Chesterfield wrote: ↑
Fri Oct 12, 2018 10:32 pm
1) Why (or in which ways) does 6 month Treasury have much better liquidity than say 7 month NWFCU CD?
If you want/need to liquidate before maturity, you pay an early withdrawal penalty (EWP) on a direct CD. For longer-term CDs, like five years, the early withdrawal option can be a benefit, in that the EWP could be significantly less than the loss on a 5-year Treasury if yields increase enough, say in 2-3 years.
However, on a short-term CD, I think it's unlikely that rates would increase enough over a few months for this to be the case. And if rates decrease, you still take a loss on doing an early withdrawal from the CD. Hence, I don't consider the early withdrawal option a benefit on short-term CDs.
The bid/ask spread is very small for Treasuries, so the cost to sell is small. I haven't done any actual calculations, but I'd guess that you'd lose less on selling a 6-month Treasury before maturity if rates increase than you would in doing an early withdrawal from the 7-month CD. And if rates decrease, the Treasury will increase in value, unlike the CD. This could be useful, for example, for rebalancing into stocks.
2) Where & how does one buy Treasury on auction?
I buy them through a broker, but you also can buy them at Treasury Direct. A broker will have some sort of "trade fixed income", "trade bonds and CDs", or some similar choice in a menu. Once at one of the fixed income trading web pages, there will be an option to select Treasuries, then buy at auction or on secondary market. Selecting the buy at auction choice will show the Treasuries for which the auctions are open.
Each Treasury being auctioned will have a "buy" link next to it. Click that, enter the quantity (quantity 1 = $1,000 face value), then click through the screens to submit the buy order. You can do this any time between when the auction opens and when it closes, even on the weekend. Your order may show up in your order status screen, but at Vanguard it may not show up until the next trading day (happened to me last weekend).
3) What are the pros and cons between buying Treasury at auctions vs buying Treasury Index fund?
There are a number of differences, some of which are as follows.
A fund has expenses, so you will lose a few basis points to the expense ratio. For example, the ER for the Vanguard short-term Treasury Index fund Admiral shares is 7 basis points (0.07%). So on a 2-year Treasury in the fund with a yield of 2.85%, your net yield would be about 2.78%.
A fund is much simpler to manage. I think most forum members think the relatively small expense ratio of Vanguard bond funds (or low-cost bond ETFs from various providers) is worth it for the simplicity.
For Treasuries, the diversification of a fund is not really a benefit, but it is for bonds with credit risk, like corporates and munis.
With individual securities, you can optimize your fixed-income portfolio to your liking. For example, in an IRA, I would buy Treasuries out to 1-year maturity, but CDs from 1-year to 3-year maturity. In taxable, I might buy munis for some of a ladder (as I was doing some months ago), or I might buy Treasuries unless munis are providing a high enough yield premium. You also have more control over the maturities you own, but I don't think this is important to most people (it is to me though).
With individual securities you can use some of the proceeds of maturing securities (Treasuries, CDs, munis) to fund expenses--you don't necessarily have to sell anything before it matures. With a fund, it's easy to sell shares, but you're selling a bit of all maturities in the fund, and you may be selling after a significant price decline (significant as far as bonds go--nothing compared to stocks).
Of course the flip side of this is that you have to reinvest the proceeds of maturing securities if you don't use all proceeds for expenses. Fidelity offers an auto-roll feature, but this wouldn't work if you wanted to use some of the proceeds of maturing securities for expenses (at least I wouldn't think so--I've never used it).
I'm sure there are more differences. Others can chime in if they want.