6 month Treasury Note: "Bond" or "Cash"?

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triyoda
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6 month Treasury Note: "Bond" or "Cash"?

Post by triyoda » Thu Oct 11, 2018 11:13 pm

Just curious how you would classify this investment?
No matter what you would classify this as, I would be interested in the "cross over" point, what is the threshold for an investment to be a bond? Is is based on duration, liquidity, what? Does cash imply it is immediately available? I have put about half of my cash into a ladder (6 rungs) of 6 month notes, so the note due every month would be enough to cover 1 months living expenses. I live in a high income tax state (OR) and marginally I hit the highest rate (9.9%), so the state tax free aspect of the notes is actually pretty substantial for me.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by sport » Thu Oct 11, 2018 11:32 pm

I would say that it depends on how you plan to use the note. If you plan to hold it to maturity, it would be a "bond". If you plan to sell it the next time you need some money, it would function as "cash" for you. It is the same situation for I-bonds held more than one year. You can continue to hold them as bonds for another 29 years, or you can cash them any time you need the money. So, as with many things, it all depends...

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by smectym » Fri Oct 12, 2018 12:04 am

triyoda wrote:
Thu Oct 11, 2018 11:13 pm
Just curious how you would classify this investment?
No matter what you would classify this as, I would be interested in the "cross over" point, what is the threshold for an investment to be a bond? Is is based on duration, liquidity, what? Does cash imply it is immediately available? I have put about half of my cash into a ladder (6 rungs) of 6 month notes, so the note due every month would be enough to cover 1 months living expenses. I live in a high income tax state (OR) and marginally I hit the highest rate (9.9%), so the state tax free aspect of the notes is actually pretty substantial for me.
Excellent question. To the extent one considers a treasury money market fund with a stable $1 NAV be a “cash equivalent” (and I do), note that Vanguard Treasury MMF has a weighted average maturity of only about 47 days. Doesn’t mean the funds can’t hold some 6-month securities, of course.

Let’s call the 6-month “near-cash.” But I like your ladder strategy. I too live in a high-tax state and also am loading up on treasuries.

Smectym

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Fri Oct 12, 2018 4:48 am

triyoda wrote:
Thu Oct 11, 2018 11:13 pm
Just curious how you would classify this investment?
No matter what you would classify this as, I would be interested in the "cross over" point, what is the threshold for an investment to be a bond? Is is based on duration, liquidity, what? Does cash imply it is immediately available? I have put about half of my cash into a ladder (6 rungs) of 6 month notes, so the note due every month would be enough to cover 1 months living expenses. I live in a high income tax state (OR) and marginally I hit the highest rate (9.9%), so the state tax free aspect of the notes is actually pretty substantial for me.
The formal definition of "Money Market" is up to 1 year maturity. Above that is "bond market".

I believe a bond with less than 1 year to maturity is called "money market".

The price will move around but will converge to $100 fairly rapidly.

I would treat this as part of my cash allocation. In accounting, I believe, a company would report this as "Cash and short term investments" meaning, by the definition of short term in accounting, cash within 1 year.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by welderwannabe » Fri Oct 12, 2018 7:31 am

I hold all my notes and bills to maturity...with some rare exceptions.

I consider all my bills cash. My notes I consider cash once their maturity date closes to 1 year or less.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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HueyLD
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by HueyLD » Fri Oct 12, 2018 7:40 am

As an accountant, I would define cash and cash equivalents as short-term, highly liquid investments with a maturity of three months or less at the time of purchase.

The items included as cash and cash equivalents must also be unrestricted, i.e. you cannot pledge such money as collateral for loans.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by MichCPA » Fri Oct 12, 2018 7:51 am

In practice, money market funds from VG, Fido, and Schwab have average maturities in the 40-50 day range. VG has an ultrashort bond fund with an average duration of .9 years and 63% for its bonds mature in 1 year or less. For your personal purposes you could classify a 6 mo as either one, and I wouldn't disagree with you. My personal approach follows the accounting rules, so 3 months or less is cash.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Fri Oct 12, 2018 8:02 am

HueyLD wrote:
Fri Oct 12, 2018 7:40 am
As an accountant, I would define cash and cash equivalents as short-term, highly liquid investments with a maturity of three months or less at the time of purchase.

The items included as cash and cash equivalents must also be unrestricted, i.e. you cannot pledge such money as collateral for loans.
Also, (to clarify for non-accountants) "cash and cash equivalents" would generally include ALL banking balances (savings accounts, checking accounts, CDs, etc).
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Spirit Rider » Fri Oct 12, 2018 8:23 am

As has been pointed out, there are certain precise definitions for cash equivalents:
  • Money market funds must maintain a weighted average maturity (WAM) of 60 days or less.
  • Accounting rules for businesses define them as having a maturity of three months or less.
When it comes to a personal portfolio, you have a little more leeway in defining your own cash equivalents. For myself I define it as any group of principal protected fixed income investments with an average WAM of three months or less or with liability matching to their intended use. Your rolling ladder of 6-month T-Bills meets both of my definitions. I also consider Savings Bonds held >= five years to be cash equivalents.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Call_Me_Op » Fri Oct 12, 2018 9:35 am

6 months is usually a treasury bill, not note. But this is really an arbitrary definition, as is cash versus bond. 6 months is a short-duration bond, whereas technically cash is a zero-duration bond.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by JoMoney » Fri Oct 12, 2018 12:09 pm

I see 30day Tbills frequently used as 'cash' in portfolio examples.
I consider all my bonds 'cash', it's just cash I don't have any expectation of using before maturity. In the case of bond funds, I try to keep my duration at a similar duration as that of a ladder of bonds I would be willing to hold to maturity.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Dandy » Fri Oct 12, 2018 12:44 pm

You can drive yourself crazy trying to define cash. I gave up and decided to use Principal safe, short term and intermediate term fixed income.

I define Principal Safe as Savings, Money Market, CDs, EE bonds, etc. That still creates category issues. e.g. what about a 5 year CD. It goes in Principal Safe because I will hold to maturity or at worst pay a small early withdrawal fee (which I have never done). In retirement with a large percentage of assets in fixed income this works for me. Basically, I know "no" risk, low risk and some risk as far as how my fixed income is allocated.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Artsdoctor » Fri Oct 12, 2018 3:53 pm

There have been articles and books written on this very topic. However, as an individual investor, you could do much worse than just looking on Investopedia:

https://www.investopedia.com/terms/c/ca ... alents.asp

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by nisiprius » Fri Oct 12, 2018 6:19 pm

Even the primary categories, stocks/bonds/cash are not precise and grade into each other. Preferred stocks are bond-like stocks; junks bonds are stock-like bonds. Brokered CDs are bond-like cash, United States savings bonds are cash-like bonds.

The question is always what use you plan to make of the information.

Whenever I've looked at it, the conclusion I came to is that the "distance" between stocks and bonds is far greater than the "distance" between bonds and cash. For most purposes, all that matters is the division between "stocks" and "not-stocks."

For example, if I simply run the Vanguard Nest Egg Calculator, accepting all defaults, their default portfolio is 50% stocks, 30% bonds, 20% cash, and the result is:

Image

If I now decide that some of those "bonds" were misclassified, and should have been classified as "cash," the portfolio changes to 50% stocks, 20% bonds, 30% cash, and the result is:

Image
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by joe8d » Fri Oct 12, 2018 7:30 pm

Any interest bearing debt instrument, I consider a bond.
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Kevin M
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Fri Oct 12, 2018 7:51 pm

You can define it however you want, based on the replies you're getting. For me, cash has no term risk and little-to-no credit risk. In other words, I can access it today (or at least in 2-3 business days--the time it takes to do an ACH transfer) with close to absolute certainty that I will not have lost any principal.

The "no term risk" part means maturity and duration are 0 years/months/days. So I do not consider my 6-month Treasuries to be cash.

Accepting a tiny bit of credit risk allows me to count money market funds as cash. It doesn't matter at all to me what the average maturity of the securities are in a MM fund, since the share price is maintained at $1/share; i.e., no term risk. A 30-day Treasury bill, much less a 6-month Treasury, doesn't have the same stable value component.

I could care less what the market or accounting definition of cash is. Maybe you do care though--it's a personal choice.

A CD definitely is not cash as far as I'm concerned, unless perhaps it's maturing tomorrow. If it's a direct CD, there will be an early withdrawal penalty to redeem it early. If it's a brokered CD, there is a bid/ask spread, probably quite large, as well as the term risk based on the term to maturity.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Fri Oct 12, 2018 7:54 pm

Call_Me_Op wrote:
Fri Oct 12, 2018 9:35 am
6 months is usually a treasury bill, not note.
If you buy at auction, yes. You can buy 6- month bills, notes or bonds on the secondary market.
Call_Me_Op wrote:
Fri Oct 12, 2018 9:35 am
But this is really an arbitrary definition, as is cash versus bond. 6 months is a short-duration bond, whereas technically cash is a zero-duration bond.
Exactly the way I think about it.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Artsdoctor » Fri Oct 12, 2018 7:57 pm

joe8d wrote:
Fri Oct 12, 2018 7:30 pm
Any interest bearing debt instrument, I consider a bond.
Perhaps. But how about those 10-year "bonds" which had no interest (or even had negative interest)? Those were debts but without any interest whatsoever.

https://www.barrons.com/articles/beware ... 1466173328

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by MRMN » Fri Oct 12, 2018 8:30 pm

6-months is a “bill” (re: T-bills), and I think the general term would be that it’s a debt security, not just bonds.

Sorry, not too far off my S7....bills-notes-bonds still implanted.

Bills, under 1 year, short term
Notes, 1 to 10 yrs, mid-term (“notes don’t get pregnant”)
Bonds, 15 to 30 yr, long term

....after that lecture, i’ll see myself out, now.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Sat Oct 13, 2018 11:07 am

MRMN wrote:
Fri Oct 12, 2018 8:30 pm
6-months is a “bill” (re: T-bills), and I think the general term would be that it’s a debt security, not just bonds.

Sorry, not too far off my S7....bills-notes-bonds still implanted.

Bills, under 1 year, short term
Notes, 1 to 10 yrs, mid-term (“notes don’t get pregnant”)
Bonds, 15 to 30 yr, long term

....after that lecture, i’ll see myself out, now.
Hi

I believe your definitions are at time of issue?

A T Bond is more than 10 years to maturity at time of issue. A T Note up to 10 years.

Thus a 30 year T Bond issued 25 years ago is still a T Bond whereas a 6 year T Note issued last year is still a T Bond. Even though both have 5 years to maturity.

A T Bill is a money market instrument issued w up to 1 year to maturity.

Thus a security w 6 months to go could be a T Note T Bond or T Bill.

T Bills are in any case discount instruments ie no coupon and issued at less than face value so are different than bonds.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Sat Oct 13, 2018 11:12 am

Artsdoctor wrote:
Fri Oct 12, 2018 7:57 pm
joe8d wrote:
Fri Oct 12, 2018 7:30 pm
Any interest bearing debt instrument, I consider a bond.
Perhaps. But how about those 10-year "bonds" which had no interest (or even had negative interest)? Those were debts but without any interest whatsoever.

https://www.barrons.com/articles/beware ... 1466173328
I haven't clicked thru on the article.

In Eurozone but I was not aware in US Treasury market bonds were issued w minimal coupon and at a higher price than 100 Thus giving rise to a negative nominal yield.

They did not in fact have no interest. If a bond pays no coupon and is issued at a premium to 100 it still has a yield to maturity. Say minus 1.0 per cent. But if overall interest rates are minus 2 per cent the borrower still gave something to the lender.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Sat Oct 13, 2018 11:14 am

joe8d wrote:
Fri Oct 12, 2018 7:30 pm
Any interest bearing debt instrument, I consider a bond.
That doesn't really work for instruments issued w no coupon and 1 year or less to maturity. Ie a T Bill.

Similarly you can have CDs of various maturities.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by whodidntante » Sat Oct 13, 2018 12:16 pm

T-bills are cash. But I thought politics was forbidden in our walled garden.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by NYCwriter » Sat Oct 13, 2018 2:24 pm

I'm using a short treasury floating rate etf (not interested in buying/selling FRNs). I consider it a debt instrument.

I have emergency cash split between bank and Vanguard MM. This also earns interest. VG is technically not risk-free (but the risk is small).

Cash should be about max liquidity and least risk. Cash has no duration.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Spirit Rider » Sat Oct 13, 2018 11:11 pm

NYCwriter wrote:
Sat Oct 13, 2018 2:24 pm
Cash should be about max liquidity and least risk. Cash has no duration.
That may be your definition, but is not the standard accounting or accepted portfolio definitions.

There is no requirement that the "cash" portion of a portfolio have immediate liquidity, but it should be principal protected.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by andy2012 » Sun Oct 14, 2018 9:02 am

1) Are bonds safe/principal protected?
2) Where I can find the current yield on Bonds?

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Spirit Rider » Sun Oct 14, 2018 10:49 am

1) Bonds that are marketable securities are not principal protected unless retained until maturity. Savings Bonds are principal protected.
2) It depends what type of bond and whether you are talking about yields for individual bonds or in aggregate.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Sun Oct 14, 2018 11:37 am

Spirit Rider wrote:
Sat Oct 13, 2018 11:11 pm
NYCwriter wrote:
Sat Oct 13, 2018 2:24 pm
Cash should be about max liquidity and least risk. Cash has no duration.
That may be your definition, but is not the standard accounting or accepted portfolio definitions.

There is no requirement that the "cash" portion of a portfolio have immediate liquidity, but it should be principal protected.
I don't care about "standard accounting" definitions, but what is your source for "accepted portfolio definitions"? Although I don't really care much about that either, Vanguard includes only money market funds, which meet my definition of cash (no term risk and little-to-no credit risk), as "short-term reserves" in its portfolio watch tool (the term "cash" is not used). It includes short-term Treasuries, including the 6-month Treasuries I bought at the most recent auction, (and CDs too, by the way) in the bond category.

I recall looking, and don't recall being able to find "cash" defined in my investment textbooks, which of course cover portfolio theory. Of course there are discussions about the riskless asset (typically a 1-month T-bill), and the division of financial markets into capital markets and money markets (maturity less than one year).

If you don't like to use the term "cash" for fixed income with no term risk and little-to-no credit risk, do you have a better suggestion (Vanguard uses "short-term reserves", but "cash" is more concise)? Those are important criteria for me in terms of portfolio construction and financial planning. I have no intention of selling any of my 6-month Treasuries to meet expenses in the next month or so. I call the stuff I use for that "cash".

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Sun Oct 14, 2018 12:12 pm

Kevin M wrote:
Sun Oct 14, 2018 11:37 am
I recall looking, and don't recall being able to find "cash" defined in my investment textbooks, which of course cover portfolio theory. Of course there are discussions about the riskless asset (typically a 1-month T-bill), and the division of financial markets into capital markets and money markets (maturity less than one year).
That's probably because cash isn't an investment.

Savings vehicles like checking accounts, CDs, etc. don't play much of a role in investment theory because they aren't capital assets.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Call_Me_Op » Sun Oct 14, 2018 12:31 pm

vineviz wrote:
Sun Oct 14, 2018 12:12 pm
Kevin M wrote:
Sun Oct 14, 2018 11:37 am
I recall looking, and don't recall being able to find "cash" defined in my investment textbooks, which of course cover portfolio theory. Of course there are discussions about the riskless asset (typically a 1-month T-bill), and the division of financial markets into capital markets and money markets (maturity less than one year).
That's probably because cash isn't an investment.

Savings vehicles like checking accounts, CDs, etc. don't play much of a role in investment theory because they aren't capital assets.
I would not lump CDs with checking accounts. By any definition of capital assets, I think there are CDs that effectively fit the definition.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Sun Oct 14, 2018 1:07 pm

vineviz wrote:
Sun Oct 14, 2018 12:12 pm
Kevin M wrote:
Sun Oct 14, 2018 11:37 am
I recall looking, and don't recall being able to find "cash" defined in my investment textbooks, which of course cover portfolio theory. Of course there are discussions about the riskless asset (typically a 1-month T-bill), and the division of financial markets into capital markets and money markets (maturity less than one year).
That's probably because cash isn't an investment.

Savings vehicles like checking accounts, CDs, etc. don't play much of a role in investment theory because they aren't capital assets.
That's not it. It's just that they don't use the term cash.

As you know, riskless assets are an important component of investment theory and portfolio construction. Typically short-term T-bills are used as the riskless asset in modeling (e.g., as in CAPM); there's not that much difference between a 1-month T-bill and a money market account, savings account, etc.

CDs are mentioned, but typically in the context of money markets (as opposed to capital markets), considering only maturities of one year or less. No way is a 5-year CD cash.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Sun Oct 14, 2018 1:14 pm

Kevin M wrote:
Sun Oct 14, 2018 1:07 pm
No way is a 5-year CD cash.
The FDIC doesn't agree with you on this point, thankfully.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Sun Oct 14, 2018 1:23 pm

vineviz wrote:
Sun Oct 14, 2018 1:14 pm
Kevin M wrote:
Sun Oct 14, 2018 1:07 pm
No way is a 5-year CD cash.
The FDIC doesn't agree with you on this point, thankfully.
Even if that were true, I wouldn't care what they call it. What I care about is that they insure it:
FDIC wrote:FDIC insurance covers all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA), time deposit such as a certificate of deposit (CD), or an official item issued by a bank, such as a cashier's check or money order.
Source: FDIC: What's Covered

I don't consider a time deposit account as cash, unless there is no early withdrawal penalty (as in the Ally no-penalty CD, which I do consider cash after the 6-day lock period). Of course I do consider a demand deposit account as cash.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Sun Oct 14, 2018 1:38 pm

Kevin M wrote:
Sun Oct 14, 2018 1:23 pm
I don't consider a time deposit account as cash, unless there is no early withdrawal penalty (as in the Ally no-penalty CD, which I do consider cash after the 6-day lock period).
I doubt you're alone in this: it's a common misunderstanding.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Sun Oct 14, 2018 2:31 pm

vineviz wrote:
Sun Oct 14, 2018 1:38 pm
Kevin M wrote:
Sun Oct 14, 2018 1:23 pm
I don't consider a time deposit account as cash, unless there is no early withdrawal penalty (as in the Ally no-penalty CD, which I do consider cash after the 6-day lock period).
I doubt you're alone in this: it's a common misunderstanding.
It's no misunderstanding to understand what assets are available to me with no term risk and little-to-no credit risk. What is it about this that's so hard for you to understand? Vanguard seems to understand it, although they use the term "short-term reserves"--perhaps to avoid the confusion that seems rampant about the term "cash".

"Cash" is just a convenient term I use to classify these assets. You and others are free to use the term to mean something else.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Sun Oct 14, 2018 2:45 pm

Kevin M wrote:
Sun Oct 14, 2018 2:31 pm
"Cash" is just a convenient term I use to classify these assets. You and others are free to use the term to mean something else.
If labelling non-cash instruments as "cash" helps you sleep better at night then the last thing I want to do is encourage you to change your behavior.

Others, on the other hand, will possibly benefit from knowing the actual distinction between cash instruments and capital assets. Trying to make that distinction clear is one of the ways I try to do good in the world.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Sun Oct 14, 2018 8:08 pm

vineviz wrote:
Sun Oct 14, 2018 2:45 pm
Kevin M wrote:
Sun Oct 14, 2018 2:31 pm
"Cash" is just a convenient term I use to classify these assets. You and others are free to use the term to mean something else.
If labelling non-cash instruments as "cash" helps you sleep better at night then the last thing I want to do is encourage you to change your behavior.

Others, on the other hand, will possibly benefit from knowing the actual distinction between cash instruments and capital assets. Trying to make that distinction clear is one of the ways I try to do good in the world.
You've got it backwards. You are saying that CDs are cash, so you are the one labeling non-cash instruments as cash. Misleading someone into thinking a security that can have significant term risk is cash is not doing anyone any good.

Standard finance theory uses two main risk factors to characterize fixed income: term risk and credit risk. Regardless of what we call it, a 5-year CD has term risk, while a savings account or money market fund does not. A brokered CD has term risk similar to a bond of the same maturity, so clearly is in the bond category as far as portfolio construction is concerned. A direct CD's term risk is limited on the downside by the early withdrawal penalty, and there is no upside to its term risk, so is somewhat unique in terms of fixed income, but it still has some term risk, unlike a savings account or money market fund.

The OP seems to understand that duration is a consideration in classifying fixed income as bond or cash:
triyoda wrote:
Thu Oct 11, 2018 11:13 pm
No matter what you would classify this as, I would be interested in the "cross over" point, what is the threshold for an investment to be a bond? Is is based on duration, liquidity, what? Does cash imply it is immediately available?
We've seen in various replies that maturity/duration is a key factor for most people in defining fixed-income as "cash". Apparently the accountant definition is fixed income with maturity of three months or less. That seems somewhat arbitrary, but if someone wants to consider their 3-month Treasury as cash, that's fine with me; the maturity/duration is very short, so no big harm done. Fixed income with a maturity/duration of 0 has a special place in my portfolio, and "cash" is a convenient term for it.

But we should try and understand what the OP is trying to understand:
triyoda wrote:
Thu Oct 11, 2018 11:13 pm
have put about half of my cash into a ladder (6 rungs) of 6 month notes, so the note due every month would be enough to cover 1 months living expenses. I live in a high income tax state (OR) and marginally I hit the highest rate (9.9%), so the state tax free aspect of the notes is actually pretty substantial for me.
That seems very reasonable to me, and I am doing something similar, although my ladder extends out several years. I don't call any of this cash, but does it matter?

The OP has a very specific purpose for this 6-month ladder, and I'm wondering what difference it makes to the OP what it's called. If it makes any difference to the OP, Vanguard would classify it as bonds, and so would I.

Not that it has any bearing on OP's question, but please cite your source for the misleading statement implying that the FDIC considers CDs to be cash. The FDIC doesn't insure "cash", it insures "deposits". Here is a reference: FDIC Law, Regulations, Related Acts, 2000 - Rules and Regulations, PART 330—DEPOSIT INSURANCE COVERAGE:
The insurance coverage provided by the Act and this part is based upon the ownership rights and capacities in which deposit accounts are maintained at insured depository institutions. All deposits in an insured depository institution which are maintained in the same right and capacity (by or for the benefit of a particular depositor or depositors) shall be added together and insured in accordance with this part. Deposits maintained in different rights and capacities, as recognized under this part, shall be insured separately from each other. (Example: Single ownership accounts and joint ownership accounts are insured separately from each other.)
Nowhere in these regulations does it state that the FDIC insures cash. Nowhere is it stated that CDs are cash. Savings accounts, checking accounts, and CDs are all deposit accounts, which is what the FDIC insures.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Sun Oct 14, 2018 8:33 pm

Kevin M wrote:
Sun Oct 14, 2018 8:08 pm
You've got it backwards. You are saying that CDs are cash, so you are the one labeling non-cash instruments as cash.
I thought you were content to let the rest of the world be correct as long as you were free to use whatever labels you wanted to.

CDs are, in fact, cash. They are bank deposits (it's right there in the name) and all bank deposits are cash. This isn't even controversial anywhere but on this forum.

You put $10 in the bank, you take $10 out of the bank. Because it's cash. You earn interest while the money is in bank, and maybe pay fees for not keeping the balance as high as you promised to or for taking it out sooner than you promised to. The fees and the interest are window dressing on a deposit of cash in a bank.

CDs - like every other bank deposit instrument plus some other instruments - are considered money market instruments by, well, pretty much everyone.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Mon Oct 15, 2018 5:03 am

HueyLD wrote:
Fri Oct 12, 2018 7:40 am
As an accountant, I would define cash and cash equivalents as short-term, highly liquid investments with a maturity of three months or less at the time of purchase.

The items included as cash and cash equivalents must also be unrestricted, i.e. you cannot pledge such money as collateral for loans.
So that is cash as opposed to other short term instruments? But still short term assets on the Balance Sheet?

So our Assets would show Current Assets (ie ones convertible to cash within 1 year) as Cash (liquidity within 3 months) & then another category as Short Term securities?

That 3 month rule is interesting - is it US GAAP? I am not aware of a similar definition under IFRS (but I'd have to check).

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by HueyLD » Mon Oct 15, 2018 7:17 am

Yes. In the old days, we had to do manual journal entries to reclassify some investments as cash. But investment software took care of the classification and interface with the general ledger.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Kevin M » Mon Oct 15, 2018 7:19 pm

vineviz wrote:
Sun Oct 14, 2018 8:33 pm
CDs are, in fact, cash. They are bank deposits (it's right there in the name) and all bank deposits are cash. This isn't even controversial anywhere but on this forum.
A CD is a deposit account (could be a bank or credit union), but all bank/CU deposits are not cash. Citing a credible reference would lend credibility to your posts.
vineviz wrote:
Sun Oct 14, 2018 8:33 pm
CDs - like every other bank deposit instrument plus some other instruments - are considered money market instruments by, well, pretty much everyone.
Again, incorrect. Let me show you how to cite a reference:
Money markets are used by government and corporate entities as a means for borrowing and lending in the short term, usually for assets being held for up to a year. Conversely, capital markets are more frequently used for long-term assets, which are those with maturities of greater than one year.
Source: Investopedia: Financial markets: Capital vs. Money Markets; By Kristina Zucchi, CFA

This definition of money markets vs. capital markets, which I've previously described briefly, is consistent with my investment textbooks. I would prefer to cite those as references, but everyone doesn't have access to them.

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Mon Oct 15, 2018 7:47 pm

Kevin M wrote:
Mon Oct 15, 2018 7:19 pm
This definition of money markets vs. capital markets, which I've previously described briefly, is consistent with my investment textbooks. I would prefer to cite those as references, but everyone doesn't have access to them.
Given the stubborn unteachability with which you seem to be approaching this topic I'm going to let it go unless there are other participants who wish me to carry on.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by triceratop » Mon Oct 15, 2018 8:52 pm

vineviz wrote:
Mon Oct 15, 2018 7:47 pm
Kevin M wrote:
Mon Oct 15, 2018 7:19 pm
This definition of money markets vs. capital markets, which I've previously described briefly, is consistent with my investment textbooks. I would prefer to cite those as references, but everyone doesn't have access to them.
Given the stubborn unteachability with which you seem to be approaching this topic I'm going to let it go unless there are other participants who wish me to carry on.
Given the certainty with which you've asserted your viewpoints I would like to see a reference. You stated that all deposits are cash and that it is synonymous with FDIC insurance, but I don't see the equivalence as at all true since there are two dimensions to fixed income and FDIC insurance only covers risk in one axis.
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by J295 » Mon Oct 15, 2018 9:26 pm

Coming in here late after the linguistics argument

We only have four asset allocations: equity, bonds, cash, alternatives.

If I had a six month treasury note, I would lump it under our cash. Then I wouldn’t worry about it anymore, and go play golf

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by vineviz » Mon Oct 15, 2018 10:14 pm

triceratop wrote:
Mon Oct 15, 2018 8:52 pm
Given the certainty with which you've asserted your viewpoints I would like to see a reference. You stated that all deposits are cash and that it is synonymous with FDIC insurance, but I don't see the equivalence as at all true since there are two dimensions to fixed income and FDIC insurance only covers risk in one axis.
One place to start would be the Federal Reserve Board which defines in Regulation T "cash equivalents" as "securities issued or guaranteed by the United States or its agencies, negotiable bank certificates of deposit, bankers acceptances issued by banking institutions in the United States and payable in the United States, or money market mutual funds." {CFR §220.2}

The FDIC includes the following in their RMS Manual of Examination policies under "cash": "Cash accounts include U.S. and foreign coin and currency on hand and transit, clearing, and cash items. Demand and time deposits maintained at correspondent banks are often known as due from accounts, or correspondent balances." https://www.fdic.gov/regulations/safety ... ion3-4.pdf {note they do not distinguish between time and demand deposits, contra to GAAP which allows firms some discretion on that count}

Likewise, the IRS considers both time and demand deposits to be cash: "The term “cash” means cash on hand, and time or demand deposits with, or withdrawable accounts in, other financial institutions." {CFR § 301.7701-13A(e)(1)}

The ICI notes the inclusion of CDs in the category of money market instruments: ".... the portfolio composition of “money market” funds is variable both in terms of the types of securities purchased and their maturities, the portfolios of such funds typically include U.S. government and government agency issues, certificates of deposit, banker’s acceptances, and commercial paper." https://www.ici.org/pdf/pub_15_valuatio ... e_vol1.pdf

Stepping back to a higher level, the fundamental distinction between the regulations of capital market assets (under the purview of the SEC) and the regulation of banking assets (under the FDIC or Federal Reserve) should be enough to illustrate the difference between a bond (capital asset, SEC) and a CD (bank account, FDIC).
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by MikeG62 » Tue Oct 16, 2018 8:13 am

Valuethinker wrote:
Mon Oct 15, 2018 5:03 am
HueyLD wrote:
Fri Oct 12, 2018 7:40 am
As an accountant, I would define cash and cash equivalents as short-term, highly liquid investments with a maturity of three months or less at the time of purchase.

The items included as cash and cash equivalents must also be unrestricted, i.e. you cannot pledge such money as collateral for loans.
So that is cash as opposed to other short term instruments? But still short term assets on the Balance Sheet?

So our Assets would show Current Assets (ie ones convertible to cash within 1 year) as Cash (liquidity within 3 months) & then another category as Short Term securities?

That 3 month rule is interesting - is it US GAAP? I am not aware of a similar definition under IFRS (but I'd have to check).
Just to add a comment on US GAAP definition. Under US GAAP, the instrument must have an original maturity (at the date of purchase) of 3 months or less to be considered a "cash equivalent".

As a retired CPA (former chief accountant for a large NYSE listed company), I think looking to the original maturity makes little common sense (there are many things in GAAP that lack common sense). For example, following US GAAP, a company that bought a 3-month Treasury on Dec 30th (maturing on or about Mar 30th) would include that in cash equivalents on their Dec 31 balance sheet, but would not include a 6-month Treasury brought on July 5th (which was scheduled to mature on our about Jan 5th). Seems ridiculous to me as the 6-month Treasury is much closer to being actual ready cash at Dec 31 than the 3-month Treasury (in my example).

So I would not use this definition. A modified version which looks at remaining term to maturity could make more sense than a strict adherence to US GAAP.

I am almost done building out a 6-month Treasury ladder and I am considering the ladder as a cash equivalent. Since it's my decision to make I can do as I please (no requirement to follow US GAAP or anyone else's opinion). :wink:
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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by Valuethinker » Tue Oct 16, 2018 9:19 am

MikeG62 wrote:
Tue Oct 16, 2018 8:13 am
Valuethinker wrote:
Mon Oct 15, 2018 5:03 am
HueyLD wrote:
Fri Oct 12, 2018 7:40 am
As an accountant, I would define cash and cash equivalents as short-term, highly liquid investments with a maturity of three months or less at the time of purchase.

The items included as cash and cash equivalents must also be unrestricted, i.e. you cannot pledge such money as collateral for loans.
So that is cash as opposed to other short term instruments? But still short term assets on the Balance Sheet?

So our Assets would show Current Assets (ie ones convertible to cash within 1 year) as Cash (liquidity within 3 months) & then another category as Short Term securities?

That 3 month rule is interesting - is it US GAAP? I am not aware of a similar definition under IFRS (but I'd have to check).
Just to add a comment on US GAAP definition. Under US GAAP, the instrument must have an original maturity (at the date of purchase) of 3 months or less to be considered a "cash equivalent".

As a retired CPA (former chief accountant for a large NYSE listed company), I think looking to the original maturity makes little common sense (there are many things in GAAP that lack common sense). For example, following US GAAP, a company that bought a 3-month Treasury on Dec 30th (maturing on or about Mar 30th) would include that in cash equivalents on their Dec 31 balance sheet, but would not include a 6-month Treasury brought on July 5th (which was scheduled to mature on our about Jan 5th). Seems ridiculous to me as the 6-month Treasury is much closer to being actual ready cash at Dec 31 than the 3-month Treasury (in my example).

So I would not use this definition. A modified version which looks at remaining term to maturity could make more sense than a strict adherence to US GAAP.

I am almost done building out a 6-month Treasury ladder and I am considering the ladder as a cash equivalent. Since it's my decision to make I can do as I please (no requirement to follow US GAAP or anyone else's opinion). :wink:
Thank you. This was very informative.

If you think US GAAP is bad, you should see IFRS ;-).

For me, if it is cash within one year then it is cash. That accords with the capital market definition of "money markets" (up to 1 year) and "capital markets" (more than 1 year). And also with the distinction between Current and Non current assets & liabilities on a balance sheet (Statement of Financial Position ;-)).

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Re: 6 month Treasury Note: "Bond" or "Cash"?

Post by triceratop » Tue Oct 16, 2018 5:03 pm

vineviz wrote:
Mon Oct 15, 2018 10:14 pm
triceratop wrote:
Mon Oct 15, 2018 8:52 pm
Given the certainty with which you've asserted your viewpoints I would like to see a reference. You stated that all deposits are cash and that it is synonymous with FDIC insurance, but I don't see the equivalence as at all true since there are two dimensions to fixed income and FDIC insurance only covers risk in one axis.
One place to start would be the Federal Reserve Board which defines in Regulation T "cash equivalents" as "securities issued or guaranteed by the United States or its agencies, negotiable bank certificates of deposit, bankers acceptances issued by banking institutions in the United States and payable in the United States, or money market mutual funds." {CFR §220.2}

The FDIC includes the following in their RMS Manual of Examination policies under "cash": "Cash accounts include U.S. and foreign coin and currency on hand and transit, clearing, and cash items. Demand and time deposits maintained at correspondent banks are often known as due from accounts, or correspondent balances." https://www.fdic.gov/regulations/safety ... ion3-4.pdf {note they do not distinguish between time and demand deposits, contra to GAAP which allows firms some discretion on that count}

Likewise, the IRS considers both time and demand deposits to be cash: "The term “cash” means cash on hand, and time or demand deposits with, or withdrawable accounts in, other financial institutions." {CFR § 301.7701-13A(e)(1)}

The ICI notes the inclusion of CDs in the category of money market instruments: ".... the portfolio composition of “money market” funds is variable both in terms of the types of securities purchased and their maturities, the portfolios of such funds typically include U.S. government and government agency issues, certificates of deposit, banker’s acceptances, and commercial paper." https://www.ici.org/pdf/pub_15_valuatio ... e_vol1.pdf

Stepping back to a higher level, the fundamental distinction between the regulations of capital market assets (under the purview of the SEC) and the regulation of banking assets (under the FDIC or Federal Reserve) should be enough to illustrate the difference between a bond (capital asset, SEC) and a CD (bank account, FDIC).
Thanks. I know it seems strange to post a one-word response of "Thanks" to all that, but I truly am thankful for the well-researched links that I can dive into and learn more. So, "Thanks". Now, to go do that!
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