VRDOs - A reasonable T-bill alternative to park cash ?

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VRDOs - A reasonable T-bill alternative to park cash ?

Post by grkmec » Sun Jan 13, 2019 12:40 am

My tax bracket is 37% (fed) + 3.8% (NIIT) + 7% (CT) = 47.8%

I have a large amount of cash (>1mm) I need to keep liquid so looking for the best place to park it. I have considered:

Online Savings (Ally, Marcus, CIT) - highest I see is CIT at 2.45%
--> after tax that is 1.28%

Bank CDs - (eg. Ally has a 14 month at 2.85%)
---> after tax that is 1.49% (but I need to lock up money for 14 months)

Vanguard Treasury Money Market (VUSXX) yields 2.3%
---> after tax 1.36%

1-month T-bills yield 2.39%
---> after tax 1.41%

3-month T-bills yield 2.41%
---> after tax 1.43%

6-month T-bills yield 2.50%
---> after tax 1.48%

12-month T-bills yield 2.57%
---> after tax 1.52%

Fidelity CT Money Market (FCMXX) yields 1.21%
---> same after tax at 1.21%

So now VRDOs. I pulled up the holdings of FCMXX and it has a ton of VRDOs. FCMXX has expense ratio of 48 bps, so you can see this fund is a rip-off. I pulled all the VRDO CUSIPS and found a handful that yield <1.5%

207900BT7 (1.55%)
76252PJC4 (1.54%)
20774UG90 (1.53%)
207900BU4 (1.50%)

Assuming I can buy/sell these VRDO's commission free, they seem like a decent alternative to T-bills. The big difference of course is that T-bills are the gold standard, but to get into the 1.50% after tax zip code I am looking at close to 1yr maturity. On the other hand, the VRDOs have weekly coupon resets and I can "put" security at par to LOC provider if all hell breaks loose.

So, do you think VRDOs are worth tinkering with? Or should I just stick with T-bill ladders?

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Re: VRDOs - A reasonable T-bill alternative to park cash ?

Post by whodidntante » Sun Jan 13, 2019 12:46 am

Probably stick with T-bills, but I also like to look under rocks. It's tough to beat the liquidity of a T-bill, especially during a crazy market day/week/year. What kind of spreads do VRDOs have? How do they trade during a crisis? And are you comfortable with the risk of default, even if it's low?

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