize (theoretically):
If we bought a 6-month T-bill 3 months ago, the yield was 1.87%.
If we bought a 6-month T-bill 3 months ago, but then sold it 3 months early, the yield was 1.33%.
You could say we lost 54 basis points, or in this case about 3.75 weeks of the interest we thought we were going to get over the 3 month period.
But what if we bought a 3-month T-bill 3 months ago and held to maturity? At this moment, the Fidelity chart shows 6-month T-bills 19 basis points more than 3-month T-bills. So let's assume that if we had a time machine and could go back to 3 months ago, we would have gotten a 3-month T-bill at 1.68%.
Comparing a 6-month T-bill sold 3 months early to a 3-month T-bill, we lost 35 basis points, or about 2.7 weeks of the interest we would have been expecting if we had played it safe with the 3 month bill.


I guess it is a matter of psychology whether you want to compare the early sale with our former conservative self who played it safe and bought a short term one or our greedy, foolish self who bought a longer term one and had to sell it early.
Just because you're paranoid doesn't mean they're NOT out to get you.

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Kevin M
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Re: CIT MM Now 1.85% [Money Market]

Post by Kevin M » Fri Jun 29, 2018 7:46 pm

GrowthSeeker wrote:
Fri Jun 29, 2018 3:44 pm
manedark wrote:
Sun May 27, 2018 12:52 am
Actually my response was a question. What's the haircut on a T-bill, decided by secondary market?
What I have been searching for is a rule-of-thumb style calculation representing the penalty or "haircut" for early sale of a Treasury bought at auction, similar to the idea that if you sell a CD early the penalty is maybe 5 months worth of interest (which may or may not be true, I never bought a CD because of this belief). Many thanks to Kevin M for the information provided in this thread.
There's no such rule of thumb, because the biggest factor can be what happens to yields between the time you buy and sell. The secondary factors are bid/ask spread and large-quantity/small-quantity spread. There also is no such rule of thumb for brokered CDs, as the bid/ask spreads can vary a lot, and changes in yields also can have a significant impact. For direct CDs, the early withdrawal penalty is known in advance, and these too vary between banks and credit unions.

Let's assume you buy a 2-year Treasury at the yield shown today (6/29/2018) at https://www.treasury.gov/resource-cente ... data=yield, which is 2.52%. For simplicity, also assume it's bought at par, which means coupon also = 2.52% and price = 100, and also assume only one coupon per year (instead of the actual two--just to simplify the model slightly). We will look at the 1-year return under different scenarios.

For first scenario, assume the 1-year yield one year from now is the same as shown today at Treasury.gov, which is 2.33%, and also assume no bid/ask or large/small spreads. Your 1-year return on the 2-year Treasury in this case would be 2.71%, which consists of the 2.52% coupon plus a capital return of 0.19% (actually 0.19 percentage points = 19 basis points). You earned 19 bps of additional return because you now have a 1-year bond with a 2.52% coupon and 1-year yield at 2.33%, so the bond price has risen from 100 to 100.19.

As long as the bid/ask spread plus large/small-quantity spread is less than 19 basis points, you'll still earn more than the original yield. So even if the bid/ask is say 5 bps and the large/small spread is 10 bps, reducing the price from 100.19 to 100.04, you'll earn 2.56%, so 4 bps more than the original yield of 2.52%.

For second scenario assume the 1-year yield increases by 20 bps from 2.33% to 2.53% in one year. Total return on 2-year held for one year ignoring any spreads now is 2.51%, which is only 1 basis point lower than the original yield. That's because you now have a 1-year bond with a 2.52% coupon at a 2.53% yield, so pretty close to a par bond at this point, with price of 99.99.

However, now the bid/ask and large/small-quantity spreads would reduce your return below the initial yield. Assuming a total of 15 bps of bid/ask plus small/large, price is reduced to 99.84, and total return is reduced to 2.36%.

For final scenario let's assume a large increase of 100 basis points in the 1-year yield after one year, so from 2.33% to 3.33%. In this case with no spreads your return is 1.74%, so 78 basis points below the initial yield of 2.52%. Here the change in yields is a much bigger factor than even the fairly large 15 bps of assumed bid/ask plus small/large-quantity spreads, which would reduce the return to 1.59%.
Question 1: Is the following statement accurate: It seems from the following discussion that the haircut we take is mainly from the spread and not from the market fluctuation of interest rates / bond prices.
Not necessarily. As illustrated above, a large enough change in yields can have a much larger impact on the return, but for smaller changes, the bid/ask and large/small-quantity spreads can dominate.
Question 2: for a bill or note bought at auction then sold on the secondary market should we be concerned with half the spread or the entire spread?
The yield/price at auction should be close the the large-quantity ask yield/price on secondary market, so if you were to sell immediately with no change in yield, you're looking at the full bid/ask spread plus the large/small-quantity spread for smaller lot sizes.
Question 3: Is there a rule of thumb that suggests how big a haircut (in basis points, in weeks/months of interest) when you sell a Treasury early? How does it vary with the duration of the bill / note / bond?
No rule of thumb. Longer duration bonds (generic term, includes bills and notes) will have larger price changes for a given change in yields, and the change can be positive or negative. If I recall, longer maturity bonds also tend to have smaller bid/ask and large/small-quantity spreads, but that's easy to check, and for sure the change in yields can have a much more significant impact on return.

Kevin
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