Selling Treasuries before maturity

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Kevin M
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Selling Treasuries before maturity

Post by Kevin M » Tue Jul 10, 2018 7:54 pm

In a fairly recent thread that started off discussing the latest CIT money market account rate, Treasury bills were raised as an alternative to money market accounts or savings accounts, which led to a discussion about liquidity. Some people seem to consider only trading costs as a liquidity factor, while others also include possible loss of value due to increases in interest rates. I'm in the latter camp.

In that thread, I went through some hypothetical scenarios to illustrate the impacts of bid/ask spread and possible loss due to rising rates. Subsequently, I did an analysis of a Treasury note I actually own, but thought that it would be better to present it here, rather than continue to diverge further from the original post of that thread.

I bought 10 notes (face value $10,000) on 2/27/2018, maturing 10/31/2019, with a yield (to maturity) of 2.166%. Assuming I had sold them on 7/2/2018 (the day I did the analysis), my internal rate of return would have been 0.888%, or 1.29 percentage points less than my original yield. The bid/ask spread for this relatively small quantity was about 15 basis points (0.15 percentage points), so most of the shortfall was due to higher yields since I bought the note.

For a quantity of 400, ($400K face value), the bid/ask spread was only about 3.5 basis points. Assuming the same difference in bid/ask spreads for small quantity vs. large quantity on the purchase, the IRR for a quantity of 400 would have been 1.224%, so 0.335 percentage points higher than for the smaller quantity, but still 0.953 percentage points less than the original yield. Again, the loss due to the increase in yields was much more significant than the bid/ask spread.

For smaller quantities, one can think in terms of a large-quantity/small-quantity spread in addition to a bid/ask spread. This might be a useful way to think about it if you buy at auction, in which case you get the large-quantity price on the purchase, but the small-quantity price on the sale. In this case, the large-quantity/small-quantity spread was about 11.5 basis points--15 bps bid/ask for the small quantity minus 3.5 bps bid/ask for the large quantity. If you get large-quantity pricing on the purchase, then only the large-quantity/small-quantity spread on the bid price impacts your return, so about half of the 11.5 basis point total, or about 5.75 basis points.

Kevin
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patrick013
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Re: Selling Treasuries before maturity

Post by patrick013 » Tue Jul 10, 2018 8:26 pm

The estimated auction rates are posted in Barron's
every week based on the bids rec'd so far for that term,
yield, and auction date. Might help to decide if one
wanted to jump into the auction or not.
age in bonds, buy-and-hold, 10 year business cycle

ThriftyPhD
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Re: Selling Treasuries before maturity

Post by ThriftyPhD » Tue Jul 10, 2018 8:48 pm

To be fair, the original suggestion was for a 6 month (26 week) T-bill. You have a 20 month T-note, which I assume you bought on the secondary market since Treasury Direct only sells 2, 3, 5, 7, and 10 year notes. The rate risk would be a lot worse for the longer duration note.

One option with the T-bills is to do a 6 month ladder, with 1/6 of your fund maturing each month. In Treasury Direct, you can set them to reinvest until you need the money, then turn off reinvestment and have the matured bills deposited to your account.

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Re: Selling Treasuries before maturity

Post by stlutz » Tue Jul 10, 2018 11:27 pm

The bid/ask spread for this relatively small quantity was about 15 basis points (0.15 percentage points
Was this during trading hours? I've noticed that quoted spreads on Fidelity are smaller during trading hours than if I look in the evening--generally about 8 basis points for small lots. But those have been for notes with 3-10 years left to maturity as well.

I've also noticed (and others have confirmed), that Schwab quotes smaller spreads than Fidelity does.

grok87
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Re: Selling Treasuries before maturity

Post by grok87 » Wed Jul 11, 2018 3:55 am

Fidelity usually has worse spreads than vanguard
Keep calm and Boglehead on. KCBO.

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jeffyscott
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Re: Selling Treasuries before maturity

Post by jeffyscott » Wed Jul 11, 2018 9:33 am

ThriftyPhD wrote:
Tue Jul 10, 2018 8:48 pm
One option with the T-bills is to do a 6 month ladder, with 1/6 of your fund maturing each month. In Treasury Direct, you can set them to reinvest until you need the money, then turn off reinvestment and have the matured bills deposited to your account.
How many days prior to the reinvestment date do you need to turn it off, if you decide you want the cash?
press on, regardless - John C. Bogle

ThriftyPhD
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Re: Selling Treasuries before maturity

Post by ThriftyPhD » Wed Jul 11, 2018 5:33 pm

jeffyscott wrote:
Wed Jul 11, 2018 9:33 am
ThriftyPhD wrote:
Tue Jul 10, 2018 8:48 pm
One option with the T-bills is to do a 6 month ladder, with 1/6 of your fund maturing each month. In Treasury Direct, you can set them to reinvest until you need the money, then turn off reinvestment and have the matured bills deposited to your account.
How many days prior to the reinvestment date do you need to turn it off, if you decide you want the cash?
Four days before maturity.

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Kevin M
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Re: Selling Treasuries before maturity

Post by Kevin M » Wed Jul 11, 2018 5:45 pm

stlutz wrote:
Tue Jul 10, 2018 11:27 pm
The bid/ask spread for this relatively small quantity was about 15 basis points (0.15 percentage points
Was this during trading hours? I've noticed that quoted spreads on Fidelity are smaller during trading hours than if I look in the evening--generally about 8 basis points for small lots. But those have been for notes with 3-10 years left to maturity as well.
Thanks for sharing this. Don't remember if market was open when I did the original analysis, but I checked today when it was, and small-quantity bid/ask was 8.2 basis points, so consistent with your observation. Large-quantity bid/ask was 3.6 bps at the time.
I've also noticed (and others have confirmed), that Schwab quotes smaller spreads than Fidelity does.
It's also been shared that Schwab seems to offer best Treasury pricing on small quantities--just the opposite of Fidelity (and I think Vanguard too).

Kevin
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stlutz
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Re: Selling Treasuries before maturity

Post by stlutz » Wed Jul 11, 2018 6:47 pm

It's also been shared that Schwab seems to offer best Treasury pricing on small quantities--just the opposite of Fidelity (and I think Vanguard too).
And I've given some friendly feedback to Fidelity about the matter... :P

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jeffyscott
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Re: Selling Treasuries before maturity

Post by jeffyscott » Wed Jul 11, 2018 7:07 pm

ThriftyPhD wrote:
Tue Jul 10, 2018 8:48 pm
Four days before maturity.
Thanks
press on, regardless - John C. Bogle

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Doc
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Re: Selling Treasuries before maturity

Post by Doc » Thu Jul 12, 2018 6:30 am

Regarding spreads:

In general a qty of 25 usually gets you very close to the best bid/ask. Recenty at Schwab qty with min of 10 have had better still. These are from Schwab's inventory and have a max amount too small for large investors.

Don't bother looking outside of market hours. Use WSJ data site instead which will at least get you the "correct" yield if not the spread.

I always look at two brokers before placing any order to pick up any anomolies.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

carguyny
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Re: Selling Treasuries before maturity

Post by carguyny » Thu Jul 12, 2018 9:17 am

Spreads on Interactive Brokers are much more reasonable, but you pay a very small commission. Fidelity, Vanguard and Schwab are making their money in the spreads. Commission is $5, but it gets you north of $250k in bonds for $5. (0.002 cents per Bond).

Right now I don't see a spread wider than 1.4 cents on any of my holdings with a 1 bond transaction minimum. Most are closer to 0.3 cents (e.g. bid 99.519 ask: 99.522)

I also use IB for Muni bonds - paid $10 for 50 bonds yesterday vs $50 at my other brokerages.

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