Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

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mervinj7
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Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

Quite a few folks have send me PMs asking for details on how to build a Treasury Ladder at Fidelity and take advantage of the Auto-Roll Feature. I personally use this setup in my Fidelity “Brokerage” account for my 6 month Emergency Fund as well as my HSA held in CA (which taxes HSA like any other taxable account).

1. U.S. Treasury Auction Schedule and Yield Curve
latest auction schedule and latest yield curve on the U.S. Treasury site:
https://www.treasury.gov/resource-cente ... ctions.pdf
https://www.treasury.gov/resource-cente ... data=yield

2. Calculate Expected Yield of a Single Bill
As an example, let’s say we are interested in building a 6 month ladder of 26 week bills with $5k maturing/auto-rolling each month. The current expected yield of a 6 month bill is 1.56%. As per Kevin M’s post on Tax Equivalent Yields, my personal TEY with Fed Rate = 27.8% and CA State Tax=9.3% is
TEY=1.56% *(1-0.278)/(1-0.278-0.093)=1.79%

Ref: viewtopic.php?p=4826562

2. Let's say I choose to purchase the 26-week Treasury with an Auction Date of Nov 26. Between the announcement date of Nov 21 and the auction date of Nov 26, I can go to the fixed income section of Fidelity and place an order (in increments of $1000) for this T-Bill. Note, the "New Issues" won't show up until till the afternoon of the announcement date (Nov 21st, around noon).
https://fixedincome.fidelity.com/ftgw/fi/FILanding

3. When placing the order, you have the option of turning auto-roll on or off. If you turn it on, when this T-bill matures 26 weeks after Nov 26, Fidelity will automatically use the proceeds to purchase a similar 26 week T-bill. If you turn off auto-bill, then the proceeds of the T-bill will be placed into account.
https://www.fidelity.com/fixed-income-b ... ll-program

4. If you want to build a ladder of T-bills, then you can repeat the steps above every month (or quarter, etc). Based on the current auction schedule, I would place another order of 26 week T-bills for Dec 24 and the next on Jan 28. Once you set up the ladder, Fidelity will continue to purchase T-bills on their maturity. Hence the auto-rolling individual Treasury ladder technique!

5. For funds that I keep in cash, I currently use FDLXX (Fidelity Treasury Only Money Market). In the HSA, I hold incoming contributions here till they reach the minimum to purchase a T-bill ($1000) at auction.
https://fundresearch.fidelity.com/mutua ... /31617H300

For CA HSA holders, the advantage of setting up the above is to effectively create your own Treasury bond fund with 0 ER (no cost to purchase T-bills at auction), no capital gains distributions since the bills are held to maturity, no state tax on dividends, and no CA specific state tax filings. You can also choose your own effective duration (e.g. 2 years, 5 years), which can be helpful when the yield curve is as flat as it is now.

For CMA users, it’s a method to effectively create your own VUSXX-like fund but where one gets to set their own duration and pay 0 ER.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

A. Screenshot of Fixed Income New Isssues at Fidelity:
Image


B. Screenshot showing rough 6 month ladder.
Image


C. Screenshot showing a 4 week bill about to mature 01/28/2020 and be automatically replaced with another 4 week bill maturing on 02/25/2020. No lag time between maturities and settlement. Thus, no lost interest.
Image
Last edited by mervinj7 on Thu Jan 23, 2020 4:59 pm, edited 2 times in total.
bhtomj
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by bhtomj »

Thanks mervinj7. Great timing on your post.
I am in CALIFORNIA also with a UMB to Fidelity transfer in progress. I wanted to do something like this so now I have instructions :happy
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

bhtomj wrote: Wed Jan 22, 2020 1:00 am Thanks mervinj7. Great timing on your post.
I am in CALIFORNIA also with a UMB to Fidelity transfer in progress. I wanted to do something like this so now I have instructions :happy
It's still a work in progress, though. I have two questions that I need to work out:

1. How does one calculate the equivalent SEC yield?
For example, the 6 month T-bill maturing on 2/6/2020 was bought for $4950.71. So I could calculate my yield on 2/6 as $49.29/($4950.71)*2=1.991%. But that doesn't take in account the remaining 5 months that were brought as the yield curve rolled downwards. Redoing it with cost basis (assuming I bought just $5k/month), $49.29/($4950.71+$4954.63+$4953.87+$4961.2+$4960+$4960)*6*2=1.988%

2. What's the appropriate duration to choose?
For my EF, since it's roughly 6 months of expenses, I implemented a 6 rung ladder of 6 month bills. It's fairly straightforward. However, one could make the argument that an EF is rarely tapped and could be extended to longer duration like 2-3 years for slightly more yield. However, I decided that was the incorrect approach for an EF and that I should leave the risk to the equities in my taxable account.

For my HSA, I also implemented a ladder using 6 month bills (mostly out of convenience) but again the argument could be made that the duration should be longer for an account that won't be tapped for 20 years. I also bought a single 5-year TIPS so I can understand the mechanics.
Last edited by mervinj7 on Wed Jan 22, 2020 12:07 pm, edited 1 time in total.
mrb09
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mrb09 »

Mervinj7 has previously posted some of this in another thread. I live in CA and followed his instructions for my HSA and am the happy owner of a 26w t-bill ladder. I want to thank Marvinj7 for posting originally and reposting a complete set now. Very highly recommended.

This additional post also helped me with the transfer from my corporate plan bank to Fidelity: https://thefinancebuff.com/best-hsa-pro ... money.html
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Kevin M
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kevin M »

mervinj7 wrote: Wed Jan 22, 2020 11:53 am It's still a work in progress, though. I have two questions that I need to work out:

1. How does one calculate the equivalent SEC yield?
For example, the 6 month T-bill maturing on 2/6/2020 was bought for $4950.71. So I could calculate my yield on 2/6 as $49.29/($4950.71)*2=1.991%. But that doesn't take in account the remaining 5 months that were brought as the yield curve rolled downwards. Redoing it with cost basis (assuming I bought just $5k/month), $49.29/($4950.71+$4954.63+$4953.87+$4961.2+$4960+$4960)*6*2=1.988%
Interestingly, there are a number of nuances to answering this question. Here we go ...

First, I'm not sure how relevant SEC yield is to a Tbill ladder, but we can explore the nuances of this as well. First though, let's look at what I think most investors would be interested in, and look at how to calculate the yield to maturity (YTM, or just "yield") of the ladder.

The yield of the ladder is the weighted yield of the individual bills. You can simply look up the yields of the bills using the Fidelity fixed income search tool, but there are nuances even to this. To illustrate, I'll do a search for bills maturing 05/2020 through 07/2020, which will show us some bills that were auctioned as 26-week maturity. Here is a screenshot showing the search criteria:

Image

And here is a screenshot of the search results summary (caveat: market is closed now, so the prices and yields shown here may not be representative of when the market is open):

Image

The first nuance is that there are bid and ask yields, so you have to decide which yield is relevant for your purposes. If I'm looking at liquidation value, I'm more interested in bid price than bid yield. Bid price is lower than ask price, so bid yield is higher than ask yield, so using bid yields will give you a higher ladder yield than using ask yields. If you're comparing current YTM of a bill to the yield when you purchased, perhaps using ask yields is more appropriate.

The second nuance is that the summary page shows the best prices/yields, which typically will be better for larger minimum quantities than you are likely to hold in your ladder. We see minimum quantities mostly of 3,000 ($3,000,000 face value) and 100 ($100,000 face value). So next, you must click the Depth of Book icon for the bill of interest to see the bids and yields for the relevant minimum quantity.

Here's the depth of book for the first bill in the table, maturing 5/7/2020, with best-price minimum quantity of 3,000 for both bid and ask.

Image

The bid price that probably is relevant for your ladder is the one with minimum quantity 1, which of course is lower than the prices with larger minimum quantities (and of course the yield is higher). Conversely, on the ask side, the price is higher and yield lower for minimum quantity of 1. Although you get the same pricing as institutional investors buying huge quantities when you buy at auction, that may not be the case if you sell.

At any rate, once you select the relevant yield for each bill in your ladder, then you can calculate the dollar-weighted average yield of your ladder.

Another caveat if you are comparing to yield (investment rate) at auction is that the Treasury uses some specific formulas to calculate investment rate, which you can see here: https://www.treasurydirect.gov/instit/a ... ecbill.pdf. However, using the spreadsheet YIELD function gives results that are the same to the published three decimal places for bills with maturities between 8-weeks and 52-weeks. For maturities of less than 52-weeks, use frequency parameter = 1, and for 52-week bills (and notes and bonds) use frequency parameter = 2.

For maturities of 4-weeks and less, the YIELD function gives results that are off by a few tenths of a basis point relative to the published investment rate calculated with the Treasury formula. For example, for the 4-week bill issued 01/28/2020 (maturing 02/25/2020), the published investment rate is 1.527%, while the YIELD function gives 1.523%.

Now, back to the nuances of SEC yield.

First, "The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days." (from Vanguard website), so it's an average yield, not a snapshot yield.

Second, I believe that the fund income distributions for bills are calculated by evenly accreting the purchase discount based on the number of days from purchase to maturity. Using this approach, the yield of a bill for purposes of the SEC yield calculation will remain constant at the purchase-date yield. This is very different than the mark to market yield, which is what was discussed above.

Here is a link to a post in a thread on VUSXX yield in which I first thought about this, and how to model it for estimating VUSXX yield: Re: Why is Vanguard Treasury Money Market yield so high?.

Using this modeling approach (actually taking a 7-day average of the 1-month, 2-month, and 3-month averages of the respective maturity bills, and subtracting the expense ratio), VUSXX yield often is a few basis points higher than the model predicts, as it is now.

Image

For yesterday, 1/24/2020, the calculated model yield is 1.47%, while VUSXX yield is 1.53%, so 6 basis points higher than the model estimation, making up for 2/3 of the ER of 0.09%.

Note that while VUSXX holds bills mostly in the 1-3 month maturity range, it does sometimes hold a few bills of longer maturity, and it also sometimes holds a few floating rate notes, both of which were the case as of 12/31/2019: https://investor.vanguard.com/mutual-fu ... o-holdings.

Kevin
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maximumlawman
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by maximumlawman »

Honest question: If I'm doing this for an emergency fund, why wouldn't I just put it in one of the savings accounts that pay higher interest than Treasury securities do right now? That would make it easier to tap in an emergency as well as pay more interest. Is the concern that you want it to be harder to tap than a bank account but easier than a CD ladder (which at this point would also pay more interest)? That you are above the FDIC limit on your bank accounts already (in which case you probably already can easily handle any emergencies out of your existing accounts)? I'm honestly wondering if I'm missing something, because I see that plenty of smart people do this, but I'm not seeing the rationale.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kevin M »

maximumlawman wrote: Sun Jan 26, 2020 9:46 am Honest question: If I'm doing this for an emergency fund, why wouldn't I just put it in one of the savings accounts that pay higher interest than Treasury securities do right now? That would make it easier to tap in an emergency as well as pay more interest. Is the concern that you want it to be harder to tap than a bank account but easier than a CD ladder (which at this point would also pay more interest)? That you are above the FDIC limit on your bank accounts already (in which case you probably already can easily handle any emergencies out of your existing accounts)? I'm honestly wondering if I'm missing something, because I see that plenty of smart people do this, but I'm not seeing the rationale.
I can't answer for the OP or anyone else who currently is doing this, as currently I'm not doing anything like it, because as you say, I have a (local) bank account that pays a much higher rate of interest on an taxable-equivalent (or after-tax) basis. However, for the 26-week auctions between 8/6/2018 and 6/3/2019, the 26-week bill had a higher taxable-equivalent yield (TEY) than my 2.50% savings account, and I was investing in Treasuries with maturities out to about two years during that timeframe.

This raises the first point that some might be considering, which the OP pointed out: the state tax exemption results in a higher TEY than the quoted yield if you pay state income tax. Still, at current yields, TEY for the OP of the most recently auctioned 26-week bill at 1.557% is only 1.79%.

A second consideration is although there are many savings accounts paying a higher rate (e.g., ballpark 2%), the bank someone actually uses may not be, and they may not be interested in opening new accounts to "chase rates". For example, many forum members use Ally Bank, and the rates on their savings account is only 1.60% (however, their no-penalty CD earns 1.85% on $25K or more, so that would make more sense for an EF).

Finally, some folks like to consolidate their investing and banking at one firm, and Fidelity seems to be a popular choice for that--there's a long thread on Fidelity as a one stop shop (currently up to 27 pages). For someone in this camp, a 6-month Treasury ladder has a higher TEY than Fidelity's highest-paying money market fund, FZDXX with compound yield of 1.58%, and that fund requires a $100K minimum initial investment in a taxable account. The next-best is SPRXX with compound yield of only 1.46%.

Although I don't use Fidelity as a one-stop shop, I currently am using it for much of my banking, as well as for part of my investment portfolio. Back when Treasury yields were more competitive, I bought $10K of a 26-week Treasury at auction in the Fidelity brokerage account I use for banking (separate from my investment brokerage account) as margin for any possible overdrafts from the money market fund used to pay bills. Treasury yields were no longer competitive when that matured, so I didn't roll it over, and now just keep a comfortable buffer in the MM fund used to pay bills.

Kevin
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by MotoTrojan »

Let’s say I have the $30K now. What advantage do you personally desire by having the ladder with such a short 6-month maturity rate? Do you really gain that much by staggering the purchases?

Maybe you prefer to let them mature rather then sell on open market? Don’t you have to call to cancel an auto-roll so you get the cash (that’s a pain)? Plenty liquid to just sell IMHO.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kevin M »

MotoTrojan wrote: Sun Jan 26, 2020 2:08 pm Don’t you have to call to cancel an auto-roll so you get the cash (that’s a pain)?
No. You just cancel the order for the replacement Treasuries before your existing Treasuries mature. You might also characterize this as a pain, but I've done it several times, and didn't consider it a pain at all. Fidelity sends you an email when this becomes doable.

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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by MotoTrojan »

Kevin M wrote: Sun Jan 26, 2020 3:31 pm
MotoTrojan wrote: Sun Jan 26, 2020 2:08 pm Don’t you have to call to cancel an auto-roll so you get the cash (that’s a pain)?
No. You just cancel the order for the replacement Treasuries before your existing Treasuries mature. You might also characterize this as a pain, but I've done it several times, and didn't consider it a pain at all. Fidelity sends you an email when this becomes doable.

Kevin
Makes sense, thanks for clarifying. So that’s the primary goal of the ladder? There aren’t many drawbacks to selling prior to maturity I can see.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kevin M »

MotoTrojan wrote: Sun Jan 26, 2020 3:48 pm
Kevin M wrote: Sun Jan 26, 2020 3:31 pm
MotoTrojan wrote: Sun Jan 26, 2020 2:08 pm Don’t you have to call to cancel an auto-roll so you get the cash (that’s a pain)?
No. You just cancel the order for the replacement Treasuries before your existing Treasuries mature. You might also characterize this as a pain, but I've done it several times, and didn't consider it a pain at all. Fidelity sends you an email when this becomes doable.

Kevin
Makes sense, thanks for clarifying. So that’s the primary goal of the ladder? There aren’t many drawbacks to selling prior to maturity I can see.
Not sure what the "primary goal" question is about.

I should clarify that my answer only related to getting the cash at maturity. If you want it before maturity, you just sell, and the auto roll is automatically cancelled, since there's nothing to roll. Apparently auto roll is cancelled even if you sell only part of the enrolled position (or add to it):
Fidelity wrote:You have the ability to withdraw from the service at any time with no penalties, giving you complete control. This Auto Roll feature will continue to purchase a replacement position at the maturity of the existing position unless:

* You cancel the Auto Roll feature for that enrolled position

* You sell part of, or add to, that enrolled position
Source: https://www.fidelity.com/fixed-income-b ... ll-program

Kevin
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by MotoTrojan »

Kevin M wrote: Sun Jan 26, 2020 4:31 pm
MotoTrojan wrote: Sun Jan 26, 2020 3:48 pm
Kevin M wrote: Sun Jan 26, 2020 3:31 pm
MotoTrojan wrote: Sun Jan 26, 2020 2:08 pm Don’t you have to call to cancel an auto-roll so you get the cash (that’s a pain)?
No. You just cancel the order for the replacement Treasuries before your existing Treasuries mature. You might also characterize this as a pain, but I've done it several times, and didn't consider it a pain at all. Fidelity sends you an email when this becomes doable.

Kevin
Makes sense, thanks for clarifying. So that’s the primary goal of the ladder? There aren’t many drawbacks to selling prior to maturity I can see.
Not sure what the "primary goal" question is about.

I should clarify that my answer only related to getting the cash at maturity. If you want it before maturity, you just sell, and the auto roll is automatically cancelled, since there's nothing to roll. Apparently auto roll is cancelled even if you sell only part of the enrolled position (or add to it):
Fidelity wrote:You have the ability to withdraw from the service at any time with no penalties, giving you complete control. This Auto Roll feature will continue to purchase a replacement position at the maturity of the existing position unless:

* You cancel the Auto Roll feature for that enrolled position

* You sell part of, or add to, that enrolled position
Source: https://www.fidelity.com/fixed-income-b ... ll-program

Kevin
I was asking why an investor with $30K EF in cash (per OP example) would be better off adding $5K/month to a 26-week auction w/ auto-roll rather than simply buying all $30K at once and not having a ladder. I can’t imagine the outcomes vary much.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by ankonaman »

Does Vanguard have a similar program?
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by MotoTrojan »

ankonaman wrote: Sun Jan 26, 2020 5:50 pm Does Vanguard have a similar program?
No.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kevin M »

MotoTrojan wrote: Sun Jan 26, 2020 5:40 pm I was asking why an investor with $30K EF in cash (per OP example) would be better off adding $5K/month to a 26-week auction w/ auto-roll rather than simply buying all $30K at once and not having a ladder. I can’t imagine the outcomes vary much.
Ah, got it. Agreed that it probably isn't worth the hassle for such a short-term ladder.

Like I said, mine wasn't what I'd call an EF, but I just put all $10K into a 26-week. I think I might have set it to auto roll when I bought it, but I sold half of the position about a month before maturity, so that would have cancelled the auto roll if it had been in place.

When I bought (5/30/2019 settlement), yield curve was pretty flat out to six months, with the 6-month just a smidge higher, and we pretty much knew short term rates would continue to fall due to Fed signals, so it seemed best to lock in the yield, and the odds were good that I'd earn the original yield or higher if I had to sell before maturity.

Yield curve still is flat out to six months (actually out to one year), but the path of short-term interest rates is less clear. But as you say, the outcome of a ladder vs. all in on a six-month is likely to be negligible.

Kevin
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

MotoTrojan wrote: Sun Jan 26, 2020 5:40 pm I was asking why an investor with $30K EF in cash (per OP example) would be better off adding $5K/month to a 26-week auction w/ auto-roll rather than simply buying all $30K at once and not having a ladder. I can’t imagine the outcomes vary much.
OP here. This is a work in progress, obviously. Each user should set their rungs and duration as appropriate.

For example, a much simpler example is to just to stick to one rung and buy a single 8 week T-bill and set it to auto-roll. It's average duration would be slightly slower than a MMF like VUSXX with similar yields. That gets around one of the biggest complaints folks have with Fidelity, it's high ERs for MMFs. My other goal, was to consolidate our financial picture to just one institution (e.g. Fidelity as a One Stop Shop). I don't move funds for slightly higher yields in HYS accounts but I will move funds for large bonuses (e.g. Chase's $900 checking bonus).

That said, the next question could be why I did a 6 month ladder? When I first setup the ladder, I figured it's a 6 month EF, so having a T-bill that matures each month seemed the obvious choice. In theory, I should get slightly higher yields than a Treasury MMF since the duration extended to 90 days from 45 days (that made more sense when the yield curve wasn't so flat). If I did have a emergency and I needed to tap my EF for extended period of time, I would turn off auto-roll only as necessary and use funds as the T-bills mature. BTW, you can can turn-off auto-roll using the chat feature, or you can sell the T-bill before maturity, or you can cancel the purchase of the next T-bill. No need to call. However, as far as I know, you can't turn off auto-roll just for portion of a bill purchase (e.g. $3k out of a $6k 26-week bill maturing on 02/05/2020).

Moving forward, I might just move to a 1 or 2 year ladder with just 3-4 bills. I'm already moving my HSA to longer duration T-bills.
Last edited by mervinj7 on Mon Jan 27, 2020 11:52 am, edited 1 time in total.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

ankonaman wrote: Sun Jan 26, 2020 5:50 pm Does Vanguard have a similar program?
Vanguard does not currently have a similar program but Schwab recently announced that they are starting an auto-roll feature. There's some debate whether it's implemented the same way as Fidelity's with little to no lag between bills maturing and the next bill being purchased.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

Kevin M wrote: Sat Jan 25, 2020 5:25 pm
mervinj7 wrote: Wed Jan 22, 2020 11:53 am It's still a work in progress, though. I have two questions that I need to work out:

1. How does one calculate the equivalent SEC yield?
For example, the 6 month T-bill maturing on 2/6/2020 was bought for $4950.71. So I could calculate my yield on 2/6 as $49.29/($4950.71)*2=1.991%. But that doesn't take in account the remaining 5 months that were brought as the yield curve rolled downwards. Redoing it with cost basis (assuming I bought just $5k/month), $49.29/($4950.71+$4954.63+$4953.87+$4961.2+$4960+$4960)*6*2=1.988%
Interestingly, there are a number of nuances to answering this question. Here we go ...
Kevin M, thanks for your very detailed answer. I will take some time to process it.
In general, I believe I am overthinking the yield question in terms of my actual use case. Since (in most situations), my EF is never "tapped" and I hold all bills to maturity, the only yield relevant to me is the yield at auction. For example, the next T-bill to mature on 02/05/2020 was purchased on 08/05/2019 for $4,950.71 or a yield of 1.99%. If I sell right now, I would use your instructions to calculate the effective yield based on the current bid/ask spread for 1 bill.
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by Kaymaza »

mervinj7 wrote: Tue Jan 21, 2020 6:01 pm Quite a few folks have send me PMs asking for details on how to build a Treasury Ladder at Fidelity and take advantage of the Auto-Roll Feature. I personally use this setup in my Fidelity “Brokerage” account for my 6 month Emergency Fund as well as my HSA held in CA (which taxes HSA like any other taxable account).

1. U.S. Treasury Auction Schedule and Yield Curve
latest auction schedule and latest yield curve on the U.S. Treasury site:
https://www.treasury.gov/resource-cente ... ctions.pdf
https://www.treasury.gov/resource-cente ... data=yield

2. Calculate Expected Yield of a Single Bill
As an example, let’s say we are interested in building a 6 month ladder of 26 week bills with $5k maturing/auto-rolling each month. The current expected yield of a 6 month bill is 1.56%. As per Kevin M’s post on Tax Equivalent Yields, my personal TEY with Fed Rate = 27.8% and CA State Tax=9.3% is
TEY=1.56% *(1-0.278)/(1-0.278-0.093)=1.79%

Ref: viewtopic.php?p=4826562

2. Let's say I choose to purchase the 26-week Treasury with an Auction Date of Nov 26. Between the announcement date of Nov 21 and the auction date of Nov 26, I can go to the fixed income section of Fidelity and place an order (in increments of $1000) for this T-Bill. Note, the "New Issues" won't show up until till the afternoon of the announcement date (Nov 21st, around noon).
https://fixedincome.fidelity.com/ftgw/fi/FILanding

3. When placing the order, you have the option of turning auto-roll on or off. If you turn it on, when this T-bill matures 26 weeks after Nov 26, Fidelity will automatically use the proceeds to purchase a similar 26 week T-bill. If you turn off auto-bill, then the proceeds of the T-bill will be placed into account.
https://www.fidelity.com/fixed-income-b ... ll-program

4. If you want to build a ladder of T-bills, then you can repeat the steps above every month (or quarter, etc). Based on the current auction schedule, I would place another order of 26 week T-bills for Dec 24 and the next on Jan 28. Once you set up the ladder, Fidelity will continue to purchase T-bills on their maturity. Hence the auto-rolling individual Treasury ladder technique!

5. For funds that I keep in cash, I currently use FDLXX (Fidelity Treasury Only Money Market). In the HSA, I hold incoming contributions here till they reach the minimum to purchase a T-bill ($1000) at auction.
https://fundresearch.fidelity.com/mutua ... /31617H300

For CA HSA holders, the advantage of setting up the above is to effectively create your own Treasury bond fund with 0 ER (no cost to purchase T-bills at auction), no capital gains distributions since the bills are held to maturity, no state tax on dividends, and no CA specific state tax filings. You can also choose your own effective duration (e.g. 2 years, 5 years), which can be helpful when the yield curve is as flat as it is now.

For CMA users, it’s a method to effectively create your own VUSXX-like fund but where one gets to set their own duration and pay 0 ER.
Hey Mervin looks like the FDLXX fund is closed to new investors. Wanted to see if you have any other funds that you would recommend that I can keep my cash in. Thanks.
SnowBog
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by SnowBog »

mervinj7 wrote: Tue Jan 21, 2020 6:01 pm Quite a few folks have send me PMs asking for details on how to build a Treasury Ladder at Fidelity and take advantage of the Auto-Roll Feature. I personally use this setup in my Fidelity “Brokerage” account for my 6 month Emergency Fund as well as my HSA held in CA (which taxes HSA like any other taxable account).
Thank you for this!

I'm all set to start a rolling 3 tier ladder with a mix of 13, 26, and 52 week T Bills tomorrow, each with 1/3 of monthly expenses.

Your guide was immensely helpful!
Topic Author
mervinj7
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

Kaymaza wrote: Mon Jul 06, 2020 2:24 pm
Hey Mervin looks like the FDLXX fund is closed to new investors. Wanted to see if you have any other funds that you would recommend that I can keep my cash in. Thanks.
For my EF, I moved some of it into HYS at other banks. For the money markets funds, they are all fairly low. For my HSA, since I already I had funds in FDLXX, I still keep $1k in there. It's a small amount, so I don't sweat the lost interest.
mauwong
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mauwong »

Hi Mervyn,

CA resident here with HSA in Fidelity, I'm leaning toward TIPS instead of Treasuries. Does your method work the same with TIPS (e.g. autorolling, tax implications)? Is there a state tax on TIPS' inflation-adjusted principal? Any disadvantages with TIPS vis-a-vis Treasuries?
Last edited by mauwong on Wed Jan 13, 2021 9:53 am, edited 1 time in total.
rich126
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by rich126 »

maximumlawman wrote: Sun Jan 26, 2020 9:46 am Honest question: If I'm doing this for an emergency fund, why wouldn't I just put it in one of the savings accounts that pay higher interest than Treasury securities do right now? That would make it easier to tap in an emergency as well as pay more interest. Is the concern that you want it to be harder to tap than a bank account but easier than a CD ladder (which at this point would also pay more interest)? That you are above the FDIC limit on your bank accounts already (in which case you probably already can easily handle any emergencies out of your existing accounts)? I'm honestly wondering if I'm missing something, because I see that plenty of smart people do this, but I'm not seeing the rationale.
I was wondering the same thing. When I first joined Fidelity (my employer uses it so I also added an account) I played around with some CD ladders and T-bill ladders but then the rates came down and it seemed pointless to do so. I got lucky with some CDs at Marcus and a MYGA and went that route and haven't looked back. Maybe in a few years I will check them out again.
Topic Author
mervinj7
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

mauwong wrote: Wed Jan 13, 2021 6:52 am Hi Mervyn,

CA resident here with HSA in Fidelity, I'm leaning toward TIPS instead of Treasuries. Does your method work the same with TIPS (e.g. autorolling, tax implications)? Is there a state tax on TIPS' inflation-adjusted principal? Any disadvantages with TIPS vis-a-vis Treasuries?
As far as TIPS are concerned, I did (as an experiment) buy a 5 year and 10 year TIPS last year. I did not try the auto-roll option for TIPS nor do I know whether it's possible. You can give a try this Friday with the next 10 year auction. As far as tax implications are concerned, for TIPS:
  • Interest income and growth in principal are exempt from state and local income taxes.
  • Interest income and growth in principal are subject to federal income tax. --> ignore for HSA


https://www.treasurydirect.gov/indiv/pr ... glance.htm
Last edited by mervinj7 on Wed Jan 13, 2021 12:05 pm, edited 1 time in total.
Topic Author
mervinj7
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mervinj7 »

rich126 wrote: Wed Jan 13, 2021 9:48 am
maximumlawman wrote: Sun Jan 26, 2020 9:46 am Honest question: If I'm doing this for an emergency fund, why wouldn't I just put it in one of the savings accounts that pay higher interest than Treasury securities do right now? That would make it easier to tap in an emergency as well as pay more interest. Is the concern that you want it to be harder to tap than a bank account but easier than a CD ladder (which at this point would also pay more interest)? That you are above the FDIC limit on your bank accounts already (in which case you probably already can easily handle any emergencies out of your existing accounts)? I'm honestly wondering if I'm missing something, because I see that plenty of smart people do this, but I'm not seeing the rationale.
I was wondering the same thing. When I first joined Fidelity (my employer uses it so I also added an account) I played around with some CD ladders and T-bill ladders but then the rates came down and it seemed pointless to do so. I got lucky with some CDs at Marcus and a MYGA and went that route and haven't looked back. Maybe in a few years I will check them out again.
I still use Treasury Ladders in my HSA (in CA) since it's already set up that way and I treat it as part of my bond allocation in my overall portfolio. For my EF, I sold off my Treasury Ladder. I keep extended cash in a mix of high yield online savings and ICSH ETF. If treasury rates for the 2 year T-bill start coming up again, then I'll revisit my EF.
Last edited by mervinj7 on Wed Jan 13, 2021 3:43 pm, edited 1 time in total.
SnowBog
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by SnowBog »

I just sold off my treasury ladder in December. I might have made a few more cents than my default "cash" holdings, but still a lot less than high yield savings are paying
mauwong
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mauwong »

mervinj7 wrote: Wed Jan 13, 2021 12:00 pm
As far as TIPS are concerned, I did (as an experiment) buy a 5 year and 10 year TIPS last year. I did not try the auto-roll option for TIPS nor do I know whether it's possible. You can give a try this Friday with the next 10 year auction. As far as tax implications are concerned, for TIPS:
  • Interest income and growth in principal are exempt from state and local income taxes.
  • Interest income and growth in principal are subject to federal income tax. --> ignore for HSA


https://www.treasurydirect.gov/indiv/pr ... glance.htm
Thanks, Mervin. After digging through Fidelity's somewhat confusing website. I found out that TIPS are not qualified for the auto-roll program which I guess make sense given its limited auction date availability.
SnowBog
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by SnowBog »

mauwong wrote: Mon Jan 25, 2021 6:59 am
mervinj7 wrote: Wed Jan 13, 2021 12:00 pm
As far as TIPS are concerned, I did (as an experiment) buy a 5 year and 10 year TIPS last year. I did not try the auto-roll option for TIPS nor do I know whether it's possible. You can give a try this Friday with the next 10 year auction. As far as tax implications are concerned, for TIPS:
  • Interest income and growth in principal are exempt from state and local income taxes.
  • Interest income and growth in principal are subject to federal income tax. --> ignore for HSA


https://www.treasurydirect.gov/indiv/pr ... glance.htm
Thanks, Mervin. After digging through Fidelity's somewhat confusing website. I found out that TIPS are not qualified for the auto-roll program which I guess make sense given its limited auction date availability.
I've not tried TIPS, but I did build out (and have since sold) a Treasury Bill ladder with auto roll, which I think has a similar "limited auction" model.

One of the things I learned though is you want to make sure you are looking only at "new issue". It wasn't immediately obvious (to me), that I'd see both "new" and "secondary" options. I don't think you can auto roll things from the secondary market.
mauwong
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Location: CA

Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by mauwong »

SnowBog wrote: Mon Jan 25, 2021 1:39 pm
mauwong wrote: Mon Jan 25, 2021 6:59 am
Thanks, Mervin. After digging through Fidelity's somewhat confusing website. I found out that TIPS are not qualified for the auto-roll program which I guess make sense given its limited auction date availability.
I've not tried TIPS, but I did build out (and have since sold) a Treasury Bill ladder with auto roll, which I think has a similar "limited auction" model.

One of the things I learned though is you want to make sure you are looking only at "new issue". It wasn't immediately obvious (to me), that I'd see both "new" and "secondary" options. I don't think you can auto roll things from the secondary market.
Per this link: https://www.fidelity.com/fixed-income-b ... ll-program

TIPS is not eligible for the auto-roll program.

Per the schedule, the auction for new TIPS doesn't happen as often as Treasury bills/notes (only 6 times - 2x for 5yr, 3x for 10yr and 1x for 30yr). This is what I meant by limited. Sorry for the confusion.
SnowBog
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Re: Fidelity Tips: Building an auto-rolling US Treasury ladder for EF or HSA in California

Post by SnowBog »

Interesting. Looks like the equivalent of auto roll ("reinvest") isn't allowed at Treasury Direct either: https://www.treasurydirect.gov/indiv/re ... redeem.htm
The current auction schedule doesn't allow for the reinvestment of TIPS in TreasuryDirect.
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