Prime MM vs 6-month Treasury in IRA

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Kevin M
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Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Sat Nov 17, 2018 9:14 pm

I was thinking of entering an order in an IRA for some 6-month Treasury bills at the auction that closes on Monday. Vanguard is showing the estimated yield for the 6-month at about 2.51%, while Prime MM SEC yield now is 2.25%. Odds are pretty good that the Fed will increase the federal funds rate (FFR) target by 25 basis points in December, and this chart shows Prime MM yield compared to the effective FFR (EFFR) since December 2015.

Image

This indicates that if the Fed does increase the FFR target as expected, Prime MM should hit 2.5% in a month or two, and perhaps keep climbing if odds look decent of another FFR increase in Q1 of 2019.

Note though that the odds of an FFR increase have dropped from about 80% to about 65% in the last month: https://www.cmegroup.com/trading/intere ... fomc.html/.

Now I'm leaning toward just hanging out in Prime MM with this chunk of cash.

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Re: Prime MM vs 6-month Treasury in IRA

Post by BL » Sun Nov 18, 2018 1:10 am

Thanks, Kevin. It is interesting to see how close they are and have been. I have Prime MM.

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Re: Prime MM vs 6-month Treasury in IRA

Post by peppers » Sun Nov 18, 2018 8:33 am

fwiw

Playing devil's advocate we could be looking at a 3.0% FFR at the end of 1Q 2019.

Having to invest during the Volcker years, the phrase "don't fight the Fed" comes to mind. I would stay put in the Vanguard MMF.
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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Sun Nov 18, 2018 9:13 am

Kevin M wrote:
Sat Nov 17, 2018 9:14 pm
I was thinking of entering an order in an IRA for some 6-month Treasury bills at the auction that closes on Monday. Vanguard is showing the estimated yield for the 6-month at about 2.51%, while Prime MM SEC yield now is 2.25%.
Side point. What is your reasoning for holding large amounts of "cash" in an IRA?
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Re: Prime MM vs 6-month Treasury in IRA

Post by Dandy » Sun Nov 18, 2018 9:27 am

I have some concern that Prime has the ability to restrict withdrawals/impose fees in extreme situations. The Fed money market has none of these restrictions for about 11 bps less. Treasury Money Market is another option if you investing $50k it has the same yield as Prime with no restrictions/withdrawals/fees and for non IRA's state tax benefits?

Prime is likely fine if you don't put too much of your "safe" assets there. But since the discussion is about CDs or short term Treasuries low risk seems to be a priority for the money being considered. Is 11 bps more yield worth the slight risk is the question you have to consider since the time you most need your "safe" money is in extreme situations.

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Re: Prime MM vs 6-month Treasury in IRA

Post by William4u » Sun Nov 18, 2018 2:09 pm

Dandy wrote:
Sun Nov 18, 2018 9:27 am
I have some concern that Prime has the ability to restrict withdrawals/impose fees in extreme situations. The Fed money market has none of these restrictions for about 11 bps less. Treasury Money Market is another option if you investing $50k it has the same yield as Prime with no restrictions/withdrawals/fees and for non IRA's state tax benefits?

Prime is likely fine if you don't put too much of your "safe" assets there. But since the discussion is about CDs or short term Treasuries low risk seems to be a priority for the money being considered. Is 11 bps more yield worth the slight risk is the question you have to consider since the time you most need your "safe" money is in extreme situations.
+1
Vanguard Federal MM is at 2.16%. It is the sweep for Vanguard, has no minimum, and is generally 11bp behind Prime MM. It has state tax advantages for many states (Prime does not). It is a good option too.

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Re: Prime MM vs 6-month Treasury in IRA

Post by whodidntante » Sun Nov 18, 2018 2:24 pm

William4u wrote:
Sun Nov 18, 2018 2:09 pm
Dandy wrote:
Sun Nov 18, 2018 9:27 am
I have some concern that Prime has the ability to restrict withdrawals/impose fees in extreme situations. The Fed money market has none of these restrictions for about 11 bps less. Treasury Money Market is another option if you investing $50k it has the same yield as Prime with no restrictions/withdrawals/fees and for non IRA's state tax benefits?

Prime is likely fine if you don't put too much of your "safe" assets there. But since the discussion is about CDs or short term Treasuries low risk seems to be a priority for the money being considered. Is 11 bps more yield worth the slight risk is the question you have to consider since the time you most need your "safe" money is in extreme situations.
+1
Vanguard Federal MM is at 2.16%. It is the sweep for Vanguard, has no minimum, and is generally 11bp behind Prime MM. It has state tax advantages for many states (Prime does not). It is a good option too.
Do those state tax benefits extend to the OP's IRA?

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Re: Prime MM vs 6-month Treasury in IRA

Post by Spewin » Sun Nov 18, 2018 2:36 pm

Dandy wrote:
Sun Nov 18, 2018 9:27 am
Treasury Money Market is another option ... it has the same yield as Prime...
I don't see it. As of this posting, Treasury and Federal MM have exactly the same SEC yield, while Prime is 11bp higher.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Sun Nov 18, 2018 3:02 pm

Spewin wrote:
Sun Nov 18, 2018 2:36 pm
Dandy wrote:
Sun Nov 18, 2018 9:27 am
Treasury Money Market is another option ... it has the same yield as Prime...
I don't see it. As of this posting, Treasury and Federal MM have exactly the same SEC yield, while Prime is 11bp higher.
Vanguard Treasury Money Market Fund (VUSXX) - It may not be a sweep fund.

Vg is showing the Federal fund with a minimum of $3k. Same as the Investor class of the Prime MM fund.

They may not all be available as sweep accounts.

https://investor.vanguard.com/mutual-fu ... nd-returns

(If you are using the filter in the "find fund" screen be sure to check the $50k minimum box if you want to see the Treasury fund.)
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Re: Prime MM vs 6-month Treasury in IRA

Post by Dandy » Sun Nov 18, 2018 3:18 pm

I don't see it. As of this posting, Treasury and Federal MM have exactly the same SEC yield, while Prime is 11bp higher.
my bad. :oops:
Dandy

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Sun Nov 18, 2018 3:25 pm

Doc wrote:
Sun Nov 18, 2018 9:13 am
Kevin M wrote:
Sat Nov 17, 2018 9:14 pm
I was thinking of entering an order in an IRA for some 6-month Treasury bills at the auction that closes on Monday. Vanguard is showing the estimated yield for the 6-month at about 2.51%, while Prime MM SEC yield now is 2.25%.
Side point. What is your reasoning for holding large amounts of "cash" in an IRA?
Who said it was a large amount?

I'm actually looking at two accounts.

One is mine, and the cash is partially from Treasury/CD interest and proceeds from a matured Treasury. It's a tiny percentage of my portfolio.

The other is my step-father's IRA, for whom I'm an agent, and the cash is from an IRA rollover from a penalty-free early withdrawal from a PenFed IRA CD that had a yield of only 1.8%. So with Prime at 2.25%, he's already ahead, and can benefit from the likely continued increase in the shortest-term yields (65% probability of FFR increase of 25 bps in December). Again, this is a relatively small portion of my mom and his portfolio, much of which consists of a short-term ladder (with irregular rungs) of CDs and Treasuries. So the only question is whether to keep this as a 0-year rung or a 6-month rung, or maybe some of each.

Finally, I acknowledge some huge recency bias here, but patience in deploying cash into fixed income even with limited term risk has paid off over the last year, and I've deployed quite a bit (from proceeds of real estate sales and matured CDs). Just look at the 1-year returns of money market funds vs. short-term bond funds.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Sun Nov 18, 2018 3:33 pm

Kevin M wrote:
Sun Nov 18, 2018 3:25 pm
Doc wrote: ↑Sun Nov 18, 2018 8:13 am
Kevin M wrote: ↑Sat Nov 17, 2018 8:14 pm
I was thinking of entering an order in an IRA for some 6-month Treasury bills at the auction that closes on Monday. Vanguard is showing the estimated yield for the 6-month at about 2.51%, while Prime MM SEC yield now is 2.25%.
Side point. What is your reasoning for holding large amounts of "cash" in an IRA?
Kevin wrote:Who said it was a large amount?
I just assumed that you wouldn't expend much effort to attain an additional 10 or 20 bps on a few $k. :?:
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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Sun Nov 18, 2018 3:35 pm

Dandy wrote:
Sun Nov 18, 2018 9:27 am
I have some concern that Prime has the ability to restrict withdrawals/impose fees in extreme situations. The Fed money market has none of these restrictions for about 11 bps less. Treasury Money Market is another option if you investing $50k it has the same yield as Prime with no restrictions/withdrawals/fees and for non IRA's state tax benefits?
I'm not concerned about the fees and restrictions of Prime MM at this point. If the financial situation started to deteriorate, I'd reconsider. At any rate, I don't have much of my portfolio in Prime MM. The state tax exemption of Treasury MM is irrelevant in an IRA, and this topic is specifically about IRAs.

I'd prefer Treasury MM in a taxable account, as the taxable-equivalent yield (TEY) is higher for me, at 2.40%, than Prime MM, in addition to the extra safety. However, I have a local bank account that pays 2.50%, so even better than Treasury MM, but perhaps not for long. I will switch back to Treasury MM in taxable when the TEY gets to 2.50%, as there is no 6/month limitation on withdrawals, and there are a few other conditions for the bank account to pay that rate. But this is all off topic.
Prime is likely fine if you don't put too much of your "safe" assets there. But since the discussion is about CDs or short term Treasuries low risk seems to be a priority for the money being considered. Is 11 bps more yield worth the slight risk is the question you have to consider since the time you most need your "safe" money is in extreme situations.
The discussion is not about CDs or short-term Treasuries (that decision is easy for me--depends on whether it's an IRA or taxable, and what maturities we're talking about), it's about Prime MM vs. a 6-month Treasury. Liquidity in extreme risk situations is not a big concern in these IRAs--just need enough to cover any RMDs, and that's handled. There is plenty of other safe fixed income for liquidity. But good point to keep in mind.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Ricchan » Sun Nov 18, 2018 6:12 pm

The opportunity cost of holding onto cash in Prime MM, currently at 2.25%, vs buying a 6-month bill at 2.51%, is only 0.26%. For an amount of, say, $100k, that's about $21.67 per month. And with Prime MM yield likely to increase, that's probably going to be even less. Is that worth the cost of knowing how Prime MM reacts to the FFR increase in December and being able to make an investment choice with that information in hand? Not to mention the newer 6-month bill(s) in December will likely be offered with higher rates compared to the upcoming 6-month bill.

I guess you could also invest part of the sum in the upcoming 6-month bill while holding onto the rest to see what happens with Prime MM vs 6-month bills in the future.

If it were me, I'd probably park at least most of the cash in Prime MM and wait and see. In the meantime, I'd probably post a question about it on the Bogleheads forum and hope for advice from knowledgeable experts on fixed income like Kevin M. ;)

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Sun Nov 18, 2018 8:51 pm

Playing devil's advocate against myself, the 6-month Tbill at about 2.5% is 25 basis points higher than 0-month Prime MM at 2.25%, which is 50 basis points per year of additional maturity. This is well above the Swedroe guideline of 20 bps/year of additional maturity.

Since people brought up the Treasury state tax exemption in taxable accounts, I thought I'd take a look at the picture in a taxable account as well. Here's the same chart with a number of additional yields:

Image

The curves with "TEY" in them are the taxable-equivalent yields at my marginal tax rates of 27% fed and 8% state. VUSXX TEY is the TEY for Treasury MM fund (the raw yield is irrelevant to me, since I would only use this fund in a taxable account right now).

As of 11/15, 6-month Tbill TEY was 2.82% and VUSXX TEY was 2.40%. So that's 40 about basis points of additional yield, or 80 bps/year of additional maturity--even more additional yield for extending maturity than in an IRA. However, I actually compare it to the 2.50% I'm earning in a local bank account, so it's actually about 30 basis points of additional yield or 60 bps/year of additional maturity. Still better than the IRA.

I do have some cash sitting at Schwab that I was going to transfer back to my bank account, but maybe I should buy a 6-month Treasury instead. One nice thing about Schwab is that their pricing is so good for smaller quantities that if you miss the auction, you're likely to get a similar yield on the secondary market a couple of days later, unless of course the 6-month yield drops.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Tue Nov 20, 2018 3:05 pm

Kevin M wrote:
Sun Nov 18, 2018 8:51 pm
One nice thing about Schwab is that their pricing is so good for smaller quantities that if you miss the auction, you're likely to get a similar yield on the secondary market a couple of days later, unless of course the 6-month yield drops.
Here is a data point. The auction price was 98.765681 for an investment yield of 2.520% (auction closed yesterday, 11/19). Price at Schwab for minimum quantity 5, max quantity 3,000 (best price) is 98.756620, with the yield showing as 2.511%. Note that the price is lower, so you'd expect the yield to be higher.

From my yield calculations, the explanation is that the Schwab pricing is based on an 11/21 settlement (tomorrow/Wednesday), while the auctioned Treasury settles on 11/23 (Friday). So the term to maturity is 2 days longer, and the price isn't enough lower to compensate. I don't understand enough about how all of this works to know how you can get settlement on the secondary market before the Treasury bought at auction settles--I guess others can sell before their auction trades settle?

I decided to buy some with my cash at Schwab, partially to find out if it actually settles on 11/21.

While writing this, price dropped to 98.754075, showing a yield of 2.516%, and my order for 14 was filled at this price. My trade details show a settlement date of 11/21.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Tue Nov 20, 2018 4:07 pm

Kevin M wrote:
Tue Nov 20, 2018 3:05 pm
I decided to buy some with my cash at Schwab, partially to find out if it actually settles on 11/21.
I'm over my head here but some points:

The security description says " Price based on 50 bonds and a settlement date of 11/21/2018". (Forget the 50.) It does not say that it settle on the 21st only that the prices are based on that day.

Way back in my memory I recall seeing something on newly auction treasures that they trade on a "when issued" basis. The issue date is 11/23/18.

The original issue date is May 24, 2018. So is this a reissue?
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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Tue Nov 20, 2018 4:54 pm

Doc wrote:
Tue Nov 20, 2018 4:07 pm
Kevin M wrote:
Tue Nov 20, 2018 3:05 pm
I decided to buy some with my cash at Schwab, partially to find out if it actually settles on 11/21.
I'm over my head here but some points:

The security description says " Price based on 50 bonds and a settlement date of 11/21/2018". (Forget the 50.) It does not say that it settle on the 21st only that the prices are based on that day.
Yes, which is one reason I wanted to try it. My trade history details show 11/21 settlement. We shall see.
Way back in my memory I recall seeing something on newly auction treasures that they trade on a "when issued" basis. The issue date is 11/23/18.

The original issue date is May 24, 2018. So is this a reissue?
Also out of my depth, but yeah, it's probably because it is a reissue.

I also noticed that typically to buy an auctioned Treasury on secondary at Schwab a day or two after the auction, you must call to buy--there's a little phone symbol instead of a buy link, and when you hover over the phone symbol, it says to call to buy. This one I was able to buy online, so again, perhaps because it's a reissue.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Tue Nov 20, 2018 5:52 pm

Kevin M wrote:
Tue Nov 20, 2018 4:54 pm
Also out of my depth, but yeah, it's probably because it is a reissue.
If it's a reissue you may be buying an existing bill in the market and the settlement is therefore T1. On the other hand if you bought at auction, reissue or not, the settlement would be Friday as specified in the announcement.

You can tell if its a reissue by looking at the cusip for the May 23 bill. Are they the same? (I may have my dates off by 1 or 2 on the original issue.)

If anyone is paying attention I am only speculating. I don't know the true facts.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Tue Nov 20, 2018 6:45 pm

Doc wrote:
Tue Nov 20, 2018 5:52 pm
Kevin M wrote:
Tue Nov 20, 2018 4:54 pm
Also out of my depth, but yeah, it's probably because it is a reissue.
If it's a reissue you may be buying an existing bill in the market and the settlement is therefore T1. On the other hand if you bought at auction, reissue or not, the settlement would be Friday as specified in the announcement.

You can tell if its a reissue by looking at the cusip for the May 23 bill. Are they the same? (I may have my dates off by 1 or 2 on the original issue.)

If anyone is paying attention I am only speculating. I don't know the true facts.

No more today. It's happy hour in the midwest. :sharebeer
The CUSIPs are different. The CUSIP for the 11/23/2018 issue is 912796QH5, while the CUSIP for the one issued 5/24/2018 is 912796QK8.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Wed Nov 21, 2018 7:36 am

Kevin M wrote:
Tue Nov 20, 2018 6:45 pm
Doc wrote:
Tue Nov 20, 2018 5:52 pm
Kevin M wrote:
Tue Nov 20, 2018 4:54 pm
Also out of my depth, but yeah, it's probably because it is a reissue.
If it's a reissue you may be buying an existing bill in the market and the settlement is therefore T1. On the other hand if you bought at auction, reissue or not, the settlement would be Friday as specified in the announcement.

You can tell if its a reissue by looking at the cusip for the May 23 bill. Are they the same? (I may have my dates off by 1 or 2 on the original issue.)

If anyone is paying attention I am only speculating. I don't know the true facts.

No more today. It's happy hour in the midwest. :sharebeer
The CUSIPs are different. The CUSIP for the 11/23/2018 issue is 912796QH5, while the CUSIP for the one issued 5/24/2018 is 912796QK8.

Kevin
So which one did you buy at Schwab? If you bought QK8 that's the answer to the settlement date difference.

Are there really two T- bills maturing on the same day but with different cusips? I don't think that situation can happen with notes or bonds with the same maturity date and the same coupon. I occasionally get an email about an upcoming auction that may have the same coupon as an existing issue with a warning that in the case of the same coupon the new auction will be a reopening.
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Re: Prime MM vs 6-month Treasury in IRA

Post by dalbright » Wed Nov 21, 2018 8:14 am

I went through a similar thought process and ended up doing a 5 rung roughly monthly treasury ladder that went out 5-6 months with 5/6 of my cash and 1/6 in MM. May be too much work for some but if rates go up i can roll back in or take advantage of in the MM. Leaves me some portion of cash available should i choose to up my $$ into stocks/bonds in the next 0-2 years as I'm mostly on the sidelines as I am just getting started with tax advantaged 401k and IRA this year.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Wed Nov 21, 2018 10:15 am

Kevin M wrote:
Tue Nov 20, 2018 6:45 pm
The CUSIPs are different. The CUSIP for the 11/23/2018 issue is 912796QH5, while the CUSIP for the one issued 5/24/2018 is 912796QK8.
The 5/24/18 bill QK8 is a 26 week bill. We are looking for a 52 week bill that will mature on the same date as the 26 week bill just auctioned. That 52 week bill is 912796QH5 maturing May 23, 2019 per the announcement.

The 11/19/18 26 week bill is 912796QH5 maturing May 23, 2019 with an issue date of November 23, 2018
but an original issue date of May 24, 2018.

The bid sheet from Schwab for a 26 week bill is the QH5. It shows a dated date and first settlement date of 5/24/18 and a maturity date of 05/23/2019.

So the auction appears to be a reissue which explains why you have a T-1 settlement if purchased on the secondary market and a slightly longer settlement date if you bought at auction.

Discrepancy resolved?
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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Wed Nov 21, 2018 3:12 pm

Doc wrote:
Wed Nov 21, 2018 10:15 am
Kevin M wrote:
Tue Nov 20, 2018 6:45 pm
The CUSIPs are different. The CUSIP for the 11/23/2018 issue is 912796QH5, while the CUSIP for the one issued 5/24/2018 is 912796QK8.
The 5/24/18 bill QK8 is a 26 week bill. We are looking for a 52 week bill that will mature on the same date as the 26 week bill just auctioned. That 52 week bill is 912796QH5 maturing May 23, 2019 per the announcement.

The 11/19/18 26 week bill is 912796QH5 maturing May 23, 2019 with an issue date of November 23, 2018
but an original issue date of May 24, 2018.

The bid sheet from Schwab for a 26 week bill is the QH5. It shows a dated date and first settlement date of 5/24/18 and a maturity date of 05/23/2019.

So the auction appears to be a reissue which explains why you have a T-1 settlement if purchased on the secondary market and a slightly longer settlement date if you bought at auction.

Discrepancy resolved?
Yes, this explains it. Good sleuthing. I didn't think of looking at the 52-week bill issued about six months ago, but that's it.

For those that might care, the site I use to see all the Treasury auction details is https://www.treasurydirect.gov/instit/a ... esults.htm. Under Announcements and Results by Auction Year, leave 2018 selected as the year. Expand Bill, then expand Term: 26-week. The one I bought currently is second in the list, with announcement date 11/15/2018, auction date 11/29/2018, CUSIP 912796QH5. Then if you expand Term: 52-week, you'll see the same CUSIP for announcement date 5/17/2018, auction date 5/22/2018.

If you open up the PDF files for the announcements or competitive results, you can see that they both have the same maturity date.

So what I bought was what was originally the 52-week bill, but that has been "reissued" as a 26-week bill, and is why I was able to buy it on the secondary market with a settlement date of 11/21 instead of the auction settlement date of 11/23.

Kevin
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Re: Prime MM vs 6-month Treasury in IRA

Post by ofckrupke » Wed Nov 21, 2018 4:29 pm

Kevin M wrote:
Wed Nov 21, 2018 3:12 pm
For those that might care, the site I use to see all the Treasury auction details is https://www.treasurydirect.gov/instit/a ... esults.htm. Under Announcements and Results by Auction Year, leave 2018 selected as the year. Expand Bill, then expand Term: 26-week. The one I bought currently is second in the list, with announcement date 11/15/2018, auction date 11/29/2018, CUSIP 912796QH5. Then if you expand Term: 52-week, you'll see the same CUSIP for announcement date 5/17/2018, auction date 5/22/2018.

If you open up the PDF files for the announcements or competitive results, you can see that they both have the same maturity date.
If a 26-week bill is to be a re-issue, an original issue date will also be listed in its auction announcement (alternative to looking six months back in the auction calendar for a matching 52-week CUSIP).
For 26-week bills this happens every fourth week (the periodicity of auctions for 52-week bills); contrarily, every 13-week t-bill auction should be a re-issue of an existing 26-week or 52-week bill.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Wed Nov 21, 2018 5:27 pm

Kevin M wrote:
Wed Nov 21, 2018 3:12 pm
Yes, this explains it. Good sleuthing. I didn't think of looking at the 52-week bill issued about six months ago, but that's it.
I didn't look either. As ofckrupke noted the current auction announcement has the info.

A coupon bond is a little different. The Treasury won't know if the auction will produce a coupon that is the same as another previously issued security. In that case the new auction will be changed to a reopening. The Treasury gives a heads up a few days before the auction alerting that it could become a reopening.

Then there are also scheduled reopening for some longer issues that aren't auction as frequently.
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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Wed Nov 21, 2018 7:15 pm

ofckrupke wrote:
Wed Nov 21, 2018 4:29 pm
If a 26-week bill is to be a re-issue, an original issue date will also be listed in its auction announcement <snip>
Yes, this was established several posts before ...
(alternative to looking six months back in the auction calendar for a matching 52-week CUSIP).
... Doc finally mentioned that it would be a re-issue of a 52-week bill. Before that, it was clear that it was a reissue, but what wasn't clear was a reissue of what.
For 26-week bills this happens every fourth week (the periodicity of auctions for 52-week bills); contrarily, every 13-week t-bill auction should be a re-issue of an existing 26-week or 52-week bill.
Thanks for explaining that. Without knowing any of this, I was just following Doc's explanation, and looking at the announcement of the 52-week bill verified it for my own understanding.

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Re: Prime MM vs 6-month Treasury in IRA

Post by ofckrupke » Wed Nov 21, 2018 7:38 pm

Kevin M wrote:
Wed Nov 21, 2018 7:15 pm
ofckrupke wrote:
Wed Nov 21, 2018 4:29 pm
(alternative to looking six months back in the auction calendar for a matching 52-week CUSIP).
... Doc finally mentioned that it would be a re-issue of a 52-week bill. Before that, it was clear that it was a reissue, but what wasn't clear was a reissue of what.
But what else could it be? It had to be something with the same (zero) coupon and maturity date - from an earlier auction therefore originally longer than 26-week - and 52-week are the only zeros offered at auction longer than 26-week (STRIPs are post-auction creations).

Edit to add: until today I believed the yield comparison calculations for numbers you presented upthread should be figured using purchase date (secondary) and issue date (auction) for these two acquisitions, rather than settlement dates. But YIELDDISC() does agree with your #s when using the 21st and 23rd....and now following consultation w/ (internet) authority I see settlement dates is correct. Thank you for helping me find my way to the path. Now on to correcting my worksheet....

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Wed Nov 21, 2018 10:36 pm

ofckrupke wrote:
Wed Nov 21, 2018 7:38 pm
Kevin M wrote:
Wed Nov 21, 2018 7:15 pm
ofckrupke wrote:
Wed Nov 21, 2018 4:29 pm
(alternative to looking six months back in the auction calendar for a matching 52-week CUSIP).
... Doc finally mentioned that it would be a re-issue of a 52-week bill. Before that, it was clear that it was a reissue, but what wasn't clear was a reissue of what.
But what else could it be? It had to be something with the same (zero) coupon and maturity date - from an earlier auction therefore originally longer than 26-week - and 52-week are the only zeros offered at auction longer than 26-week (STRIPs are post-auction creations).
I obviously didn't figure it out myself. Guess I'm not as smart as I thought I was--or maybe it's just age.
Edit to add: until today I believed the yield comparison calculations for numbers you presented upthread should be figured using purchase date (secondary) and issue date (auction) for these two acquisitions, rather than settlement dates. But YIELDDISC() does agree with your #s when using the 21st and 23rd....and now following consultation w/ (internet) authority I see settlement dates is correct. Thank you for helping me find my way to the path. Now on to correcting my worksheet....
Well at least this is something I've understood for a long time :wink:

It's right in the parameter name of the YIELD functions.

Code: Select all

YIELDDISC(settlement, maturity, price, redemption, [day_count_convention])

YIELD(settlement, maturity, rate, price, redemption, frequency, [day_count_convention])

settlement
The settlement date of the security, the date after issuance when the security is delivered to the buyer.
As an aside, it's sometimes hard to get the spreadsheet YIELD function to come up with exactly the same yield displayed by a broker. I've even seen Fidelity and Vanguard display the exact same price but a slightly different yield, but maybe that was for CDs. Or it could be that their price actually is slightly different in a decimal place beyond what is displayed.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Thu Nov 22, 2018 9:03 am

Kevin M wrote:
Wed Nov 21, 2018 10:36 pm
As an aside, it's sometimes hard to get the spreadsheet YIELD function to come up with exactly the same yield displayed by a broker. I've even seen Fidelity and Vanguard display the exact same price but a slightly different yield, but maybe that was for CDs. Or it could be that their price actually is slightly different in a decimal place beyond what is displayed.
Not something I worry about but is it possibly due to a different way they handle the accrued interest?
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Re: Prime MM vs 6-month Treasury in IRA

Post by grayfox » Thu Nov 22, 2018 9:22 am

Kevin M wrote:
Sat Nov 17, 2018 9:14 pm
I was thinking of entering an order in an IRA for some 6-month Treasury bills at the auction that closes on Monday. Vanguard is showing the estimated yield for the 6-month at about 2.51%, while Prime MM SEC yield now is 2.25%. Odds are pretty good that the Fed will increase the federal funds rate (FFR) target by 25 basis points in December, and this chart shows Prime MM yield compared to the effective FFR (EFFR) since December 2015.

Image

This indicates that if the Fed does increase the FFR target as expected, Prime MM should hit 2.5% in a month or two, and perhaps keep climbing if odds look decent of another FFR increase in Q1 of 2019.

Note though that the odds of an FFR increase have dropped from about 80% to about 65% in the last month: https://www.cmegroup.com/trading/intere ... fomc.html/.

Now I'm leaning toward just hanging out in Prime MM with this chunk of cash.

Kevin
What will happen is that the Fed will keep raising rates slowly until there is a recession or the stock market crashes, at which point they will cut rates to emergency lows again.

So the best thing is to stay in Prime MMF (or Federal MMF) as long as possible, and move into longer term after the rate increases are finished. Hopefully before rates are cut again.

Also, I notice PenFed has 3.30% for 5 year. 3.3 - 2.25 = +1.05 higher than FFR.
I see this chart showing FFR at 3.4% by 2020. Then maybe PenFed will offer 4.5% 5 year CD.
Image
https://fred.stlouisfed.org/graph/?g=lQEM

4+% sound like a good rate to wait for.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Doc » Thu Nov 22, 2018 11:17 am

grayfox wrote:
Thu Nov 22, 2018 9:22 am
What will happen is that the Fed will keep raising rates slowly until there is a recession or the stock market crashes, at which point they will cut rates to emergency lows again.
That indeed might happen but their intent is to get rates back to where they were historically and to work off their balance sheet so that if there is a recession or greatly increase inflation they will be in a position to try to influence the adverse effects. I don't think that there is anything in the Fed's charter that suggests that they are supposed to influence how the stock market behaves.
Section 2A. Monetary policy objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
https://www.federalreserve.gov/aboutthe ... tion2a.htm
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Re: Prime MM vs 6-month Treasury in IRA

Post by peppers » Thu Nov 22, 2018 12:39 pm

fwiw

Here's a link to the history of the Federal Fund rate going back to 1954.

https://www.macrotrends.net/2015/fed-fu ... ical-chart
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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Thu Nov 22, 2018 1:05 pm

Doc wrote:
Thu Nov 22, 2018 9:03 am
Kevin M wrote:
Wed Nov 21, 2018 10:36 pm
As an aside, it's sometimes hard to get the spreadsheet YIELD function to come up with exactly the same yield displayed by a broker. I've even seen Fidelity and Vanguard display the exact same price but a slightly different yield, but maybe that was for CDs. Or it could be that their price actually is slightly different in a decimal place beyond what is displayed.
Not something I worry about but is it possibly due to a different way they handle the accrued interest?
I think you may be referring to the day count convention, as accrued interest isn't included in a yield calculation, but the day count convention determines how the interest accrual is calculated. I've found that using day count convention = 1, which is actual/actual, gives accurate results for Treasuries in general. Some references indicate that Treasury bills use a different convention, like ACT/360, but when I change the day count convention to 2 (act/360), the yields I get don't agree with what the Treasury publishes in its auction results.

Another thing that you have to be careful with is the frequency parameter. This obviously is 2 for notes and bonds, but for bills, I've found that to get results that agree with the published Treasury auction yields, you must use 1 for terms of less than 364 days (i.e., any bills other than 52-week bills), but 2 for 52-week bills.

Along these lines, the YIELDDISC function (which I generally don't use) gives accurate results for Treasury bills other than 52-week bills, but gives inaccurate results for 52-week bills (I just checked). So YIELDDISC seems to assume frequency = 1. I believe YIELDDISC gives inaccurate results for zeros with maturities of one year or longer, but haven't investigated it thoroughly.

Finally, the Treasury uses a fairly simple yield formula for Treasury bills with maturities of less than 364 days, but a more complicated formula for 52-week Treasuries. This more complicated formula gives slightly different results than the YIELD function, but you don't see the difference out to the third decimal place, which is what is published in the auction announcements. We discussed this in a thread here not too long ago.

On the secondary market, I've found that I need to switch frequency from 1 to 2 at maturities of somewhere around nine months for zero-coupon Treasuries to get closest to the yield the broker publishes, but it's often with zero-coupon securities that my yield calculations tend to be a bit off from what is published.

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Re: Prime MM vs 6-month Treasury in IRA

Post by RAchip » Thu Nov 22, 2018 6:27 pm

I like the VG prime MMF for cash that i need fully liquid. Money in an IRA should be in longer term investments.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Fri Nov 23, 2018 2:45 pm

RAchip wrote:
Thu Nov 22, 2018 6:27 pm
I like the VG prime MMF for cash that i need fully liquid. Money in an IRA should be in longer term investments.
First, intermediate-term bond funds, as most Bogleheads probably use in their tax-advantaged accounts, may have some bonds maturing in one year or less. If one builds their own fixed-income ladder instead of or in addition to using a bond fund, what's wrong with having a rung at 6-months or even 0 months?

Next, my view is that I don't want to take extra term risk unless I'm adequately compensated. The Treasury yield curve flattens out significantly after 1-year maturity--you only get about 10 basis points of additional yield for extending maturity from 1-year to 2-year Treasuries, and only about 2 bps for extending from 2-year to 3-year. That is not adequate compensation for me.

The additional yield for extending from 0 months to 6 months is decent, but there's still a reasonable possibility that the 0-month yield will increase enough that it will outperform the 6-month Treasury over the next six months. This is what makes the decision interesting to me.

The counterargument to limiting term risk is that one takes more reinvestment risk by not extending maturity even when the yield curve is relatively flat, but I personally am more averse to term risk than reinvestment risk, so I choose to stay short term with new cash (while continuing to hold my intermediate-term bond funds, both in taxable and tax-advantaged accounts). The latter provides some hedge against reinvestment risk.

Finally, just because it's in an IRA doesn't mean that my investment horizon is as long as yours. Granted, it's still fairly long, but one of the accounts I mentioned was for my step-father, whose investment horizon is only a few years. Why should he hold only longer-term investments in his IRA?

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Re: Prime MM vs 6-month Treasury in IRA

Post by Arby » Fri Nov 23, 2018 3:06 pm

2.25% is a nice yield. I can't find a money market fund at Fidelity close to 2.25%. Am I missing something?

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Re: Prime MM vs 6-month Treasury in IRA

Post by vwgrrc » Fri Nov 23, 2018 3:24 pm

A dumb question and a bit off topic - the yield from Prime MM would only realize if one hold it at the "record date", which is normally the last trading date of a month? As an extreme example, one can put money in savings account during the month and earn interest there then move it to Prime MM by the end of the month just to receive the dividend?

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Re: Prime MM vs 6-month Treasury in IRA

Post by indexonlyplease » Fri Nov 23, 2018 4:02 pm

I can put my cash in the Prime MM at Vanguard at a yeild of 2.28% and be able to get my money out any time with no penalties and best it's really easy to get money in and out. Also, I know what the yeild is when I place it in. Also, yeild keeps going up. Not sure it is worth buying the Treasury bills. Especially when someone does not pay state tax.

I like that. Can't get any more simple than that.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Fri Nov 23, 2018 4:43 pm

Arby wrote:
Fri Nov 23, 2018 3:06 pm
2.25% is a nice yield. I can't find a money market fund at Fidelity close to 2.25%. Am I missing something?
Nope, Fidelity MM funds are consistently lower-yielding than comparable Vanguard funds, due to higher expenses.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Fri Nov 23, 2018 4:44 pm

vwgrrc wrote:
Fri Nov 23, 2018 3:24 pm
A dumb question and a bit off topic - the yield from Prime MM would only realize if one hold it at the "record date", which is normally the last trading date of a month? As an extreme example, one can put money in savings account during the month and earn interest there then move it to Prime MM by the end of the month just to receive the dividend?
No. Interest is accrued daily, so you earn interest on money for whatever days you have that money in the fund.

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Re: Prime MM vs 6-month Treasury in IRA

Post by anthonyphamy » Fri Nov 23, 2018 4:48 pm

I’ve read on some posts the arguments of vanguard prime money market fund vs federal money market fund but still haven’t been able to come to a consensus. Recommendations?

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Re: Prime MM vs 6-month Treasury in IRA

Post by Gadget » Fri Nov 23, 2018 6:50 pm

Kevin M wrote:
Fri Nov 23, 2018 4:43 pm
Arby wrote:
Fri Nov 23, 2018 3:06 pm
2.25% is a nice yield. I can't find a money market fund at Fidelity close to 2.25%. Am I missing something?
Nope, Fidelity MM funds are consistently lower-yielding than comparable Vanguard funds, due to higher expenses.

Kevin
FZDXX is at 2.11 but requires an initial 100k investment. Obviously not as good, but it's close for a few people who can do that.

https://fundresearch.fidelity.com/mutua ... /31617H805

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Fri Nov 23, 2018 7:50 pm

anthonyphamy wrote:
Fri Nov 23, 2018 4:48 pm
I’ve read on some posts the arguments of vanguard prime money market fund vs federal money market fund but still haven’t been able to come to a consensus. Recommendations?
This is off topic, but there is no consensus. Federal MM is a bit safer and yield is a bit lower, but may be partially exempt from state taxes. Prime MM is safe enough for me in the current economic climate, and since I'm not going to keep a huge amount in it.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Fri Nov 23, 2018 7:51 pm

Gadget wrote:
Fri Nov 23, 2018 6:50 pm
Kevin M wrote:
Fri Nov 23, 2018 4:43 pm
Arby wrote:
Fri Nov 23, 2018 3:06 pm
2.25% is a nice yield. I can't find a money market fund at Fidelity close to 2.25%. Am I missing something?
Nope, Fidelity MM funds are consistently lower-yielding than comparable Vanguard funds, due to higher expenses.

Kevin
FZDXX is at 2.11 but requires an initial 100k investment. Obviously not as good, but it's close for a few people who can do that.

https://fundresearch.fidelity.com/mutua ... /31617H805
Yeah, that's the best you can do at Fidelity, but I wouldn't call it comparable to Prime MM with a $3K initial investment.

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Re: Prime MM vs 6-month Treasury in IRA

Post by indexonlyplease » Fri Nov 23, 2018 9:08 pm

Kevin M wrote:
Fri Nov 23, 2018 7:50 pm
anthonyphamy wrote:
Fri Nov 23, 2018 4:48 pm
I’ve read on some posts the arguments of vanguard prime money market fund vs federal money market fund but still haven’t been able to come to a consensus. Recommendations?
This is off topic, but there is no consensus. Federal MM is a bit safer and yield is a bit lower, but may be partially exempt from state taxes. Prime MM is safe enough for me in the current economic climate, and since I'm not going to keep a huge amount in it.

Kevin
What would make Vanguard Prime MM risky?

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Re: Prime MM vs 6-month Treasury in IRA

Post by vwgrrc » Fri Nov 23, 2018 11:30 pm

indexonlyplease wrote:
Fri Nov 23, 2018 9:08 pm
Kevin M wrote:
Fri Nov 23, 2018 7:50 pm
anthonyphamy wrote:
Fri Nov 23, 2018 4:48 pm
I’ve read on some posts the arguments of vanguard prime money market fund vs federal money market fund but still haven’t been able to come to a consensus. Recommendations?
This is off topic, but there is no consensus. Federal MM is a bit safer and yield is a bit lower, but may be partially exempt from state taxes. Prime MM is safe enough for me in the current economic climate, and since I'm not going to keep a huge amount in it.

Kevin
What would make Vanguard Prime MM risky?
As someone explained above, it may lockdown temporarily in a sever downturn. But i doubt we could see that happens anytime soon. Did it lock in 2018?

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Re: Prime MM vs 6-month Treasury in IRA

Post by Scooter57 » Sat Nov 24, 2018 9:39 am

The Vanguard Prime Money Market Fund went through 2008 with no problems.

It also holds a certain percentage of Federal holdings exempt from state taxes which are reported every year by Vanguard on a separate sheet that comes with your tax information. At times that percentage has been significant.

Factoring in some Federal holdings the Prime Money Market Fund is a better choice for someone in Massachusetts where the state tax is currently 5.1% no matter what your income.

After all these years of hearing Massachusetts called "Taxachusetts" I was pleasantly surprised, when I went looking to see if other states would be more favorable for retirement, to learn that our state tax is much better than that in many other states and that even our property taxes, about which people constantly complain, are lower than they would be in quite a few other states, too. NH which prides itself on having no state tax has a 6% tax on investment income and many towns there have horrendous property taxes most of which are no longer deductible thanks to the Trump tax act. Our property taxes include garbage pickup, decent road maintenance, excellent public libraries, and access to many social services which will make old age easier to deal with.

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Re: Prime MM vs 6-month Treasury in IRA

Post by Arby » Sat Nov 24, 2018 3:28 pm

For the auction of 6 month Treasuries on Monday, November 26th, which was announced on November 21st, the Fidelity website shows an expected yield of 2.45% with no fee to buy.

The Treasury website shows the yield on November 21st is 2,52%.

What accounts for the 7 basis point differential? Is it a Fidelity markup or some other factor?

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Re: Prime MM vs 6-month Treasury in IRA

Post by Kevin M » Sat Nov 24, 2018 4:30 pm

Arby wrote:
Sat Nov 24, 2018 3:28 pm
For the auction of 6 month Treasuries on Monday, November 26th, which was announced on November 21st, the Fidelity website shows an expected yield of 2.45% with no fee to buy.

The Treasury website shows the yield on November 21st is 2,52%.

What accounts for the 7 basis point differential? Is it a Fidelity markup or some other factor?
Vanguard is showing indicative yield of 2.531%. Their algorithms for estimating yield obviously are different.

Treasury.gov yield are based on bid quotes, and the bid yield will be a bit higher than the ask yield. I was seeing 6-month ask yield at about 2.5% on Friday.

There is no markup at Fidelity for Treasuries bought at auction. Everyone gets the same price. It doesn't matter what Fidelity is showing as estimated yield--you'll get whatever it ends up being.

Kevin
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