Buying secondary market TIPS via Vanguard Brokerage

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VictoriaF
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Buying secondary market TIPS via Vanguard Brokerage

Post by VictoriaF » Fri Sep 21, 2018 4:49 pm

I purchased some TIPS on auctions and secondary market ten years ago. At that time, I figured it out, but without practice have forgotten how I did it.

Now that 5-year TIPS are yielding about 0.9%, almost as much as 30-year TIPS, I want to buy some. I have some basic questions as follows:

1. Can I buy TIPS using money from my Primary Money Market account? Or must I first move money into my settlement account (Federal Money Market)?
2. Can I focus on the TIPS with the highest ask/bid values? For example, at the time of this writing:
CUSIP 912828X39, maturity 04/15/2022, bid/ask = 0.974/0.940
CUSIP 9128284H0, maturity 04/15/2023, bid/ask = 0.937/0.914

While I would have preferred to get the TIPS maturing in 2023, the ones maturing in 2022 seem to be a better value.

3. When the ask price is less than 100, e.g., 97.156 for CUSIP 912828X39 or 98.710 for CUSIP 9128284H0, I will be paying less than the nominal value. For example, if I order 10 TIPS, I will pay less than $10,000 -- $9,715 or $9,871 for the CUSIPs I listed. Is that correct?

Thank you,
Victoria
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Blueskies123
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by Blueskies123 » Fri Sep 21, 2018 4:52 pm

I use Fidelity but this is exactly I did when I bought TIPS using Fidelity.
If you find yourself in a hole, stop digging

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HueyLD
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by HueyLD » Fri Sep 21, 2018 5:38 pm

(1). Money must be in the settlement fund.

(3). Your total purchase price is as follows:

(A). The inflation adjusted principal calculated by multiplying the par value by the TIPS inflation index ratio

(B). Interest accrued from the last coupon date to the settlement date of the purchase.

(C). Any commission associated with the purchase.

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Artsdoctor
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by Artsdoctor » Fri Sep 21, 2018 5:59 pm

^ I have nothing to add Huey's explanation since it's perfect. Logistically, you may not wind up getting the price listed in the WSJ because Vanguard tends to sell in relatively large blocks in order to get the best price (you might get a great price when you buy 50 bonds but a different [less attractive]) price when you buy 10 bonds. You won't know exactly until you start looking to buy.

Deciding on the 2022 versus 2023 is almost like dancing on the head of a pin. The 2022 has virtually no coupon so you're essentially buying a zero coupon bond--nearly all of your return will occur when it matures. The 2023 isn't much more attractive in terms of the coupon. You might wind up making your decision at the time of purchase when you'll be able to compare yields.

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#Cruncher
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by #Cruncher » Fri Sep 21, 2018 7:36 pm

HueyLD wrote:
Fri Sep 21, 2018 5:38 pm
(3). Your total purchase price is as follows:
  1. The inflation adjusted principal calculated by multiplying the par value by the TIPS inflation index ratio
  2. Interest accrued from the last coupon date to the settlement date of the purchase. ...
You forgot to include the price, HueyLD! If the TIPS were purchased today at the prices in the original post, here is what the total cost would be excluding any commission:

Code: Select all

            Total    Face     Index               Accrued
Maturity    Cost     Value    Ratio     Price     Interest
---------  -------   -----   -------   -------   -----------
4/15/2022  $10,073 = 10000 * 1.03621 * 97.156% + 10 * 0.5733
4/15/2023  $10,043 = 10000 * 1.01454 * 98.710% + 10 * 2.8066
Index ratios and accrued interest on the 9/24/2018 settlement date are shown on these web pages: 0.125% April 2022 and 0.625% April 2023.

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HueyLD
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by HueyLD » Fri Sep 21, 2018 7:51 pm

Thanks cruncher for correcting my omission.

It happened when one tried to post while cooking dinner at the same time.

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Kevin M
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by Kevin M » Fri Sep 21, 2018 8:37 pm

Artsdoctor wrote:
Fri Sep 21, 2018 5:59 pm
Logistically, you may not wind up getting the price listed in the WSJ because Vanguard tends to sell in relatively large blocks in order to get the best price (you might get a great price when you buy 50 bonds but a different [less attractive]) price when you buy 10 bonds. You won't know exactly until you start looking to buy.
You can see the different prices/yields for different quantities by looking at the depth of book. Vanguard normally has a View link that you click to see depth of book, but I'm not seeing it now--perhaps it's not displayed when the market is closed, or something is going on with their system now.

I can see depth of book at Fidelity and Schwab, and they're showing the same numbers for the TIPS maturing 4/15/2022, for example. They show the 0.940 ask yield you quote for minimum quantity 1, 0.949 for min qty 100, and 0.944 for 25. So you lose less than one basis point of yield for quantity 1 vs. quantity 100. That's not bad at all.

Similarly, for the one maturing 4/15/2023, I see 0.922, 0.920, and 0.915 for minimum quantities 100, 25 and 1 respectively. Again, less than one basis point of yield less for 1 vs. 100.

The quantity spreads I've seen are larger at Vanguard and Fidelity for nominal Treasuries, but Schwab typically offers better yields on smaller quantities of nominals than Vanguard or Fidelity--sometimes higher yields than on larger quantities. Apparently not so for TIPS.

Kevin
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Kevin M
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by Kevin M » Fri Sep 21, 2018 8:56 pm

VictoriaF wrote:
Fri Sep 21, 2018 4:49 pm
2. Can I focus on the TIPS with the highest ask/bid values? For example, at the time of this writing:
CUSIP 912828X39, maturity 04/15/2022, bid/ask = 0.974/0.940
CUSIP 9128284H0, maturity 04/15/2023, bid/ask = 0.937/0.914

While I would have preferred to get the TIPS maturing in 2023, the ones maturing in 2022 seem to be a better value..
There is a seasonality effect which must also be considered, so you can't go by just the raw yield quotes. The effect is more pronounced at shorter maturities.

#Cruncher developed a spreadsheet to estimate the seasonally-adjusted yields, which I modified (with #Cruncher's feedback and corrections) to use quotes downloaded from Fidelity, and make it more automated. I just updated the spreadsheet with the latest Fidelity quotes, but these are the large-quantity quotes.

Here are some of the results:

Code: Select all

Maturity  Yield   S/A Yield
4/15/2022 0.949%  0.757%
7/15/2022 0.790%  0.770%
1/15/2023 0.892%  0.789%
4/15/2023 0.922%  0.772%
I assume #Cruncher will share corrected results if there are issues with my results.

Kevin
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hudson
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by hudson » Sat Aug 01, 2020 5:49 pm

Old discussion....but it's the right subject for me...

If you buy TIPS on the secondary market through Vanguard, what should you look out for?
Do you have to be a savvy buyer, or can you just buy?
Is it easy for a novice to take a "haircut?"

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Kevin M
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by Kevin M » Sun Aug 02, 2020 4:08 pm

hudson wrote:
Sat Aug 01, 2020 5:49 pm
Old discussion....but it's the right subject for me...

If you buy TIPS on the secondary market through Vanguard, what should you look out for?
Do you have to be a savvy buyer, or can you just buy?
Is it easy for a novice to take a "haircut?"
As discussed in an earlier reply, one thing to look at is the difference in price between the quantity you are buying and larger minimum quantities. Ask prices typically are lowest for minimum quantities of 50, 100 or 150 (so $50K to $150K face value), so if you are buying 10 or 20, you probably will pay a higher price.

Sometimes the difference isn't much, in which case you are getting a good deal for the smaller quantity. At any rate, if you are restricted to Vanguard, you get what they offer at the time. If you have an account at another broker that sells TIPS (e.g., Fidelity, Schwab, etc.), you can compare quotes to see the differences. They often are the same or very close, but one broker may give a better deal for smaller quantities, as I know Schwab has done in the past for nominal Treasuries.

Another thing to look at is the bid/ask spread; i.e., the difference between ask price and bid price. Obviously the smaller the spread, the better the deal you're getting. TIPS spreads typically are larger than nominal Treasury spreads. I last downloaded TIPS quotes from Fidelity on 7/29/2020, and I see spreads from 0.05% to 0.25% for the adjusted bid and ask prices, with an average of 0.13%. This is for larger minimum quantity quotes (best prices)--typically 100 or 150 minimum; smaller minimum quantity bid/ask spreads are likely to be higher.

So novice or not, you are likely to take a haircut compared to large investors if you are buying quantities of less than 50 to 150, but that haircut can be smaller or larger, so you might want to take a look at it at different times when the market is open to see how much it varies for the particular TIPS you're interested in.

Of course the advantage of buying at auction is that you get the same price as the largest institutional investors.

Kevin
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hudson
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Re: Buying secondary market TIPS via Vanguard Brokerage

Post by hudson » Sun Aug 02, 2020 4:31 pm

Thanks again Kevin!
It sounds like there are no sneaky haircuts; I'll just need to learn the system and shop around.

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