Yield Curves-Treasury, CD, AA/AAA muni

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patrick013
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by patrick013 » Sat Apr 28, 2018 3:15 pm

Kevin M wrote:
Sat Apr 28, 2018 2:28 pm
I don't think there's much "riding the yield curve" expected return built into the current, relatively flat yield curve.
People are too pessimistic about the yield curve. Longer terms
always appear visually flat even as market yields increase. The
TRSY 20 year mean spread over the FFR is only 1.24 compared to the
10 year which has a close 1.06 mean spread over the FFR.

But when we have some funds available for flexible investing and may
purchase a TRSY 10 at 4% in the foreseeable future waiting for a rate
decline say to 3% in 2 years for that note will realize a cap gain of
7%. Very likely if the market rate lowers and it may.

The curve works in an investor's favor sometimes. The VG LT bond index
BLV has a 1.2% three year annualized yield and a duration of 15. So
people with CD ladders are going to be better off than that, going forward
it looks like buying better yielding CD's all the time with no cap loss.
Last edited by patrick013 on Sun Apr 29, 2018 11:13 am, edited 1 time in total.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Sat Apr 28, 2018 5:28 pm

Kevin M wrote:
Sat Apr 28, 2018 2:28 pm
First a brief clarification. Holding to maturity is not an assumption,
I meant assumption as far as the calculation is concerned.
Kevin M wrote:
Sat Apr 28, 2018 2:28 pm
... but here I'll just mention that "riding the yield curve" only works if the yield curve doesn't move against you.
And as I have mentioned before if the curve moves against you just hold to maturity. You don't "lose" the original return, you just don't get the "ride" bonus. You do however get a higher coupon until you sell because you took on more term risk.
Kevin M wrote:
Sat Apr 28, 2018 2:28 pm
I prefer to model this in terms of capital return and income return components for bonds bought at par.
OK. I find it simpler to use the zero coupon method and use the Treasury constant maturity numbers because it's easier. There should be very little difference in the two methods as the duration are going to be very close unless you are looking at very high coupon bonds.
Kevin M wrote:
Sat Apr 28, 2018 2:28 pm
However, if the 4-year yield increases to 2.77% in one year, your capital return component is 0%, and if it increases above that, your capital return component is negative. So you only have 9 basis points (bps) of buffer before your capital return goes negative. This is why a steeper yield curve provides higher probability of a positive capital return component. I don't think there's much "riding the yield curve" expected return built into the current, relatively flat yield curve.
It's not the four that determines the roll yield. For a 5-3 ladder it's the three that determines the "capital" component. The four is what you compare to because the average maturity/duration of the 5-3 ladder is 4. (Any maturity/duration difference is the coupon vs zero coupon difference.) If you are using coupon bonds to build your ladder you have the coupon difference between the four and the five as well as the cap gain when you sell at three. I call the sum to be the "roll yield" but you get to spend it no matter what you call it.

Assume I'm doing my sums right (and you checked my spreadsheet at some point in the past) I'm currently seeing a 3.14% return for the 5-3 ladder compared to about 2.74% for the four held to maturity.

If you use the ride method you can never get less than your original yield because you can always hold to maturity. If you are going to compare to a CD you will still get more from the Treasury if the longer Treasury yield is higher than the original shorter CD yield. Since you are always going to hold your CD to maturity you should give the Treasury ladder holder the option of doing the same if it's to his advantage a few years down the pike.

In any case my preference for a bond "roll" ladder over a CD is not for difference in return from the fixed income but for added "dry powder" if the stock market tanks and I want/need to buy equities to maintain my AA.

I don't have any problems with your CD preferences as long as the "assumptions" of hold to maturity in a tax advantaged account are met.
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by jainn » Sat Apr 28, 2018 8:09 pm

Can you help me understand better...

Comparing VG MMF, Short, Limited, Intermediate.... Tax Exempt Admiral funds...we are retired and our tax bracket is 35% federal + 3.8% NIIT...due to the taxable dividends from the stock side of asset allocation.

Looking at SEC and TEY premium for each additional year of duration:

MMF - VMSXX - 1.54% SEC - 38 days duration - 2.52% TEY (baseline for zero duration)
.26% SEC yield premium per additional year in duration
.42% TEY yield premium per additional year in duration
Short - VWSUX - 1.8% SEC - 1.1 year duration - 2.94% TEY
.20% SEC yield premium per additional year in duration
.33% TEY yield premium per additional year in duration
Limited - VMLUX - 2.08% SEC - 2.5 year duration - 3.40% TEY
.16% SEC yield premium per additional year in duration
.26% TEY yield premium per additional year in duration
Intermediate - VWIUX - 2.49% SEC - 5.1 year duration - 4.07% TEY

Our entire portfolio is taxable and our asset allocation is 70/30 today. Stocks are allocated 2/3 Total US Market and 1/3 Total International Market.
Bonds are 100% muni, 20% Short, 20% Limited, and 60% Intermediate. We thought to spend Short first if bear market occurred for 2-3 years, then Limited if bear market lasted 4-6 years, and then eventually spend Intermediate if a terrible scenario of 5-10 year bear market occurred.

Based on the above calculations and earlier discussed guidelines, we should switch our short and intermediate to 100% Intermediate Term Tax Exempt, as the premium guideline recommends?


Thanks!
Jainn

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sat Apr 28, 2018 9:30 pm

jainn wrote:
Sat Apr 28, 2018 8:09 pm
Can you help me understand better...

Comparing VG MMF, Short, Limited, Intermediate.... Tax Exempt Admiral funds...we are retired and our tax bracket is 35% federal + 3.8% NIIT...due to the taxable dividends from the stock side of asset allocation.

Looking at SEC and TEY premium for each additional year of duration:

MMF - VMSXX - 1.54% SEC - 38 days duration - 2.52% TEY (baseline for zero duration)
.26% SEC yield premium per additional year in duration
.42% TEY yield premium per additional year in duration
Several issues here.

First, I don't see how you come up with 2.52% TEY. What I need to know is if you pay state income tax, and if so, whether or not you get the full state income tax deduction on Schedule A. I'll assume for now that you pay no state income tax, in which case I calculate your TEY as 2.42%; if you pay no state income tax, it doesn't matter whether or not you itemize. Same applies to all subsequent TEYs, so I won't repeat this for them.

Next, the guideline as I view and use it is not based on average duration of a fund or ladder, but is applied to the individual bonds in the ladder (this really isn't relevant to a money market fund--see next point--but is to the bond funds).

Finally, since the MM fund as 0-year maturity, there is no yield premium for extending maturity, since you aren't extending maturity beyond 0 years from your perspective. It doesn't matter what the average maturity or average duration of the fund holdings are, since the fund value does not fluctuate with changing yields of the holdings, so is just 0-year to you.
Short - VWSUX - 1.8% SEC - 1.1 year duration - 2.94% TEY
.20% SEC yield premium per additional year in duration
.33% TEY yield premium per additional year in duration
Limited - VMLUX - 2.08% SEC - 2.5 year duration - 3.40% TEY
.16% SEC yield premium per additional year in duration
.26% TEY yield premium per additional year in duration
Intermediate - VWIUX - 2.49% SEC - 5.1 year duration - 4.07% TEY
The comments above about TEY and applying the guideline to average duration of fund apply to all of these.
Our entire portfolio is taxable and our asset allocation is 70/30 today. Stocks are allocated 2/3 Total US Market and 1/3 Total International Market.
Bonds are 100% muni, 20% Short, 20% Limited, and 60% Intermediate. We thought to spend Short first if bear market occurred for 2-3 years, then Limited if bear market lasted 4-6 years, and then eventually spend Intermediate if a terrible scenario of 5-10 year bear market occurred.

Based on the above calculations and earlier discussed guidelines, we should switch our short and intermediate to 100% Intermediate Term Tax Exempt, as the premium guideline recommends?
Based on the way I think about it, no. The AA muni yield curve is quite flat beyond 5-year maturity, and it's probably really flat beyond 3-year maturity, since there probably are only a few munis in higher risk states that give you decent yield premium for extending beyond three years. So with funds, short-term muni probably holds the most bonds in the steepest range of the yield curve.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sat Apr 28, 2018 10:07 pm

Doc wrote:
Sat Apr 28, 2018 5:28 pm
And as I have mentioned before if the curve moves against you just hold to maturity. You don't "lose" the original return, you just don't get the "ride" bonus. You do however get a higher coupon until you sell because you took on more term risk.
Yeah, but in this case you'd probably earn more by rolling shorter maturities to the higher yields more quickly.
OK. I find it simpler to use the zero coupon method and use the Treasury constant maturity numbers because it's easier. There should be very little difference in the two methods as the duration are going to be very close unless you are looking at very high coupon bonds.
Not easier for me. Once the spreadsheet is set up, it's on autopilot. I'm just looking at the spreadsheet I built a few years ago. The problem with zero-coupon bonds is that there is no income component--it's all capital return--so you can't separate them out to understand the two components, and differentiate the income return and the capital return, in which case it gets really difficult to understand what "roll yield" really means (and is why I prefer to avoid the term completely).
It's not the four that determines the roll yield. For a 5-3 ladder it's the three that determines the "capital" component.

Not if you're looking at annualized returns, which is the typical way to look at it. If you want to look at the 5-3 capital return component, assuming static yield curve, it's just the sum of the 5-4 and 4-3. If you assume current static yield curve 5-4 is 0.34% and 4-3 is 0.26%, so total capital return is 0.60%.
Assume I'm doing my sums right (and you checked my spreadsheet at some point in the past) I'm currently seeing a 3.14% return for the 5-3 ladder compared to about 2.74% for the four held to maturity.
I get 3.04% vs. 2.71%, but close enough. Again, I wouldn't compare it this way, and this only applies if yield curve is static. For sure rolling before maturity wins if yield curve is positively-sloped and static, but if we knew yield curve would be static, we'd just pick the segment that gave the highest total return including roll return and roll along that segment forever.
If you use the ride method you can never get less than your original yield because you can always hold to maturity. If you are going to compare to a CD you will still get more from the Treasury if the longer Treasury yield is higher than the original shorter CD yield. Since you are always going to hold your CD to maturity you should give the Treasury ladder holder the option of doing the same if it's to his advantage a few years down the pike.
Again, you can do better with the CD for two reasons. First, you get a yield premium from the CD, so maybe a 3-year CD gives you same yield as a 5-year Treasury, for example, so your premise is flawed. Second, you can roll the CD to the higher yield sooner, so if yields increase, you do even better by rolling the CD to higher yield at three years rather than holding the Treasury for five years.

The CDs I bought five years ago have done much better than a Treasury of same maturity bought five years ago and held to maturity, and also have done much better than a 5-year rolling Treasury ladder (or intermediate-term Treasury fund, which holds longer maturity bonds, as per your example).
In any case my preference for a bond "roll" ladder over a CD is not for difference in return from the fixed income but for added "dry powder" if the stock market tanks and I want/need to buy equities to maintain my AA.
A different strategy, that may or may not work as intended. Treasury prices don't always go up when stocks tank, and I will have plenty of proceeds from maturing CDs, munis and Treasuries to buy stocks when they tank, unless they tank is so fast and recover so quickly that most people will miss the rebalancing opportunity anyway Or maybe stocks tank quickly, and you rebalance too soon, then they tank even more, and that's when my next CD, muni or Treasury matures, and I end up rebalancing at a better time. We really don't know what the optimal rebalancing strategy will be.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by willthrill81 » Sat Apr 28, 2018 10:20 pm

I find it encouraging to see that two year CDs have yields above the last 12 months' inflation rate of 2.4%.
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Sun Apr 29, 2018 9:34 am

Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
Doc wrote: ↑Sat Apr 28, 2018 5:28 pm
And as I have mentioned before if the curve moves against you just hold to maturity. You don't "lose" the original return, you just don't get the "ride" bonus. You do however get a higher coupon until you sell because you took on more term risk.

Yeah, but in this case you'd probably earn more by rolling shorter maturities to the higher yields more quickly.
Hindsight is 20-20.
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
Doc: OK. I find it simpler to use the zero coupon method and use the Treasury constant maturity numbers because it's easier. There should be very little difference in the two methods as the duration are going to be very close unless you are looking at very high coupon bonds.

Not easier for me. Once the spreadsheet is set up, it's on autopilot. I'm just looking at the spreadsheet I built a few years ago. The problem with zero-coupon bonds is that there is no income component--it's all capital return--so you can't separate them out to understand the two components, and differentiate the income return and the capital return, in which case it gets really difficult to understand what "roll yield" really means (and is why I prefer to avoid the term completely).
I didn't say easier I said simpler. As you say it gets difficult to understand what "roll yield" really means. Is it only the capital component or does it include the coupon difference. I use the YTM (zero coupon) method because it includes both and YTM is the common way to look at bonds. Since CD's are often direct and there is no price component it seems that maybe the coupon term is often more prevalent than YTM. It probably is only different by a few months in the maturity/duration.
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
It's not the four that determines the roll yield. For a 5-3 ladder it's the three that determines the "capital" component.

Not if you're looking at annualized returns, which is the typical way to look at it. If you want to look at the 5-3 capital return component, assuming static yield curve, it's just the sum of the 5-4 and 4-3. If you assume current static yield curve 5-4 is 0.34% and 4-3 is 0.26%, so total capital return is 0.60%.
If you are using total return not just capital return the 7-5 is 7.71% and the 5-3 is 6.9% for a total return of 14.61% which maybe just perhaps(?) is exactly the same as the 7-3. (I'm using the Fed constant maturity data so I don't have the four data.)
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
Again, you can do better with the CD for two reasons.
I never said the you cannot do better with the CD. I said that the current "premium" after tax is not enough for me to make up for the lack of liquidity for the CD. I keep seeing and hearing about "no bids" for secondary CD's and early withdrawal penalties for direct CD's. That to me is not liquid.
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
I get 3.04% vs. 2.71%, but close enough. Again, I wouldn't compare it this way, and this only applies if yield curve is static.
The difference is the coupon vs total return method I think. But yes it only counts if the yield curve is static. But I never don't look at the value at all except to respond to you. I'm just looking for the "sweet spot" for a roll ladder not the sweet spot for something held to maturity.

Example:
Image
It's only the color that counts.
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
In any case my preference for a bond "roll" ladder over a CD is not for difference in return from the fixed income but for added "dry powder" if the stock market tanks and I want/need to buy equities to maintain my AA.
A different strategy, that may or may not work as intended
I do not try to maximize the the return from the fixed income portion of my portfolio. I'm not that smart. I can't predict FI future returns. I avoid long bonds because of the risk. (You belive that the short part of the curve currently yields better returns.) I don't change my overall short term, long term position. I model my FI portfolio on the BBgBarc Intermediate (1-10) bond index. I break it into pieces for tax and equity correlation reasons into 4 parts. The treasury parts are short and intermediate. I use a roll ladder for the intermediate part and position it at the "best" area as shown in the chart above. (it's a pretty squishy area.) I then add enough short term Treasuries usually as funds to adjust the total maturity to match the index.

Your take a maximize return approach within a credit risk criteria. You apparently also are willing to adjust the term risk to try to increase return. That's fine if that's what your IPS says.
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sun Apr 29, 2018 12:28 pm

Doc wrote:
Sun Apr 29, 2018 9:34 am
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
Doc wrote:
Sun Apr 29, 2018 9:34 am
And as I have mentioned before if the curve moves against you just hold to maturity. You don't "lose" the original return, you just don't get the "ride" bonus. You do however get a higher coupon until you sell because you took on more term risk.
Yeah, but in this case you'd probably earn more by rolling shorter maturities to the higher yields more quickly.
Hindsight is 20-20.
Huh? We're both talking about "what if" the yield curve moves against you--in other words, the shorter term yields increase, reducing or eliminating the return you expected due to the riding the yield curve effect. You say in that case you can just hold to maturity. I say in that case you could earn a higher return by rolling the shorter-term maturities into higher yields sooner. This isn't hindsight, this is just two different standard bond strategies, and we don't know in advance which will earn more.

My main point is just that riding the yield curve does not provide any sort of guaranteed extra return. It's just part of the potential, but not guaranteed, higher return you might get for taking more term risk. So of course you don't lose the original YTM if you hold to maturity--it's just that that doesn't guarantee that you'll earn more than rolling shorter-term bonds over the same holding period.

This is an important point for people to understand, as I often see comments from posters about receiving a roll yield or roll return as if it's some guaranteed thing, but it's not.
Doc wrote: I didn't say easier I said simpler. As you say it gets difficult to understand what "roll yield" really means. Is it only the capital component or does it include the coupon difference. I use the YTM (zero coupon) method because it includes both and YTM is the common way to look at bonds.
You are garbling terminology here. YTM applies to all bonds, whether coupon or zero coupon. We both are using YTM. You can either get your entire YTM from capital return with a zero, or from a combination of income return and capital return from a coupon bond. I'm worried that equating YTM to a zero coupon bond will confuse people (this conversation probably is already too deep in the weeds for most forum members).

Simplicity is in the eye of the spreadsheet creator. I find my method very simple and much more understandable than yours, but our brains work in different ways, so I understand that you find working with zero-coupon models easier. I also think my approach helps in understanding the difference between the income component and capital return component of bonds, and since most people own bonds or bond funds that pay income from coupons, I think this is useful.

For example, Vanguard provides a web page for each of their bond funds that separates the annual returns into income return and capital return, and what I'm doing is a way to help understand how this works at the individual bond level.
If you are using total return not just capital return the 7-5 is 7.71% and the 5-3 is 6.9% for a total return of 14.61% which maybe just perhaps(?) is exactly the same as the 7-3. (I'm using the Fed constant maturity data so I don't have the four data.)
We're both using the same constant maturity Treasury data (https://www.treasury.gov/resource-cente ... data=yield). I just use linear interpolation to approximate the yields for the maturities they don't provide, which of course is not as sophisticated as the Fed/Treasury model, but good enough for the rough modeling we're doing. After all, the yields on Treasury.gov are just modeled yields, not yields you can get from a bond you can actually buy on that day.

Since my model is a ladder with rungs at each year, my modeled static yield curve returns will be slightly lower than yours, but it's not a big deal. Your 7-5 will be higher because you are using the 7-year initial yield for the 2-year period, while I am using the 7-year and interpolated 6-year yields, so the 7-6 part will be about the same, but the 6-5 part will be a bit lower in my model because the interpolated 6-year yield is lower than the 7-year yield.

So I get 6.39% total return for 7-5 and 6.11% for 5-3, for total of 12.49% for 7-3. This difference isn't particularly important for this discussion, but I'm glad that I understand it now.

Incidentally, the Treasury yields are based on bonds that are close to par, since they use the most recently auctioned Treasuries as much as possible, so the yields are more applicable to par bonds than to zero-coupon bonds. But again, for the type of rough modeling we're doing, it doesn't matter much.
I never said the you cannot do better with the CD. I said that the current "premium" after tax is not enough for me to make up for the lack of liquidity for the CD. I keep seeing and hearing about "no bids" for secondary CD's and early withdrawal penalties for direct CD's. That to me is not liquid.
OK, but the point I've been trying to make is that the "riding the yield curve" effect that you're hoping for may not materialize, and the relatively flat yield curve makes it even less likely. You're just not getting much bang for the buck in extending maturity, and yields have to rise much less to wipe out your ride return. You can get the same or more bang by buying a CD without having to extend maturity by a couple of years to get the higher yield.

We have no disagreement at all about the much higher liquidity of Treasuries compared to brokered CDs.

I would quibble with the early withdrawal penalty being considered a negative though, especially if it is low enough (which these days it typically isn't), since the early withdrawal penalty can be much less than the loss in a Treasury if yields increase enough. But that game isn't really on the table these days, since the yield premiums in direct CDs aren't high enough, and the EWPs generally are too high. That's why I've shifted to brokered CDs where the yield curve is steep enough that I feel sufficiently rewarded in taking the term risk.
Doc wrote:
Kevin M wrote:
Sat Apr 28, 2018 10:07 pm
I get 3.04% vs. 2.71%, but close enough. Again, I wouldn't compare it this way, and this only applies if yield curve is static.
The difference is the coupon vs total return method I think. But yes it only counts if the yield curve is static.
First, I typed the wrong thing. I meant to compare my 3.04% to your 3.14% (not to your 2.71%), so it's even closer. And I think I've now found the main reason for the differences, as discussed above. We can both look at total return with our models, so there is no "coupon vs. total return" issue. In my model, total return = coupon return + capital return, while in your model total return = capital return. But there may be some additional minor differences in using zero-coupon vs. coupon bonds, but not enough to worry about.
I'm just looking for the "sweet spot" for a roll ladder not the sweet spot for something held to maturity.
I get that. I think we just have a different view of where the sweet spot is, but even more so how sweet it is.

I'll grant you that extending maturity might look slightly better in terms of bps/year if you add in a roll return component assuming a static yield curve. For example looking at extending from 6-year to 7-year (again, using interpolation for the 6-year) you get 6 bps looking at just yield (YTM), and you get 13 bps looking at total return (including the capital return component for par bonds assuming static yield curve). But even 13 bps just doesn't look very enticing to me.

By contrast, you get 25 bps of extra yield and 50 bps of extra total return (assuming static yield curve) by extending from 1-year to 2-year maturity.

If you're just looking for the peak of the expected total return assuming static yield curve, then yeah, 7-year looks the best (in the 1-10 year range). But if you're looking at it on a risk-adjusted basis--i.e., how much extra expected return you get for extending maturity by a year--then the 2-year looks best.
I do not try to maximize the the return from the fixed income portion of my portfolio. I'm not that smart. I can't predict FI future returns. I avoid long bonds because of the risk.

I avoid longer maturity bonds for the same reason--we just have a different definition of what "long" is. Long to me is anything that doesn't give me at least 20 bps of extra yield for an extra year of maturity. I'm just trying to optimize risk-adjusted return, not absolute return or absolute risk.
(You belive that the short part of the curve currently yields better returns.)

No, not better returns, better risk-adjusted expected returns. I have no idea what actually will produce higher returns, but we have to use some policy or strategy to make our decisions (and for many that is just to stick with a total bond fund, which is fine if that floats their boats).
I don't change my overall short term, long term position. I model my FI portfolio on the BBgBarc Intermediate (1-10) bond index. I break it into pieces for tax and equity correlation reasons into 4 parts. The treasury parts are short and intermediate. I use a roll ladder for the intermediate part and position it at the "best" area as shown in the chart above. (it's a pretty squishy area.) I then add enough short term Treasuries usually as funds to adjust the total maturity to match the index.
That's great. You have an investment policy and you're sticking to it.

My fixed-income investment policy is different, and it evolves as the fixed income landscape evolves. If my policy was to stick with direct 5-year CDs, I wouldn't be doing what I thought made sense now. It made a lot of sense a few years ago when I could get 100-150 bps yield premium over Treasuries of same maturities, and with EWPs of six months of interest. That just doesn't work anymore, so I've had to adapt.

Larry Swedroe isn't sticking with the same fixed-income strategy he had a few years ago. He's now into alternative fixed-income funds, but I'm not ready to go there. It just seems to be too much free lunch, not consistent with efficient markets. He's basically saying you get equity-like returns with fixed-income like risk. While I respect Larry immensely, I don't always go along with what he thinks makes the most sense for him. Similarly, I don't heavily tilt to small-value as he does (although I do tilt some).
Your take a maximize return approach within a credit risk criteria. You apparently also are willing to adjust the term risk to try to increase return. That's fine if that's what your IPS says.
Again, not trying to maximize return, but just to find the balance between expected return and risk that seems optimal to me. But yeah, perfectly willing to adjust term risk depending on the expected return, shape of yield curve, availability of great direct CD deals, etc.

I'm also willing to change the particular types of fixed income I use. A couple of years ago I wouldn't have considered any Treasuries, but now they look good out to 1-year maturity in tax-advantaged, compared to other choices. And Treasuries look better in taxable for me than CDs out to 3-year maturity, and about the same in terms of TEY at 5-year maturity. CDs have an edge of about 15 bps at 10-year maturity, but I wouldn't consider going that far out with anything with the yield curve so flat between 5-year and 10-year maturities.

I also wasn't considering individual munis until late last year, since then I have been buying them. Not only are the great direct CD deals not there any longer, so not good enough for taxable, but I decided to do my homework and learn about munis to the point where I felt comfortable with them. I refine my investment policies as circumstances change and as I learn more.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sun Apr 29, 2018 1:33 pm

Doc wrote:
Sat Apr 28, 2018 11:07 am
I updated my yield chart for more recent data.

Image
I think what you're trying to show here is the change in the shape/steepness of the yield curve. Here's another way to look at it:

Image

That this shows is basically the bps/year of extra maturity for three segments of the yield curve: 2yr-1mo, 5y-2y, and 10y-5y. I divide the the difference in the 2y and 1m by 2, the difference between 5y and 2y by 3, and the difference in 10y and 5y by 5, to get approximate bps/year (no 1m is not 0m, but close enough). Also, I use monthly average yields to smooth the graph (as opposed to daily yields). I also used a slightly different period, starting from when yields began generally rising.

So we can see that the short end has always been steeper than the longer ends, but is steeper now than at the beginning of the period, and relatively much steeper than the longer ends now than it was at the beginning. We also see that the 5-2 and 10-5 were relatively flat at the beginning, but even more so now. The 5-2 rose above 20 bps/year between Nov 2016 and Apr 2017, but has been below that and declining since.

You can also see the same thing by simply looking at the yields over the same period, but it's not quite as clear:
Image

Note that as yields rose from the beginning of the period to Dec 2016, the 5-year rose more than the 2-year, which is seen as the gap between the two curves getting wider, which is the yield curve in that segment getting steeper. Simlarly, the 2-year rose more than the 1-month, so that segment also steepened.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Sun Apr 29, 2018 2:31 pm

Just a couple of points:
Kevin M wrote:
Sun Apr 29, 2018 12:28 pm
Incidentally, the Treasury yields are based on bonds that are close to par, since they use the most recently auctioned Treasuries as much as possible, so the yields are more applicable to par bonds than to zero-coupon bonds. But again, for the type of rough modeling we're doing, it doesn't matter much.
...
We can both look at total return with our models, so there is no "coupon vs. total return" issue. In my model, total return = coupon return + capital return, while in your model total return = capital return. But there may be some additional minor differences in using zero-coupon vs. coupon bonds, but not enough to worry about.
It is my understanding that the Fed constant maturity curve is based on a five factor spline fit with the on the run issues as the knot points. So yes the the constant maturity "bonds" are very close to par bond depending on what day of the month you are looking at. Today (Friday?) the Bid YTM of the 04/30/2023 1.625% is 2.825% and the 2.75% for the same date is 2.809%. The 2.75% coupon is the on the run note. The constant maturity for the five as of 4/27/18 was 2.80. The duration of the on the run security is 4.7 years not 5. So I am introducing a small error by treating that security as a zero which would have a duration of 5.0 years. I think the on the run issues also usually have a slightly lower yield than the adjacent off the run issues because of the higher trading volume.
Kevin M wrote:
Sun Apr 29, 2018 12:28 pm
I'm just looking for the "sweet spot" for a roll ladder not the sweet spot for something held to maturity.
I get that. I think we just have a different view of where the sweet spot is, but even more so how sweet it is.
We do not have the same objective. You are trying to generate " not better returns, better risk-adjusted expected returns" by changing the portion of the curve that you are investing in. I am choosing the "best" part of the curve to invest my rolling ladder in but I am keeping the overall duration of the portfolio constant thus keeping the risk constant. The idea is to maximize the return while keeping the risk constant. I'm not smart enough to think I can do better than the bond traders. The longer duration of my roll ladder which does have higher risk than your CD "ladder" is being offset by adding shorter term bonds and not buying 9s and 10s and 8s only rarely. We have different objectives.

The only thing this has to do with the CD/Treasury issue is that it may be expensive to create a roll ladder with CDs because of the cost on the sale.
Kevin M wrote:
Sun Apr 29, 2018 1:33 pm
I think what you're trying to show here is the change in the shape/steepness of the yield curve. Here's another way to look at it:
The chart I posted comes from my roll calculation spreadsheet. I use various Fred charts usually to look at longer term changes. This is my default page looking at the spreads instead of the actual values:

Image

I think we may have beaten this dog to death. :sharebeer
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 01, 2018 12:41 pm

I agree that, based on this week's T-bill rates as quoted here, https://www.bankrate.com/rates/interest ... asury.aspx , that the 1 year or 2 year Treasuries are very competitive (2.24 and 2.48% respectively).

There are also 2 year CDs listed on depositaccounts.com at 2.7-2.8% which seem like a better option if you know you can hold to maturity and if state income tax is not a significant issue.

10 year AA munis are selling at 2.7% yield. Unless you are in a high income tax bracket and funds are taxable, this does not appear competitive to me (I am a retiree- paid no federal taxes last year and do not expect to be above the 15% bracket this coming year). Am I missing something here?

A 2% bank account is a great option if you need the liquidity.

I will (hopefully) receive about $170K from a home sale in about a month and will be looking for a place to park my cash. Does my analysis above make sense to you, Kevin?

Thanks again for your treasure trove of information and diligent research.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 01, 2018 1:09 pm

I hadn't posted Treasury yield curves based on actual quotes because the quotes are for large minimum quantities, like 100-400, and to get quotes for smaller quantities at Fidelity, you must look at depth of book for each security. I decided to go ahead and do it anyway, but be aware that the yields you get for smaller quantities will be a bit lower than shown here.

I limited maturity to five years and excluded zero-coupon bonds. I have included the quoted yields as well as the TEYs based on my marginal tax rates. The quoted yields would be applicable to IRAs, and TEYs to taxable accounts. For 0-year yields I'm using Prime MM for taxable yield in tax-advantaged and CA muni MM for TEY in taxable. [Edited]

Image

The large dips seen in the chart are for older Treasury bonds with higher coupons, which lowers the duration, so term risk is less than for a lower-coupon bond of same maturity, and yields are lower.

I also made a chart of bps/year relative to what I use as 0-year, again, Prime MM in taxable IRA and CA muni MM in IRA taxable. [Edited]

Image

Note that these are bps/year relative to extending from 0-year maturity, so for example, what you see at 2-year maturity is a blend of extending from 0-year to 1-year and 1-year to 2-year, so you obviously are getting less than shown for extending from 1-year to 2-year.

For example, this chart shows about 46 bps/year extra yield (not TEY) for extending from 0-year to 1-year, and about 34 bps/year for extending from 0-year to 2-year. This represents about 23 bps/year for extending from 1-year to 2-year.

If you're just looking for maximum extra yield for extending maturity, you get it at about 0.8-year maturity, so a little longer than 9 months.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Tue May 01, 2018 1:24 pm

Deleted duplicate post.
Last edited by Doc on Tue May 01, 2018 1:29 pm, edited 1 time in total.
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Tue May 01, 2018 1:26 pm

Kevin M wrote:
Tue May 01, 2018 1:09 pm
I hadn't posted Treasury yield curves based on actual quotes because the quotes are for large minimum quantities, like 100-400, and to get quotes for smaller quantities at Fidelity, you must look at depth of book for each security.
You may being overly cautious with your quantities. Perhaps it's a Fidelity thing. I think they tend to sell from inventory (?). In any case I usually see a small break in "spreads" going from 100 down to 25 and then larger when you go to 10's and 1's. (I always thought that the 1's were not real just a means of trying to get a quote point on the market range.) In any case it is instructive I think not only to look at the price but the volume offered or asked at those prices.

I'm sure the negative "spikes" in your curve are a duration consideration perhaps coupled with low volume for aged bonds. (Same thing?) You did allude to this factor in a way,
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 01, 2018 2:16 pm

protagonist wrote:
Tue May 01, 2018 12:41 pm
I agree that, based on this week's T-bill rates as quoted here, https://www.bankrate.com/rates/interest ... asury.aspx , that the 1 year or 2 year Treasuries are very competitive (2.24 and 2.48% respectively).
I'd look at somewhere you can actually buy to see the yield you can actually get. What dollar amount are you looking at say 1-year maturity?

One-year yield I see quoted at Fidelity is 2.30%, but this is for minimum quantity 400 ($400,000 face value), and maturity 5/31/2029, so more like 13-month than one year. I see a couple maturing 4/30/2019, with highest yield 2.282% for min qty 400. For min qty 100 best yield is 2.277, and for 25 it's 2.253, and for min qty 1 it's 2.249. So somewhere between about 2.25% and 2.28%.

One-year new issue CD is at 2.25%, so about the same as the Treasury. I'd go for the Treasury due to higher liquidity, and if you pay any state income tax at all, the TEY will be higher for the Treasury. For me, the Treasury would be slightly more attractive

I would not go for the 2-year Treasury at about 2.5% with no state income tax, since you can easily beat this with a 2-year CD at 2.75% or so. But as you say, this assumes you will definitely hold to maturity, since the bid/ask on CDs can be quite high compared to Treasuries. Again, state income tax would make the Treasury more attractive--at my tax rates it matches or even beats the CD by a bit.
There are also 2 year CDs listed on depositaccounts.com at 2.7-2.8% which seem like a better option if you know you can hold to maturity and if state income tax is not a significant issue.
Yes, and you can do about the same with brokered 2-year CDs, which I would prefer unless you happen to have an account at a bank or credit union offering at least 2.75% for a 2-year CD. The early withdrawal option of a direct CD isn't particularly valuable for a 2-year term. But again, if you pay any income tax at all, I'd calculate the TEY for the Treasury.
10 year AA munis are selling at 2.7% yield. Unless you are in a high income tax bracket and funds are taxable, this does not appear competitive to me (I am a retiree- paid no federal taxes last year and do not expect to be above the 15% bracket this coming year). Am I missing something here?

I would not go out to 10-year maturity with anything with current relatively flat yield curves beyond 2-3 years. Fidelity shows a 3-year AA at 2.46% (and a 10-year at 3.40%), but these may be for munis that I might not want to buy, and do not include commission. Munis are much more complicated.

There is no 15% tax bracket in 2018, so you probably mean 12%. Just be careful if you have long-term capital-gains or qualified dividends that go above the top of the 12% bracket if stacked on top of ordinary taxable income, as then your marginal tax rate actually is 27%. This is the situation for me. If not an issue for you, then munis probably are not worth looking at.
A 2% bank account is a great option if you need the liquidity.
Sure. That's better than Prime money market at 1.82%, and if your marginal federal tax rate is indeed 12%, you're not going to beat that in a muni MM fund. That matches the 6-month Treasury yield with no state income tax or in an IRA, but with no term risk at all.
I will (hopefully) receive about $170K from a home sale in about a month and will be looking for a place to park my cash. Does my analysis above make sense to you, Kevin?
With the stated qualifications, yes. Of course this is not overall portfolio advice, but just comments on individual fixed-income security alternatives. And I wouldn't consider anything with more than 0-year maturity (and little to no credit risk) cash.
Thanks again for your treasure trove of information and diligent research.
You're welcome!

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by gips » Tue May 01, 2018 2:19 pm

why not purchase muni etfs?

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 01, 2018 2:36 pm

Doc wrote:
Tue May 01, 2018 1:26 pm
Kevin M wrote:
Tue May 01, 2018 1:09 pm
I hadn't posted Treasury yield curves based on actual quotes because the quotes are for large minimum quantities, like 100-400, and to get quotes for smaller quantities at Fidelity, you must look at depth of book for each security.
You may being overly cautious with your quantities. Perhaps it's a Fidelity thing. I think they tend to sell from inventory (?). In any case I usually see a small break in "spreads" going from 100 down to 25 and then larger when you go to 10's and 1's. (I always thought that the 1's were not real just a means of trying to get a quote point on the market range.) In any case it is instructive I think not only to look at the price but the volume offered or asked at those prices.
You see the same thing at Vanguard. I didn't say it was a big difference, just that you would get slightly lower yields at smaller quantities, which is true. I gave a real-time example in the reply I just posted. Basically agree with what you're saying.

I've bought in quantities of 10, so the minimum qty 1 quotes are relevant to me, since 25 usually is more than I want to do in one pop (on the rare occasions I've favored Treasuries over CDs in IRA or munis in taxable), and often there is no minimum qty between 1 and 25 (like 10).
I'm sure the negative "spikes" in your curve are a duration consideration perhaps coupled with low volume for aged bonds. (Same thing?) You did allude to this factor in a way,
Allude to? I think I stated it explicitly. I looked at a couple, and they were for bonds with like 9% coupons. I'll just pick one now that jumps out at me. Here are two notes and one bond maturing 5/15/2020:

Code: Select all

912810EF1	N/A	UNITED STATES TREAS BDS                  8.75000% 05/15/2020	8.750	05/15/2020	AAA	--	112.426	112.601	2.455	2.372	2.372	10,000(200)	3,000(100)	CP D	2.04
912828ND8	N/A	UNITED STATES TREAS NTS NOTE            3.50000% 05/15/2020	3.500	05/15/2020	AAA	--	101.891	101.953	2.541	2.51	2.510	10,000(200)	10,000(200)	CP D	2.04
912828X96	N/A	UNITED STATES TREAS NTS NOTE            1.50000% 05/15/2020	1.500	05/15/2020	AAA	--	97.973	97.996	2.528	2.516	2.516	10,000(200)	10,000(200)	CP D	2.04
You have to scroll to the right to see everything, but note the ask yield for bond with the 8.75% coupon is 2.372%, while the yields for the notes with smaller coupons are 2.510% and 2.516%. so about 13 bps less for the bond.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 01, 2018 2:45 pm

Kevin M wrote:
Tue May 01, 2018 2:16 pm
protagonist wrote:
Tue May 01, 2018 12:41 pm
I agree that, based on this week's T-bill rates as quoted here, https://www.bankrate.com/rates/interest ... asury.aspx , that the 1 year or 2 year Treasuries are very competitive (2.24 and 2.48% respectively).
I'd look at somewhere you can actually buy to see the yield you can actually get. What dollar amount are you looking at say 1-year maturity?

One-year yield I see quoted at Fidelity is 2.30%, but this is for minimum quantity 400 ($400,000 face value), and maturity 5/31/2029, so more like 13-month than one year. I see a couple maturing 4/30/2019, with highest yield 2.282% for min qty 400. For min qty 100 best yield is 2.277, and for 25 it's 2.253, and for min qty 1 it's 2.249. So somewhere between about 2.25% and 2.28%.

One-year new issue CD is at 2.25%, so about the same as the Treasury. I'd go for the Treasury due to higher liquidity, and if you pay any state income tax at all, the TEY will be higher for the Treasury. For me, the Treasury would be slightly more attractive

I would not go for the 2-year Treasury at about 2.5% with no state income tax, since you can easily beat this with a 2-year CD at 2.75% or so. But as you say, this assumes you will definitely hold to maturity, since the bid/ask on CDs can be quite high compared to Treasuries. Again, state income tax would make the Treasury more attractive--at my tax rates it matches or even beats the CD by a bit.
There are also 2 year CDs listed on depositaccounts.com at 2.7-2.8% which seem like a better option if you know you can hold to maturity and if state income tax is not a significant issue.
Yes, and you can do about the same with brokered 2-year CDs, which I would prefer unless you happen to have an account at a bank or credit union offering at least 2.75% for a 2-year CD. The early withdrawal option of a direct CD isn't particularly valuable for a 2-year term. But again, if you pay any income tax at all, I'd calculate the TEY for the Treasury.
10 year AA munis are selling at 2.7% yield. Unless you are in a high income tax bracket and funds are taxable, this does not appear competitive to me (I am a retiree- paid no federal taxes last year and do not expect to be above the 15% bracket this coming year). Am I missing something here?

I would not go out to 10-year maturity with anything with current relatively flat yield curves beyond 2-3 years. Fidelity shows a 3-year AA at 2.46% (and a 10-year at 3.40%), but these may be for munis that I might not want to buy, and do not include commission. Munis are much more complicated.

There is no 15% tax bracket in 2018, so you probably mean 12%. Just be careful if you have long-term capital-gains or qualified dividends that go above the top of the 12% bracket if stacked on top of ordinary taxable income, as then your marginal tax rate actually is 27%. This is the situation for me. If not an issue for you, then munis probably are not worth looking at.
A 2% bank account is a great option if you need the liquidity.
Sure. That's better than Prime money market at 1.82%, and if your marginal federal tax rate is indeed 12%, you're not going to beat that in a muni MM fund. That matches the 6-month Treasury yield with no state income tax or in an IRA, but with no term risk at all.
I will (hopefully) receive about $170K from a home sale in about a month and will be looking for a place to park my cash. Does my analysis above make sense to you, Kevin?
With the stated qualifications, yes. Of course this is not overall portfolio advice, but just comments on individual fixed-income security alternatives. And I wouldn't consider anything with more than 0-year maturity (and little to no credit risk) cash.
Thanks again for your treasure trove of information and diligent research.
You're welcome!

Kevin
Once again, great analysis. Thanks!

MA state tax is flat 5.1% but goes up to 12% for interest in out of state banks. I will be looking to invest about $150K I think. If I invest in an out of state bank I would thus lose about 0.3% to state tax (approx. 12% of 2.75%) vs investing in T-bills. So the 2 year treasury would pretty much match the after tax yield of the best 2 year CDs. If at Fidelity I would guess I would be taxed at the 5.1% rate. And I assume if interest rates go up the losses incurred by prematurely cashing in the T bills would probably be less than those incurred by prematurely cashing in a brokered CD? I have had no experience with brokered CDs and will have to learn about them. Bank-issued 2 yr. CDs can be found at 2.7-2.8%.


I am hoping I will not have any taxable gains relative to the sale of my house for $177K minus closing fees of around $10K. I inherited the property in 2005 at which time it was appraised at $250K, but I have been depreciating the property since I started renting it out around 2009. I have over $100K in carryover losses. I haven't looked at how depreciation impacts cost basis so I don't know exactly how that will calculate out.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 01, 2018 3:10 pm

protagonist wrote:
Tue May 01, 2018 2:45 pm
MA state tax is flat 5.1% but goes up to 12% for interest in out of state banks.

Wow, that's strange (to me at least). Makes analyzing alternatives more complicated. What counts as an out of state bank? Where the headquarters are? Whether or not they have branches in state?

How does the state track it if the bank if the interest comes from a broker, which would be the case with brokered CDs? The 1099-INT from a broker just shows the totals, so that wouldn't indicate which bank it came from. There are supplementary details provided, but I don't know that these are provided to federal or state government. In this case, is it the headquarters of the broker that counts?
If at Fidelity I would guess I would be taxed at the 5.1% rate.

If this is true (can you check?), then this would be an advantage of brokered CDs. You might even be able to get 2.8% on secondary market when new-issue is 2.75%, as you often can beat new-issue by 5-10 basis points; not today though, except maybe for tiny quantities.
And I assume if interest rates go up the losses incurred by prematurely cashing in the T bills would probably be less than those incurred by prematurely cashing in a brokered CD?

This is true regardless of what happens with interest rates. The average bid/ask on CDs last time I checked was about 0.8%, compared to a few basis points for Treasuries.

I would only buy brokered CDs if planning to hold to maturity, or if the yield premiums over Treasuries of same maturity were large enough to make up for the much higher bid/ask spreads, which they aren't now. If you can earn a 100 bps yield premium in a 5-year CD (the good old days), then you make up the bid/ask spread in a year or less, but you don't really know what the bid/ask will be when you sell your particular CD--they were all over the map last I checked, from a low of maybe 13 bps to a high of maybe 150 bps.
I have had no experience with brokered CDs and will have to learn about them. Bank-issued 2 yr. CDs can be found at 2.7-2.8%.
Pretty simple, especially if you just buy new issue. Like I said, new-issue 2-year is 2.75%.

I am hoping I will not have any taxable gains relative to the sale of my house for $177K minus closing fees of around $10K. I inherited the property in 2005 at which time it was appraised at $250K, but I have been depreciating the property since I started renting it out around 2009. I have over $100K in carryover losses. I haven't looked at how depreciation impacts cost basis so I don't know exactly how that will calculate out.
This probably is too far off topic to spend much space on here, but briefly ... The depreciation basically is recaptured at normal income tax rates, but your carried over losses apply first to the depreciation recapture--or maybe it's just short-term losses, since that's what I had last year, and they were applied to the depreciation recapture on a rental I sold. And of course you have a loss, so depreciation recapture will be reduced by that. You have to allocate sales proceeds (and gain or loss) between building and land, since depreciation only applies to building (more generally, improvements). I ended up paying much less capital gains tax than I expected after all of this was worked out.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Artsdoctor » Tue May 01, 2018 3:19 pm

^ Massachusetts gives you a little break if your CD is held in a MA bank but it's not that significant:

http://www.mass.gov/dor/individuals/fil ... -inte.html

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Tue May 01, 2018 4:22 pm

Kevin M wrote:
Tue May 01, 2018 2:36 pm
I'm sure the negative "spikes" in your curve are a duration consideration perhaps coupled with low volume for aged bonds. (Same thing?) You did allude to this factor in a way,
Allude to? I think I stated it explicitly. I looked at a couple, and they were for bonds with like 9% coupons. I'll just pick one now that jumps out at me. Here are two notes and one bond maturing 5/15/2020:
There are obviously duration effects - higher coupon mean lower yield for the same maturity. The liquidity issues for long bonds is another aspect that does not have an obvious effect. Depends whether you are buying or selling into a weak market. Anyway the spikes are there and there is a good reason or maybe two reasons, for them.

"Aged" is not not necessarily associated with high coupon.

Depends on what the definition of is, is. :D
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 01, 2018 6:35 pm

Kevin M wrote:
Tue May 01, 2018 3:10 pm
protagonist wrote:
Tue May 01, 2018 2:45 pm
MA state tax is flat 5.1% but goes up to 12% for interest in out of state banks.
Wow, that's strange (to me at least). Makes analyzing alternatives more complicated. What counts as an out of state bank? Where the headquarters are? Whether or not they have branches in state?

How does the state track it if the bank if the interest comes from a broker, which would be the case with brokered CDs? The 1099-INT from a broker just shows the totals, so that wouldn't indicate which bank it came from. There are supplementary details provided, but I don't know that these are provided to federal or state government. In this case, is it the headquarters of the broker that counts?
I can't answer those questions. So when I am unsure I give myself the benefit of the doubt. To date I have not been called out for it so I assume it is OK.
If at Fidelity I would guess I would be taxed at the 5.1% rate.
If this is true (can you check?), then this would be an advantage of brokered CDs. You might even be able to get 2.8% on secondary market when new-issue is 2.75%, as you often can beat new-issue by 5-10 basis points; not today though, except maybe for tiny quantities.
Currently there is a MA/RI credit union for which I think I can qualify offering a 2 year at 2.8%, 6 mo EWP. Is there a reason you think a brokered CD would be better than a bank CD? More flexible, but would I lose less if interest rates rise and I want to withdraw? It's a moot point anyway because I assume rates will be different in a month when I have the funds. I'm leaning towards T-bills.


I would only buy brokered CDs if planning to hold to maturity, or if the yield premiums over Treasuries of same maturity were large enough to make up for the much higher bid/ask spreads, which they aren't now. If you can earn a 100 bps yield premium in a 5-year CD (the good old days), then you make up the bid/ask spread in a year or less, but you don't really know what the bid/ask will be when you sell your particular CD--they were all over the map last I checked, from a low of maybe 13 bps to a high of maybe 150 bps.
Yes, I was thinking the same thing.


I am hoping I will not have any taxable gains relative to the sale of my house for $177K minus closing fees of around $10K. I inherited the property in 2005 at which time it was appraised at $250K, but I have been depreciating the property since I started renting it out around 2009. I have over $100K in carryover losses. I haven't looked at how depreciation impacts cost basis so I don't know exactly how that will calculate out.
I ended up paying much less capital gains tax than I expected after all of this was worked out.

Kevin
Good news for you and I hope for me as well! Hopefully my tax software will figure it out for me next year. Thanks again, Kevin!

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New-issue 13-month CD at 2.25%

Post by Kevin M » Thu May 03, 2018 12:26 pm

Today there appears to be a new-issue 1-year CD offered at Fidelity from Wells Fargo at 2.25%, so pretty much tied with 1-year Treasury in an IRA (no state tax exemption benefit). Looking more closely, the 1-year CD settles 5/9/2018 and matures 6/10/2019, so it's really a 13-month CD.

At first glance, I see it at Fidelity, but not at Vanguard, which still is showing 2.15% as best 1-year yield in its yields summary page. However, Vanguard uses shorter maximum maturity than Fidelity for display in its yield summary page, so if I extend maturity in the search criteria, I also see the WF 13-month CD at 2.25% at Vanguard.

Looking for a Treasury with closest maturity date, I see a note maturing 06/15/2019 at a yield of 2.298% for minimum quantity 100. Minimum quantity of the CD is 10, and for the Treasury I see 2.244% for minimum quantity 10; for minimum quantity 25 I see 2.277%. So which has the higher yield depends on the quantity you buy (at Fidelity anyway--based on earlier replies, you probably will do better with quantity 10 at Schwab). Of course if you might not hold to maturity, the Treasury makes more sense, even in an IRA, due to much better liquidity.

I don't see anything competitive with the new-issue CD on the secondary market at Fidelity.

Kevin
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Re: New-issue 13-month CD at 2.25%

Post by ofckrupke » Thu May 03, 2018 12:52 pm

Kevin M wrote:
Thu May 03, 2018 12:26 pm
Looking for a Treasury with closest maturity date, I see a note maturing 06/15/2019 at a yield of 2.298% for minimum quantity 100. Minimum quantity of the CD is 10, and for the Treasury I see 2.244% for minimum quantity 10; for minimum quantity 25 I see 2.277%. So which has the higher yield depends on the quantity you buy (at Fidelity anyway--based on earlier replies, you probably will do better with quantity 10 at Schwab).
Check. CUSIP 912828R85, at the moment, 10 <= quantity <= 800 offered from inventory priced (98.43313 plus accrued interest since last coupon) to yield 2.306%. 200 to 10000, presumably brokered, 2.296%, 100 to 5000, ditto, 2.295%, so Fidelity looks a little better for the really big hitters.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by ps56k » Thu May 03, 2018 1:36 pm

just a little something on the new tax rates -
guess we are going be filing - Married and 24% -

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and

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sat May 12, 2018 11:32 am

Looking at the OP, we could see that Treasuries beat CDs in an IRA (no state tax exemption) at least to 1-year maturity, and CDs beat Treasuries at 2-year maturity and beyond (by "beat" I simply mean that yield is higher). Here is a chart of just the latest CD and Treasury yields from the Fidelity yields summary page:

Image

Again, this is for new-issue CDs (no commission, so what you see is what you get), and large quantity Treasuries (so my yield would be slightly lower). Reminder: I'm using Prime MM SEC yield of 1.85% as my 0-year yield.

I'm interested in where the transition point is in the 1-year to 2-year range, so I constructed a sheet that enabled me to generate the chart below. For this chart I used net secondary yields from Fidelity for maturities in the ranges of interest. So the CD yield is what I'd actually get, but the Treasury yield still is higher than what I'd get, since there's no easy way to get yields for smaller quantities (must look at depth of book for one Treasury at a time). I don't bother including CDs with maturities of less than one year, since I already know Treasuries beat CDs in that range.

Image

Note that the CD yield curve looks more like a staircase than a smooth curve, and it is not noisy as it would be if I included all CD yields (as you can see in earlier replies). This is because of the way I filtered the CDs for this chart.

First, I filter out all CDs with quantity less than 5 and minimum quantity greater than 25, because the lot sizes I'm interested in buying are in this range. Also, yields for very small quantities, like 1 or 2, often are significantly higher than for quantities of 5 or more, and this distorts the yield curve unless you are interested in buying these small quantities.

Second, I only include a CD yield if it is higher than the maximum of all yields at lower maturities for CDs in the specified quantity range. This eliminates the lower-yield CDs that I wouldn't consider buying.

I find the result very interesting, in that there are definite stair-steps at what we might consider the popular maturities. This is most clear at 1.5-year and 2.0-year maturities, but we see it to a lesser extent at 1.25-, 1.75- and 2.75-year maturities. An exception is that there is no step at 3-year maturity, so if I were interested in CDs with maturity of more than two years, the 2.75-year maturity looks like the best deal, and there would be little benefit in buying a 3-year CD instead of the 2.75-year CD (unless you are more concerned about reinvestment risk than term risk). Of course this is just for the CDs available when I pulled the data on Friday, so it might not look the same on Monday.

Back to the original point, the CD stair-step at 1.5-year maturity makes it crystal clear that this is the exact maturity at which CD yields start to exceed Treasury yields, and here the yield premium is about 10 basis points--actually a bit more for me, since the Treasury quote is for a large quantity (probably 400), and the yield for quantity 10 or so would be several basis points lower.

To emphasize this again, I have no intention of selling before maturity, so am happy to take the illiquidity yield premium of a CD if there is one, even if it's only 10 bps. So I would choose Treasuries in an IRA for maturities of less than 1.5 years, and CDs with maturities of 1.5 years or more. It would be perfectly rational for someone with another strategy where liquidity is important to choose a Treasury over a CD even if it had a lower yield.

My next task is to do a similar analysis for Treasuries vs. Munis in a taxable account (so looking at taxable-equivalent yields). Analyzing munis is much more complicated, since credit rating needs to be considered. For example, I might buy a 2-year AA+ muni if the yield exceeded a 2-year Treasury by 20 basis points, but I probably would prefer a 2-year Treasury over an AA- 2-year muni if the yield exceeded the Treasury by only 5 basis points. I probably also will impose stricter criteria as my portfolio of individual munis grows, making it more likely that Treasuries will be playing a larger role in this ladder over time (as long as the yield curves look somewhat like they do today).

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by jainn » Sat May 12, 2018 12:09 pm

My next task is to do a similar analysis for Treasuries vs. Munis in a taxable account (so looking at taxable-equivalent yields). Analyzing munis is much more complicated, since credit rating needs to be considered. For example, I might buy a 2-year AA+ muni if the yield exceeded a 2-year Treasury by 20 basis points, but I probably would prefer a 2-year Treasury over an AA- 2-year muni if the yield exceeded the Treasury by only 5 basis points. I probably also will impose stricter criteria as my portfolio of individual munis grows, making it more likely that Treasuries will be playing a larger role in this ladder over time (as long as the yield curves look somewhat like they do today).

Kevin
I see page 6 and 7 has muni/treasury curve analysis from Baird, published this week.

http://content.rwbaird.com/RWB/Content/ ... entary.pdf

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sun May 13, 2018 1:17 pm

Kevin M wrote:
Sat May 12, 2018 11:32 am
My next task is to do a similar analysis for Treasuries vs. Munis in a taxable account (so looking at taxable-equivalent yields).
Done.

Before sharing that, here's a recap of the chart in the OP, but just looking at Treasury and AA muni TEYs (at my marginal tax rates of 27% and 8%), and for yields from Friday.

Image

From this chart it appears that AA munis might provide the additional yield that would warrant taking on the small amount of credit risk at say 2-year and 3-year maturities. But must recall that these are yields pulled from the Fidelity yields summary page, and there are a few problems with this.

One is that the muni yields are before commission, so this chart overstates the muni yields. This has a larger effect at shorter maturities, since the commission is amortized over a shorter period, so the apparent large yield premiums of munis with maturities of less than one year probably are an illusion.

Another problem is that the muni yields on the summary page are likely to be for bonds I wouldn't buy, either because they have call provisions or are in municipalities that I currently would not buy--e.g., I already have as many IL bonds as I want, so am excluding IL bonds in my search criteria. Another is that the quote could be for an AA- credit rating, and I want at least AA for 1-2 year maturity and AA+ for 2-3 year maturity.

As always, the Treasury yields are slightly overstated, since the quotes are for much larger quantities than I would buy, but this problem also exists in the charts I create from my search results.

Of course the chart above also only shows me yields at selected maturities, so nothing between 1-year and 2-year, for example.

The chart below is for TEYs based on ask quotes from my search results on Friday, and for munis are net of commission. The Treasury search is straightforward, since there are no credit ratings to worry about. The muni TEYs in this chart are from the results of several different searches, with increasing required yield and credit rating as maturity increases. I also restrict to quantity greater than 5 and less than 25, as I want quantity of at least 10, but probably don't want to put much more than that into any one muni. Since I've often seen the highest yields for munis with only 5 available, this knocks out some of the highest yields.

Image

This looks very different than the chart based on the Fidelity summary yields. I honestly found this to be somewhat surprising, as I see Treasuries beating munis at all maturities of interest to me, with a very few possible exceptions. I actually evaluated one of those exceptions on Friday.

We see a muni at 1.63-year maturity that pokes above the Treasury TEY line, with net TEY of 2.864% (obviously can't see this precision in the chart above, but I can see it by clicking on the chart in my spreadsheet and hovering mouse over the point). Looking at the details, this muni is indeed rated AA by S&P, but it's only rated A1 by Moody's. That put me off a bit on this one, so I didn't buy it.

Looking at this chart, and considering the complexity of evaluating munis, my inclination is to stick with Treasuries in my taxable account as long as the chart looks similar to this.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by jainn » Sun May 13, 2018 2:13 pm

Kevin M wrote:
Sun May 13, 2018 1:17 pm
Kevin M wrote:
Sat May 12, 2018 11:32 am
My next task is to do a similar analysis for Treasuries vs. Munis in a taxable account (so looking at taxable-equivalent yields).
Done.

Before sharing that, here's a recap of the chart in the OP, but just looking at Treasury and AA muni TEYs (at my marginal tax rates of 27% and 8%), and for yields from Friday.

Image

From this chart it appears that AA munis might provide the additional yield that would warrant taking on the small amount of credit risk at say 2-year and 3-year maturities. But must recall that these are yields pulled from the Fidelity yields summary page, and there are a few problems with this.


Kevin
Kevin,

When I look at your chart, it appears to me that 3 year treasuries yield 3%? Where should I look to find that?

I am probably looking in the wrong place or misunderstand. I see on CNBC, treasury direct May 15th issue, and Fidelity for treasuries maturing in 3 years..... 2.6-2.7% for a 3 year treasury.

https://www.cnbc.com/quotes/?symbol=US3Y

https://www.treasurydirect.gov/instit/a ... htm#tabs-3

Code: Select all

Security Term	CUSIP Reopening Issue Date   Maturity Date   High Yield    Interest Rate
3-Year	9128284P2	No	05/15/2018	05/15/2021	2.664%	2.625%
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by stlutz » Sun May 13, 2018 2:51 pm

When I look at your chart, it appears to me that 3 year treasuries yield 3%? Where should I look to find that?

I am probably looking in the wrong place or misunderstand. I see on CNBC, treasury direct May 15th issue, and Fidelity for treasuries maturing in 3 years..... 2.6-2.7% for a 3 year treasury.
He is inflating the treasury yield to reflect the fact that they are state tax exempt. Goal is to look at the CD, the Treasury, and the Muni all on the same basis.

Of course, everyone's tax situation is different so the comparison would be different in your situation and mine. Although I've arrived at the same conclusion as Kevin for my own portfolio.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Sun May 13, 2018 4:26 pm

stlutz wrote:
Sun May 13, 2018 2:51 pm
When I look at your chart, it appears to me that 3 year treasuries yield 3%? Where should I look to find that?

I am probably looking in the wrong place or misunderstand. I see on CNBC, treasury direct May 15th issue, and Fidelity for treasuries maturing in 3 years..... 2.6-2.7% for a 3 year treasury.
He is inflating the treasury yield to reflect the fact that they are state tax exempt. Goal is to look at the CD, the Treasury, and the Muni all on the same basis.

Of course, everyone's tax situation is different so the comparison would be different in your situation and mine. Although I've arrived at the same conclusion as Kevin for my own portfolio.
Exactly. For example, from my Friday search results, I see a 3-year Treasury with yield 2.694%. My taxable-equivalent yield (TEY) is 3.026% = 2.694% * (1 - 27%) / (1 - 27% - 8%).

If your federal marginal tax rate is higher than mine, and/or your state tax rate is lower, the munis would look more attractive.

If you look at the OP, you'll see lines on the chart for both yield and TEY for Treasuries. I excluded the raw yields from the most recent chart since this analysis is focused on taxable accounts. For my IRAs, I'd look at the raw Treasury yields and compare to CD yields.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by jainn » Sun May 13, 2018 5:40 pm

Got it. Thank you!
Jainn

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Mon May 14, 2018 8:53 pm

Today I added in a line for CA muni bond TEY, for which I calculate TEY differently as a CA resident. I use a different search for CA munis because they have a lower yield threshold to meet before they become attractive, due to the state tax exemption. I also simplified my search criteria for non-CA muni bonds, and just required AA (AA2) at all maturities--I had set it to AA- (AA3) for one year or less, and AA+ (AA1) for more than two years. Here is the result.

Image

First observation is that no CA munis come close to being candidates for purchase. In the past I have found CA munis that looked good, but they were mostly at shorter maturities, like less than one year, and I'm now requiring yields that are higher than provided at shorter maturities; I have a fair amount of taxable CDs maturing in less than one year, and including these, I have my monthly ladder rungs much more than sufficiently filled in out to one year. Still, I found this result a little surprising, and it makes me wonder if I've made some errors in my calculations, but spot checking, I don't see any.

Next observation is that there's a clear pop in non-CA AA muni yields at a little over 2.2-year maturity. This is different than the previous chart I posted because of considering AA instead of requiring AA+ beyond 2-year maturity. I took a closer look at a couple of these, and I'll review one here.

The one at 2.21-year maturity is an AA-rated, insured AL revenue muni, with an underlying rating of A+, and a TEY of 3.07%. A Treasury maturing at about the same time has a TEY of 2.91% for quantity 10, which is the quantity I would buy. So is 16 basis points of extra yield worth the relatively small credit risk and significantly lower liquidity? I plan to hold to maturity, so the liquidity isn't much of a factor, but having the liquidity does provide more options, like selling before maturity to rebalance into stocks if stocks tank and Treasury prices rise.

Another way to look at it is that I'd have to extend Treasury maturity to three years to come close to that TEY. So is it better to take the extra term risk with the Treasury, or take a little credit risk with the muni?

I finished the analysis shortly before market close, so didn't make a purchase today. As I think about it, I'm kind of leaning toward picking up the munis that appear attractive relative to Treasuries to a point, but then going with Treasuries after that to lower the overall credit risk of the ladder. Of course I would want to dig into the muni a bit more first, which of course takes more time, and that's also a price to factor into the decision.

Also note that the yield premiums are even larger for a couple munis at maturities beyond 2.5 years, but then that's more time for the muni to be downgraded or default, despite the 0.00% historical 3-year default rate for AA munis.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 15, 2018 1:25 pm

Bottom line: I don't think I will be in greater than the 12% marginal tax bracket this year. I don't expect to be in greater than the 22% bracket over the next 5 years, possibly the 12% bracket.
My state income tax (MA) is 5.1%.
I did not pay income tax in 2017. I imagine that will no longer be possible since I will no longer be depreciating rental real estate that I am selling .

I expect interest rates to rise.

Please tell me which of these options you would choose if you were in my shoes. Please outline advantages/disadvantages of each.

I will be investing $100K-150K in a taxable account (from sale of rental real estate at a loss), and why.

1. 2 year AA municipal bond. (I assume not competitive because of low tax bracket?).
2. 2 year bank issued CD at Greenwood FCU. 2.8% APY w/ 180d. EWP.
3. 2 year brokered CD (Fidelity or Vanguard) 2.75% APY . Could I expect to lose more or less cf. bank issued CD w/ 180d EWP if I prematurely sell because interest rates rise?
4. 3 year brokered CD (Fid. or Vanguard) 2.9% APY
5. Treasury bills with 2-3 year maturity.
6. 5 year CD at Northwest FCU 3.35% APY w/ 12 mo. EWP.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 15, 2018 3:06 pm

Here's what I saw today for Treasuries and Munis:

Image

The main thing that jumped out at me was the muni at 0.67-year maturity at a net TEY of 2.64%. Even though I'm not particularly looking for maturities of less then one year, this one looked attractive enough to examine in more detail.

It is rated AA+ by S&P, no rating by Moody's, and not insured, so AA+ is the underlying rating. It was most recently rated in May 2017, so not that long ago. That looks very solid for a muni with less than one year to maturity. It is an IN bond, which is fine with me, as only about 6% of my muni/Treasury ladder is in IN. Quantity and minimum quantity were 20, and I would be OK with that.

I didn't see anything wrong with it, and when I took a look, it was still available.

I decided to take a break, then pull the CA muni bonds, and if it was still available after that I might buy it. By the time I had done all of that, it was gone, so someone else saw the same value I did.

I loaded the muni data into my spreadsheet at 2:28 PM eastern, and it sold at 2:43, at the yield I I had seen (net 1.862%).

I personally think deals like this sometimes are just an anomaly, but if anyone wants to look at the bond to see why it might have been selling at this price/yield, it is CUSIP 15464QCC1, CENTRAL NOBLE 2012 BLDG PROJS INC IND 02.00000% 01/15/2019 FIRST MTG BDS SER. 2014.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Tue May 15, 2018 4:02 pm

protagonist wrote:
Tue May 15, 2018 1:25 pm
Bottom line: I don't think I will be in greater than the 12% marginal tax bracket this year. I don't expect to be in greater than the 22% bracket over the next 5 years, possibly the 12% bracket.
So you don't have qualified dividends that stacked on top of ordinary taxable income will push above the top of 12% bracket, which would cause your federal marginal tax rate to be 27%? I assume no LTCG due to sale of rental at a loss. I will assume 12% federal.
My state income tax (MA) is 5.1%.
I did not pay income tax in 2017. I imagine that will no longer be possible since I will no longer be depreciating rental real estate that I am selling .

I expect interest rates to rise.
What interest rates? All of them? At any rate, with this general outlook, probably only extending maturity to top of steepest segments of the yield curves make sense. That's what I'm doing--not because I expect "interest rates to rise", but because it seems to me to provide the best risk/expected-return tradeoff.
Please tell me which of these options you would choose if you were in my shoes. Please outline advantages/disadvantages of each.

I will be investing $100K-150K in a taxable account (from sale of rental real estate at a loss), and why.

1. 2 year AA municipal bond. (I assume not competitive because of low tax bracket?).
Correct. Here are the TEY curves I see for your marginal tax rates:

Image

Clearly munis don't make sense for you.
2. 2 year bank issued CD at Greenwood FCU. 2.8% APY w/ 180d. EWP.
3. 2 year brokered CD (Fidelity or Vanguard) 2.75% APY . Could I expect to lose more or less cf. bank issued CD w/ 180d EWP if I prematurely sell because interest rates rise?
4. 3 year brokered CD (Fid. or Vanguard) 2.9% APY
5. Treasury bills with 2-3 year maturity.
6. 5 year CD at Northwest FCU 3.35% APY w/ 12 mo. EWP.
Today I bought a 2-year CD at Fidelity on secondary market at a net yield of 2.856%, so that would be my benchmark for a 2-year brokered CD. Unfortunately I did not see a deal nearly this good at Vanguard when I looked, which seems to often be the case lately (but not always). Also, this is at $1/CD commission, so at $2/CD commission at Vanguard for accounts < $500K, it is much less likely to beat the new-issue yield of 2.75%.

Note that I bought the CD in an IRA, so there is a good yield premium over 2-year Treasury, since the state tax exemption doesn't come into play in an IRA.

I don't see much value in an early withdrawal option for a 2-year CD. At 2.8%, 180d EWP is about 1.4%. If you broke the CD in say one year, you would then have to invest in a 1-year CD (or other fixed income security) at about 4.2% to earn an average yield of 2.8% over the 2-year term. If you think it's likely that 1-year yields will increase that much, about 200 basis points, in one year, then the EWP might have sufficient value to you. At any rate, that's a good enough rate for a 2-year CD that if it's convenient for you, it would be OK even without the early withdrawal option.

However, you can see that Treasuries provide about the same TEY as CDs at 2-year and 3-year maturities. This won't do you much good if yields increase, as there would be no reason to sell if you don't have to. Again, if you really think yields might increase by 200 bps in a year, then the direct CD might be a better option. But if you might want to sell for any other reason, then the Treasury is better, since the trading costs are much lower. For example, if yields actually fall and stocks tank, selling the Treasury could be a good option for rebalancing into stocks.

I personally would favor the 2-year Treasury over any of the 2-year CD choices in a taxable account (but not in an IRA).

I actually see 3-year new-issue CD yield at Fidelity as 2.95%, and today I could have bought one on secondary at Fidelity at 3.02%. Still, the secondary 3-year is only about 16 basis points more yield than the secondary 2-year that I bought today.

If you look at some of the second chart in this post earlier in the thread, you'll see quite a spike in CD yields right at 2-year maturity, and it's even more pronounced with the yields I pulled today. Just looking at the new-issue yields, you get 45 basis points of extra yield for extending from 1-year to 2-year maturity, but only 20 bps for extending from 2-year to 3-year maturity. If you think yields in general are going to rise, then the 2-year provides much more buffer, and you'd be able to roll to the higher yields one year earlier.

I would not go for the 5-year CD, as I don't see enough additional yield for extending maturity beyond 2-3 years, especially with an EWP of 12 months of interest--this is especially true if you think yields will increase much. However, at 3.35% for 5-year compared to 2.95% for 3-year CD or Treasury, you do get 20 bps/year of extra yield, which Larry Swedroe has mentioned as a guideline for the minimum extra yield for extending maturity. You can run your own scenarios of how valuable the EWP would be given different yield increases at different times.

Of course you can hedge your bets by doing some of each. Maybe overweight 2-year Treasuries, but put some into the 5-year CD as well. You could also make the purchases over time, especially if you think yields will continue to rise. I am getting much higher yields than I was getting a few months ago, so patience has been rewarded, but I don't know if this will continue.

Kevin
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by MikeMak27 » Tue May 15, 2018 4:25 pm

Kevin, this is absolutely stunning, in-depth analysis. Thank you for your hard work! I help run my parents retirement accounts, and I will follow this page as I approach buying more CD’s in the coming month as they have a CD yield payment due to hit their account. I use Fidelity for their account, and like the secondary market with the higher yield and low cost ($1 per CD).
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 15, 2018 4:44 pm

MikeMak27 wrote:
Tue May 15, 2018 4:25 pm
Kevin, this is absolutely stunning, in-depth analysis. Thank you for your hard work! I help run my parents retirement accounts, and I will follow this page as I approach buying more CD’s in the coming month as they have a CD yield payment due to hit their account. I use Fidelity for their account, and like the secondary market with the higher yield and low cost ($1 per CD).
Wow, is it ever! Worth its weight in gold. THANK YOU, KEVIN!

Might this be useful to you? (Kevin and others) viewtopic.php?f=10&t=249535

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Tue May 15, 2018 11:00 pm

Kevin M wrote:
Tue May 15, 2018 4:02 pm

I personally would favor the 2-year Treasury over any of the 2-year CD choices in a taxable account (but not in an IRA).


Kevin
Kevin, do you buy your Treasuries via Fidelity or via Treasury Direct? I haven't invested in T-bills before.

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Doc » Wed May 16, 2018 10:38 am

Be aware of the possible delay you have if you want to sell a Treasury held at Treasury direct.
Treasury Direct" wrote:To sell a Treasury note held in TreasuryDirect or Legacy Treasury Direct, first transfer the note to a bank, broker, or dealer, then ask the bank, broker, or dealer to sell it for you.
https://www.treasurydirect.gov/indiv/re ... e_sell.htm

For me this makes Treasury Direct a non-starter as I rarely hold Treasuries to maturity except for T-Bills.
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Wed May 16, 2018 11:38 am

protagonist wrote:
Tue May 15, 2018 11:00 pm
Kevin M wrote:
Tue May 15, 2018 4:02 pm

I personally would favor the 2-year Treasury over any of the 2-year CD choices in a taxable account (but not in an IRA).

Kevin
Kevin, do you buy your Treasuries via Fidelity or via Treasury Direct? I haven't invested in T-bills before.
Fidelity (or Vanguard, which is fine too, as there is no commission at either). It's pretty much like buying CDs on secondary market, so if you've done that, you should know how to do it. Or you can buy at auction, which is only slightly different.

I was thinking about using some of the proceeds from a couple of munis that matured yesterday at Fidelity to buy a Treasury. I was looking at 1.54-year term (maturing 11/30/2019), to beef up my ladder at that maturity. Large quantity yield was 2.505%, and yield for 10 was 2.490%, which for me is TEY of 2.796%. In no hurry, so decided to check in with Bogleheads instead for now.

Note that Treasury CMT 1-year was 2.31% and 2-year was 2.58% yesterday. Today I see 1-year ask yield of 2.329% and 2-year at 2.596%, so looks like yields are up a bit today, continuing the rising yield trend (although can't compare directly, since CMT quotes are based on bid yields for on-the-run Treasuries, and I'm not paying attention to that in what I look at). At any rate, 2.49% looks good for 1.54-year.

Technical note: a Treasury bill (T-bill) is issued with maturity of 52 weeks or less, notes are 10-year or less, and bonds are more than 10 years. When buying on secondary market, it really doesn't matter what you call them, since all that matters (mostly) is term to maturity (really duration). You will still see them referred to as bill, note or bond in the description.

Bills are always zero coupon. Here are some examples of Treasuries all maturing in less than one year (as displayed at Fidelity):

UNITED STATES TREAS BILLS ZERO CPN 0.00000% 10/11/2018
UNITED STATES TREAS NTS NOTE 1.75000% 10/31/2018
U S TREAS BD STRIPPED PRIN PMT 0.00000% 02/15/2019 PRIN PMT
U S TREAS SEC STRIPPED INT PMT 0.00000% 02/15/2019ZERO CPN
UNITED STATES TREAS BDS 8.87500% 02/15/2019

I would consider any of them if looking for a Treasury with less than one year to maturity, but if buying at auction, you would always be buying a bill for 1-year maturity or less, a note for 2-10 year maturity, and a bond for 30-year maturity.

Kevin
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mapleosb
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by mapleosb » Sun May 20, 2018 6:57 am

MikeMak27 wrote:
Tue May 15, 2018 4:25 pm
Kevin, this is absolutely stunning, in-depth analysis. Thank you for your hard work! I help run my parents retirement accounts, and I will follow this page as I approach buying more CD’s in the coming month as they have a CD yield payment due to hit their account. I use Fidelity for their account, and like the secondary market with the higher yield and low cost ($1 per CD).
If I may pile on also, Kevin M, thank you so much for the analysis and explanations. I have been buying CD's, Treasuries, etc in my IRA for the last ten years and your articles are filled with so much informative and very useful content.

IMHO, you go down in my book with Nisiprius and sscritic for in depth useful knowledge about the subject. :sharebeer

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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by Kevin M » Wed May 30, 2018 9:50 pm

Posted 5/12/2018:
Kevin M wrote:
Sat May 12, 2018 11:32 am
Looking at the OP, we could see that Treasuries beat CDs in an IRA (no state tax exemption) at least to 1-year maturity, and CDs beat Treasuries at 2-year maturity and beyond (by "beat" I simply mean that yield is higher). Here is a chart of just the latest CD and Treasury yields from the Fidelity yields summary page:

Image

Again, this is for new-issue CDs (no commission, so what you see is what you get), and large quantity Treasuries (so my yield would be slightly lower). Reminder: I'm using Prime MM SEC yield of 1.85% as my 0-year yield.
As I just posted in another thread, CDs now have taken the lead over Treasuries at 1-year maturity in a tax-advantaged account:

Image

Large quantity 1-year Treasury yield has fallen from about 2.30% to 2.25%, while new-issue CD has risen from about 2.20% to 2.35%. Note also that Prime MM has risen from 1.85% to 1.90%.

The yield premiums of CDs over Treasuries have also increased at 2-year maturity and beyond.

Kevin
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protagonist
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Re: Yield Curves-Treasury, CD, AA/AAA muni

Post by protagonist » Wed May 30, 2018 11:33 pm

Just bought CD at Fido via secondary market maturing Oct 2020 at 2.93% yield to worst.

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