Trading Treasuries (nominal and TIPS)

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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Sat Nov 12, 2022 5:24 pm
acegolfer wrote: Sat Nov 12, 2022 4:56 pm
Kevin M wrote: Sat Nov 12, 2022 4:46 pm Accrued interest is not a factor in a YTM calculation, because it's calculated on clean price. Accrued interest only factors into the net amount you pay, which is principal amount plus accrued interest.
When calculating YTM, you may not enter the accrued interest in the calculator. Yes, you enter the clean price. But the calculator will use accrued interest to calculate yield. See https://support.microsoft.com/en-us/off ... 3c9727a4fe The mathematical formula clearly shows the accrued interest both in numerator and denominator. Let me know if you can't see the accrued interest in the formula.

If one doesn't account for accrued interest, the numerator increases and denominator decreases, which incorrectly results in a higher ytm. This is what I think happened in OP's 1st example.
I understand that accrued interest is included in the cash flows used to calculate IRR, and therefore YTM. The yield of 3.921 does not seem correct, but perhaps it's part of the explanation for the difference between 2.394 (or 2.660) and 3.521 (or 3.497). I'll check it out a bit more, unless #Cruncher gets to it first.

Thanks,

Kevin
To check the sensitivity of YTM to accrued interest, I calculated yield for a bond of about six months to maturity, with settlement the day before or the day of the coupon payment. Here are the results:

Image

So, there is a slight sensitivity to accrued interest, but it's minor. I think that the key to understanding this is to note that accrued interest is small compared to price, so the factor (price + accr int) in #Cruncher's formula does not have a large impact on the result. Perhaps the effect is amplified at the shorter maturity we're discussing.
#Cruncher wrote: Sat Nov 12, 2022 10:39 pm This is a confused formula. "par" looks like a typo for price. And it is overly complicated. In standard cases it reduces to
2 * ((100 + final interest pmt) / (price + accr int) - 1) * (days in interest period / days after settlement)
This formula works in my calculations when there is no coupon payment before maturity, but not if there is one.

Image

Perhaps I am misunderstanding the formula.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by acegolfer »

Kevin M wrote: Sun Nov 13, 2022 1:28 pm Perhaps I am misunderstanding the formula.

Kevin
Yes, you missed the part that this particular closed-form formula is only applicable in the last coupon period. When there's 1 more coupon payment (as in your column B), the closed form YTM formula is a quadratic equation solution because of compounding. (A similar discussion in another thread related to T-bill investment return.)
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

acegolfer wrote: Sun Nov 13, 2022 5:26 pm
Kevin M wrote: Sun Nov 13, 2022 1:28 pm Perhaps I am misunderstanding the formula.

Kevin
Yes, you missed the part that this particular closed-form formula is only applicable in the last coupon period. When there's 1 more coupon payment (as in your column B), the closed form YTM formula is a quadratic equation solution because of compounding. (A similar discussion in another thread related to T-bill investment return.)
Got it.

So, what do you think about my example showing that maximum accrued interest has very little impact on YTM compared to no accrued interest? Can you think of a way to show it for terms of less than about six months?

I really want to get this nailed down, since if accrued interest is a significant factor in YTM, then that's news to me, and I want to understand it thoroughly.

Thanks,

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by acegolfer »

Kevin M wrote: Sun Nov 13, 2022 5:53 pm So, what do you think about my example showing that maximum accrued interest has very little impact on YTM compared to no accrued interest? Can you think of a way to show it for terms of less than about six months?

I really want to get this nailed down, since if accrued interest is a significant factor in YTM, then that's news to me, and I want to understand it thoroughly.

Thanks,

Kevin
As long as one correctly accounts for accrued interest when calculating YTM, its size will have little impact on YTM. (your example)

But if one completely ignores accrued interest, it will have a big impact on YTM. Here's a simple and dramatic example. Consider a 6% annual bond expiring in 1 month and (clean) price is $100.

Correct method: (106 - 105.5)/105.5 x 12 = 5.6872038% (same answer given by =YIELD() )

Incorrect method (ignoring $5.50 accrued interest): (106 - 100) / 100 x 12 = 72%
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Re: Trading Treasuries (nominal and TIPS)

Post by AnnetteLouisan »

I was so excited about the prospect of 4.6 percent on a one year note that I decided to go on Fidelity to buy some. I did find where to buy them thanks to the foregoing discussion. I also saw where to buy the CDs and the callable farm credit agency bond.

So I went running up to the end of the diving board, looked, and went back, since I’m not sure which to do now.

At least I know where they are in general. I’ll admit the secondary market notes are less clear to me so I’ll probably stick with new issues. I didn’t see any 4.6 percent one year notes. I’ll check Treasury Direct on Monday. In some ways their offerings seem simpler.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

acegolfer wrote: Sun Nov 13, 2022 6:19 pm
Kevin M wrote: Sun Nov 13, 2022 5:53 pm So, what do you think about my example showing that maximum accrued interest has very little impact on YTM compared to no accrued interest? Can you think of a way to show it for terms of less than about six months?

I really want to get this nailed down, since if accrued interest is a significant factor in YTM, then that's news to me, and I want to understand it thoroughly.

Thanks,

Kevin
As long as one correctly accounts for accrued interest when calculating YTM, its size will have little impact on YTM. (your example)

But if one completely ignores accrued interest, it will have a big impact on YTM. Here's a simple and dramatic example. Consider a 6% annual bond expiring in 1 month and (clean) price is $100.

Correct method: (106 - 105.5)/105.5 x 12 = 5.6872038% (same answer given by =YIELD() )

Incorrect method (ignoring $5.50 accrued interest): (106 - 100) / 100 x 12 = 72%
Right. My point was that YIELD handles it, and accrued interest doesn't explain the large yield differences we were trying to explain, which you seemed to be saying it did in your first reply on the topic.
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Re: Trading Treasuries (nominal and TIPS)

Post by LadyGeek »

New member KSUWildcat93 has a question which I've moved to a new thread. See: Should I sell BND (Total Bond Market ETF) to buy TIPS?
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Re: Trading Treasuries (nominal and TIPS)

Post by starboi »

Anyone know why the 20 year and the 30 year are inverted? Big spread.

Treasury Zeros:
20 year = 4.43%
30 year = 3.99%
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Re: Trading Treasuries (nominal and TIPS)

Post by brownogram »

starboi wrote: Sun Nov 13, 2022 9:59 pm Anyone know why the 20 year and the 30 year are inverted? Big spread.

Treasury Zeros:
20 year = 4.43%
30 year = 3.99%
https://www.bloomberg.com/news/articles ... or-traders

> The 20-year sector “tends to cheapen up when liquidity is low” because of “the lack of real money demand and participation,” according to Williams. That’s despite the fact that the U.S. Treasury Department has, since November, reduced auction sizes for the tenor even more than some of its other offerings.
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Re: Trading Treasuries (nominal and TIPS)

Post by starboi »

brownogram wrote: Sun Nov 13, 2022 10:03 pm
starboi wrote: Sun Nov 13, 2022 9:59 pm Anyone know why the 20 year and the 30 year are inverted? Big spread.

Treasury Zeros:
20 year = 4.43%
30 year = 3.99%
https://www.bloomberg.com/news/articles ... or-traders

> The 20-year sector “tends to cheapen up when liquidity is low” because of “the lack of real money demand and participation,” according to Williams. That’s despite the fact that the U.S. Treasury Department has, since November, reduced auction sizes for the tenor even more than some of its other offerings.
Thanks
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

Alkali Ike wrote: Sun Nov 13, 2022 12:23 am I have a 26 week non-competitive treasury bill at Fidelity with a maturity date of November 17 (next Thursday) which is not set up for auto-roll. If I try to purchase a newly issued bill with an auction date on Monday the 14th and a settlement date of November the 17th, will the funds from the maturing issue be used to fund the new issue ?

I'm not sure if the funds need to be settled and shown in my cash account before the new purchase can take place. A Fidelity phone rep said that this should work without having to wait for the maturing bill to show in my cash account and to contact Fidelity if the new purchase is disallowed.

If anyone has experience with the mechanics of this, I welcome your wisdom. :happy
I think this depends on whether you have a margin account. Without a margin account, the timing delay is a quirk that is handled for you automatically in the case of autoroll. But my experience is that, without a margin account, you cannot make a manual purchase without cash being available at the time of the purchase (not the time of settlement of the new purchase).

The fixed income department may be able to set the trade up for you, though. I would call the fixed income department directly and ask them. Other reps are not nearly as familiar with the vagaries of these bond settlement timing issues.
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Re: Trading Treasuries (nominal and TIPS)

Post by Alkali Ike »

Thank you MisterMister. :sharebeer
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

MisterMister wrote: Mon Nov 14, 2022 9:19 am I think this depends on whether you have a margin account. Without a margin account, the timing delay is a quirk that is handled for you automatically in the case of autoroll. But my experience is that, without a margin account, you cannot make a manual purchase without cash being available at the time of the purchase (not the time of settlement of the new purchase
It may also depend on your broker. My experience has been that if a sell trade is made prior to the buy order being placed then the buy is OK even if the sell trade settles at a later date.
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

At Vanguard, I will enter a buy order for a bond, wait until it is executed (usually immediately) then place an order for a mutual fund sale to cover the price of the bond. So far, no problem. Both trades settle the next day.
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Re: Trading Treasuries (nominal and TIPS)

Post by client9 »

Newbie question: I'm trying to place an order with $5000 on the secondary market on Fidelity for a T-Bill with maturity on 5/11/23. Ask yield 4.548% and effective yield 4.5439%. Estimated order with zero mark up and zero accrued interest $4892. I'm prob not calculating this right but comes out to 4.32% yield? What am I missing?
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Re: Trading Treasuries (nominal and TIPS)

Post by Chip Munk »

AnnetteLouisan wrote: Sun Nov 13, 2022 6:53 pmI’ll admit the secondary market notes are less clear to me so I’ll probably stick with new issues. I didn’t see any 4.6 percent one year notes. I’ll check Treasury Direct on Monday. In some ways their offerings seem simpler.
52-week T-Bills are auctioned every 28 days (+/- due to holidays). Listings appear on Fidelity on the announcement date, usually by early afternoon. The announcement date for the next 52-week T-Bill auction is Wed Nov 23, a day earlier than the usual Thursday announcement date due to Thanksgiving. The auction date is Tue Nov 29 and the settlement date is Thu Dec 1.

Fidelity pulls the listing sometime in the morning of the auction day so I always put my order in by the night before the auction day.

Fidelity's estimated yield in their treasury listings is usually on the low side, and will change a few times between when the bill is first listed and the auction date. I find the yield on the Fixed Income summary page the night before the auction provides a better estimate of what to expect from the auction: https://fixedincome.fidelity.com/ftgw/fi/FILanding

ETA: Since you are new to checking Fidelity's listings, there are two ways to find new issues for Treasuries. I prefer the first option since it provides more auction information and shows nominal Treasuries only. Starting at the Fixed Income landing page: https://fixedincome.fidelity.com/ftgw/fi/FILanding :

Option 1. Click on the Bonds tab, then on the U.S. Treasury tab (which is probably already open), click the Auction link and you will see a list of nominal Treasury auctions coming up in the next few days with columns for Expected Coupon, Maturity Date, Expected Yield, Auction Close Date, Settlement Date, Dated Date, and Attributes.

Option 2. From the Fixed Income Landing page, click on the New Issues tab, scroll down and click on Treasury, and you will see columns for Coupon/Frequency, Maturity Date, Expected Yield, Settlement Date, and Attributes but not the auction date. You will also find TIPS included in the list which can be confusing if you're only interested in nominal treasuries.
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

client9 wrote: Mon Nov 14, 2022 1:43 pm Newbie question: I'm trying to place an order with $5000 on the secondary market on Fidelity for a T-Bill with maturity on 5/11/23. Ask yield 4.548% and effective yield 4.5439%. Estimated order with zero mark up and zero accrued interest $4892. I'm prob not calculating this right but comes out to 4.32% yield? What am I missing?
Not sure where you're getting all your numbers but since this is a zero coupon <6 month bond, the formula is just this (numbers based on total cost of 4892.35, which is what I see when I preview an order for 5000):

((5000 / 4892.35) -1) x (365 / 177) = 4.537%

177 days is the time between settlement date and maturity.

The resulting yield is annualized simple interest. Not sure where you're getting the "effective yield". The ask yield depends on the purchase quantity, so you may have been looking at a quote that required a larger purchase quantity.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

MisterMister wrote: Mon Nov 14, 2022 2:49 pm
client9 wrote: Mon Nov 14, 2022 1:43 pm Newbie question: I'm trying to place an order with $5000 on the secondary market on Fidelity for a T-Bill with maturity on 5/11/23. Ask yield 4.548% and effective yield 4.5439%. Estimated order with zero mark up and zero accrued interest $4892. I'm prob not calculating this right but comes out to 4.32% yield? What am I missing?
Not sure where you're getting all your numbers but since this is a zero coupon <6 month bond, the formula is just this (numbers based on total cost of 4892.35, which is what I see when I preview an order for 5000):

((5000 / 4892.35) -1) x (365 / 177) = 4.537%

177 days is the time between settlement date and maturity.

The resulting yield is annualized simple interest. Not sure where you're getting the "effective yield". The ask yield depends on the purchase quantity, so you may have been looking at a quote that required a larger purchase quantity.
Yield for the 5/11/2023 bill at Fidelity now is 4.535 for min qty 3,000 and 4.532 for min qty 1, so you would get the 4.532% yield.

Image

Sorry for the darkness--Windows snip tool issue. When buying, look at the ask quotes on the right.

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Re: Trading Treasuries (nominal and TIPS)

Post by AnnetteLouisan »

Chip Munk wrote: Mon Nov 14, 2022 1:57 pm
AnnetteLouisan wrote: Sun Nov 13, 2022 6:53 pmI’ll admit the secondary market notes are less clear to me so I’ll probably stick with new issues. I didn’t see any 4.6 percent one year notes. I’ll check Treasury Direct on Monday. In some ways their offerings seem simpler.
52-week T-Bills are auctioned every 28 days (+/- due to holidays). Listings appear on Fidelity on the announcement date, usually by early afternoon. The announcement date for the next 52-week T-Bill auction is Wed Nov 23, a day earlier than the usual Thursday announcement date due to Thanksgiving. The auction date is Tue Nov 29 and the settlement date is Thu Dec 1.

Fidelity pulls the listing sometime in the morning of the auction day so I always put my order in by the night before the auction day.

Fidelity's estimated yield in their treasury listings is usually on the low side, and will change a few times between when the bill is first listed and the auction date. I find the yield on the Fixed Income summary page the night before the auction provides a better estimate of what to expect from the auction: https://fixedincome.fidelity.com/ftgw/fi/FILanding

ETA: Since you are new to checking Fidelity's listings, there are two ways to find new issues for Treasuries. I prefer the first option since it provides more auction information and shows nominal Treasuries only. Starting at the Fixed Income landing page: https://fixedincome.fidelity.com/ftgw/fi/FILanding :

Option 1. Click on the Bonds tab, then on the U.S. Treasury tab (which is probably already open), click the Auction link and you will see a list of nominal Treasury auctions coming up in the next few days with columns for Expected Coupon, Maturity Date, Expected Yield, Auction Close Date, Settlement Date, Dated Date, and Attributes.

Option 2. From the Fixed Income Landing page, click on the New Issues tab, scroll down and click on Treasury, and you will see columns for Coupon/Frequency, Maturity Date, Expected Yield, Settlement Date, and Attributes but not the auction date. You will also find TIPS included in the list which can be confusing if you're only interested in nominal treasuries.
Thank you, Chip!, if I may call you that.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

starboi wrote: Sun Nov 13, 2022 9:59 pm Anyone know why the 20 year and the 30 year are inverted? Big spread.

Treasury Zeros:
20 year = 4.43%
30 year = 3.99%
For some reason, there's less demand around the 20 year point causing higher yields. The Bloomberg article brownogram linked offers some insights.

The Treasury releases a refunding statement every quarter about expected issuances of their securities and expected adjustments. Their August 2022 statement says:
Treasury also anticipates decreases of $2 billion to both the new and reopened 20-year bond auction sizes starting in August. Market participant feedback in the past quarter has indicated that slightly larger reductions to 20-year bond auction sizes relative to surrounding maturities would improve the structural supply and demand balance at the tenor, but also noted that it was important to ensure benchmark liquidity size and that any adjustments be made in the context of Treasury’s regular and predictable issuance framework.
So, they reduced their 20-year auction sizes by about 10-15% and expect to maintain that level based on the table in their November statement

---

There are liquidity issues in the market this year. I'm sure we'll get more articles about it if it gets worse. I assume the higher yields around the 20 year mark that have consistently appeared over the past year is one symptom.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Thought I would share a couple of trades I've done today, and what they illustrate.

I just bought some of the 12/29/2022 Tbill in a family member's account at Vanguard. Two points.
  1. The high yield on the 12/31/2022 note was higher, but the large/small-quantity spread was huge, so min qty 1 yield was lower than for the 12/29/2022 bill.
  2. I bought two lots; the first used money in the settlement fund, but there was not enough money in the settlement fund for the second purchase. There is a Treasury in this account that matures today, but Vanguard does not show the proceeds as available to trade. I got a warning about being sure there would be settled funds to cover the purchase, but the trade was accepted and executed. This is not a margin account.
I bought some more Jan 2024 TIPS for DW and me in our Fidelity IRAs.
  1. I was interested in the Jul 2023, since the yield has increased, and the SA yield is only slightly lower than the Jan 2024. However, the large/small-quantity spread for the Jul TIPS was 6-7 basis points, while for the Jul 2023 it was 1-2 basis points, so I went with the Jan 2024 again.
  2. The seasonal adjustment currently is significant for Jan and July TIPS, but in opposite directions. Looking at just the quoted yield of 1.76% for Jul 2023, I would not have considered it compared to quoted 2.15% for Jan 2024. But, the Jul 2023 SA yield is 1.93%, compared to 1.98% for Jan 2024. If the large/small-qty spread was not so large, I might have bought July 2023.
Image

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Re: Trading Treasuries (nominal and TIPS)

Post by kalarama »

Kevin - can you comment on the significant difference in ask vs sa yields for April 2023 TIPS from your chart above?

I have been using the ask yield to make decisions on TIPS purchases as 1) for >2 yr TIPS SA adjustment is relatively minor and 2) I don't fully understand it. However, for these short term TIPS, the gap is quite large and could affect purchase decisions.

Today I bought April 2023 and April 2024 based on high ask YTM (2.2% and 2.15% respectively). Per your chart using SA yields, July 2023 and and Jan 2024 would have had higher yields.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

kalarama wrote: Tue Nov 15, 2022 5:58 pm Kevin - can you comment on the significant difference in ask vs sa yields for April 2023 TIPS from your chart above?

I have been using the ask yield to make decisions on TIPS purchases as 1) for >2 yr TIPS SA adjustment is relatively minor and 2) I don't fully understand it. However, for these short term TIPS, the gap is quite large and could affect purchase decisions.

Today I bought April 2023 and April 2024 based on high ask YTM (2.2% and 2.15% respectively). Per your chart using SA yields, July 2023 and and Jan 2024 would have had higher yields.
The magnitude of the seasonal adjustment is related to ratio of the SA factor at settlement and that at maturity (actually only the mm/dd of the maturity date). When mm/dd of settlement date = mm/dd of maturity date, the ratio of SA factors is 1.000, and the SA price = quoted price.

Consider this chart of SA factors vs reference CPI date:

Image

Now eyeball a point on the curve at about mid-November 2022. First note that it is very close to the same mm/dd in 2021.

Next, eyeball a point near mid April, the maturity mm/dd. Note that this value is quite a bit smaller than the mid-Nov value, so the SAsettle/SAmaturity ratio will be positive. The actual values are:

SAsettle = 1.00101
SAmaturity = 0.99775
SAsettle/SAmaturity = 1.00326

This is multiplied by the quoted price of 99.308 to get the SA ask price of 99.632. The latter is used to calculate the SA yield.

I use SA yield to make my purchase decisions, since I think it's meaningful. My personal interpretation of SA is that it adjusts the yield to reflect expected differences in nominal returns due to know seasonal impacts on inflation.

Others disagree, and only care about the real yield.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by AndyAndTheTuna »

What is everyone's general strategy for taking advantage of the rising rate environment? I have a chunk of short term cash that I can lock up until January 2024; I'd like to capture interest to reinvest in a 529. I'm thinking of rolling 8 week treasuries to capture rising rates; it seems to be one of the steeper points on the yield curve.

Should I go longer, shorter, etc? Hard to say without a crystal ball, I know, but 8 weeks feels right.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

AndyAndTheTuna wrote: Mon Nov 21, 2022 12:43 pm What is everyone's general strategy for taking advantage of the rising rate environment? I have a chunk of short term cash that I can lock up until January 2024; I'd like to capture interest to reinvest in a 529. I'm thinking of rolling 8 week treasuries to capture rising rates; it seems to be one of the steeper points on the yield curve.

Should I go longer, shorter, etc? Hard to say without a crystal ball, I know, but 8 weeks feels right.
The highest T-bill rates were 26 or 52 weeks at the latest auction(s):

https://www.treasurydirect.gov/auctions/upcoming/
See Auction results column.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

AndyAndTheTuna wrote: Mon Nov 21, 2022 12:43 pm What is everyone's general strategy for taking advantage of the rising rate environment? I have a chunk of short term cash that I can lock up until January 2024; I'd like to capture interest to reinvest in a 529. I'm thinking of rolling 8 week treasuries to capture rising rates; it seems to be one of the steeper points on the yield curve.

Should I go longer, shorter, etc? Hard to say without a crystal ball, I know, but 8 weeks feels right.
If you want to stick with nominal Treasuries, and you want to invest at the peak of the steepest part of the yield curve, then maybe about 3.7 months, 3/14/2023, might be a target:

Image

Yield for the 3/14/23 is 4.39%. You still pick up decent incremental yield at 5 to 6 months: yield for the 5/11/2023 is 4.59%.

I might do a ladder with rungs every month from 2m to 6m, but modify the maximum maturity to suit your taste.

I just built a ladder for a friend at 1,2,3,6,9 and 12 months.

If yields continue to increase, which they should as long as more Fed rate hikes are expected, you will benefit from rolling the shorter maturities into the higher yields. If yields decrease, you'll benefit from holding some in the longer maturities.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Mon Nov 21, 2022 1:44 pm
AndyAndTheTuna wrote: Mon Nov 21, 2022 12:43 pm What is everyone's general strategy for taking advantage of the rising rate environment? I have a chunk of short term cash that I can lock up until January 2024; I'd like to capture interest to reinvest in a 529. I'm thinking of rolling 8 week treasuries to capture rising rates; it seems to be one of the steeper points on the yield curve.

Should I go longer, shorter, etc? Hard to say without a crystal ball, I know, but 8 weeks feels right.
The highest T-bill rates were 26 or 52 weeks at the latest auction(s):

https://www.treasurydirect.gov/auctions/upcoming/
See Auction results column.
Right, but someone might not be happy with the incremental yield from 6 months to one year.

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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Mon Nov 21, 2022 1:57 pm Right, but someone might not be happy with the incremental yield from 6 months to one year.
Agreed. I am using 26 week for now. But certainly not 8 weeks.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Mon Nov 21, 2022 1:55 pm
Yield for the 3/14/23 is 4.39%. You still pick up decent incremental yield at 5 to 6 months: yield for the 5/11/2023 is 4.59%.

I just built a ladder for a friend at 1,2,3,6,9 and 12 months.

Kevin
Yield on the 4/15/23 TIPS is 2.68% real.
Are you buying 3-6 mo. nominals instead of TIPS because you are betting that inflation will be below 1.8-1.9% annualized between now and then?

By the way, if you want to lock in short term nominal rates, I noticed that Andrews FCU is offering a 7 month CD at 5% APY for new money only....another alternative you might want to know about. It is easy to join. https://www.andrewsfcu.org/Learn/Resour ... cate-Rates
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Mon Nov 21, 2022 7:37 pm
Kevin M wrote: Mon Nov 21, 2022 1:55 pm
Yield for the 3/14/23 is 4.39%. You still pick up decent incremental yield at 5 to 6 months: yield for the 5/11/2023 is 4.59%.

I just built a ladder for a friend at 1,2,3,6,9 and 12 months.

Kevin
Yield on the 4/15/23 TIPS is 2.68% real.
Are you buying 3-6 mo. nominals instead of TIPS because you are betting that inflation will be below 1.8-1.9% annualized between now and then?

By the way, if you want to lock in short term nominal rates, I noticed that Andrews FCU is offering a 7 month CD at 5% APY for new money only....another alternative you might want to know about. It is easy to join. https://www.andrewsfcu.org/Learn/Resour ... cate-Rates
We took the proceeds from his matured PSECU CD and split it about 50/50 between TIPS and nominals. For TIPS, we used the Apr and Jul 2023 and the Jan 2024.

My taxable-equivalent yield (TEY) is 4.94% for the 3/14/2023 bill I bought today at 4.35%, so not worth chasing 5%. This was my purchase (not my friend's) using proceeds from an expired box spread at Fidelity.

I have IRA CDs at Andrews now, but I need to evaluate breaking them, since they are at 3.00% APY at about 3, 8 and 9 months remaining till maturity. It would be more convenient to break these and put the proceeds into another CD at Andrews, but it wouldn't be new money, so it wouldn't work. Also, the 5% CD is capped at $100K, and I have much more than that in the IRA CDs. The yields on their other certificates are significantly less than for Treasuries of same maturities.

Thanks,

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by kalarama »

There is a TIPS maturing on 1/15/23 which has a YTM of just 0.52% on Fidelity whereas 4/15/23 TIPS has a YTM of 2.479%. I’m trying to understand the big difference between these 2 TIPS maturing just 3 months apart.

Is it due to inflation index being mostly known for 1/15/23 maturity (October CPI set December TIPS inflation index with 0.41% increase) versus still having 3.5 months of future unknown inflation adjustments for 4/15/23? Or yield difference due to another reason?

I purchased 4/15/23 TIPS due to the high real yield and now am wondering if that's what I'll actually realize if held to maturity vs if I had bought 1/15/23.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

kalarama wrote: Mon Nov 21, 2022 9:01 pm There is a TIPS maturing on 1/15/23 which has a YTM of just 0.52% on Fidelity whereas 4/15/23 TIPS has a YTM of 2.479%. I’m trying to understand the big difference between these 2 TIPS maturing just 3 months apart.

Is it due to inflation index being mostly known for 1/15/23 maturity (October CPI set December TIPS inflation index with 0.41% increase) versus still having 3.5 months of future unknown inflation adjustments for 4/15/23? Or yield difference due to another reason?

I purchased 4/15/23 TIPS due to the high real yield and now am wondering if that's what I'll actually realize if held to maturity vs if I had bought 1/15/23.
I think you basically have it right. We know the Jan 1 ref CPI (and therefore the index ratios for December) which is based on the October CPI, so there are only 15 days of unknown IR adjustments for the 1/15/2023. So this TIPS probably is primarily trading more to be competitive with nominal Treasuries maturing in mid-Jan 2023 than in relationship to other TIPS yields.

The other thing I keep in mind is that seasonal adjustments can be significant for very short-term TIPS. When I pulled quotes today, the Jan 2023 ask yield was 0.74%, which is -0.36% seasonally adjusted. The Apr 2023 yield was 2.65%, which is 1.90% seasonally adjusted (SA). I use the SA values in my purchase decisions.

I would not buy the Jan 2023 now, which means I should consider selling what I own and buying a longer maturity. I'll think some more about that tomorrow.

I have been buying the July 2023 for DW and me lately, as it's just slightly less SA yield than the Jan 2024, which is at the peak of the SA yield curve. Bought some more today.

Image

Here are my holdings as of today:

Image

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Re: Trading Treasuries (nominal and TIPS)

Post by rockstar »

Kevin M wrote: Mon Nov 21, 2022 9:16 pm
kalarama wrote: Mon Nov 21, 2022 9:01 pm There is a TIPS maturing on 1/15/23 which has a YTM of just 0.52% on Fidelity whereas 4/15/23 TIPS has a YTM of 2.479%. I’m trying to understand the big difference between these 2 TIPS maturing just 3 months apart.

Is it due to inflation index being mostly known for 1/15/23 maturity (October CPI set December TIPS inflation index with 0.41% increase) versus still having 3.5 months of future unknown inflation adjustments for 4/15/23? Or yield difference due to another reason?

I purchased 4/15/23 TIPS due to the high real yield and now am wondering if that's what I'll actually realize if held to maturity vs if I had bought 1/15/23.
I think you basically have it right. We know the Jan 1 ref CPI (and therefore the index ratios for December) which is based on the October CPI, so there are only 15 days of unknown IR adjustments for the 1/15/2023. So this TIPS probably is primarily trading more to be competitive with nominal Treasuries maturing in mid-Jan 2023 than in relationship to other TIPS yields.

The other thing I keep in mind is that seasonal adjustments can be significant for very short-term TIPS. When I pulled quotes today, the Jan 2023 ask yield was 0.74%, which is -0.36% seasonally adjusted. The Apr 2023 yield was 2.65%, which is 1.90% seasonally adjusted (SA). I use the SA values in my purchase decisions.

I would not buy the Jan 2023 now, which means I should consider selling what I own and buying a longer maturity. I'll think some more about that tomorrow.

I have been buying the July 2023 for DW and me lately, as it's just slightly less SA yield than the Jan 2024, which is at the peak of the SA yield curve. Bought some more today.

Image

Here are my holdings as of today:

Image

Kevin
The YoY comps for inflation are going to get really bad soon unless you think inflation is going even higher.

https://fred.stlouisfed.org/series/CPIAUCSL

Nov 2021 was 6.8%. And they get much worse through June 2022.
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Re: Trading Treasuries (nominal and TIPS)

Post by user9532 »

How do I turn off auto-roll on a T-bill at Fidelity? I want to reinvest it for a different duration.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

user9532 wrote: Tue Nov 22, 2022 10:06 am How do I turn off auto-roll on a T-bill at Fidelity? I want to reinvest it for a different duration.
- Call Fidelity and talk to a fixed income specialist
- Cancel the order that appears for the auction once it appears. This might be more difficult for 17 week auction most weeks (if auto roll is or becomes available for this duration), since the auction is announced on Tuesday and occurs Wednesday morning. This is occurring for the 4 and 8 week auctions this week since the auction will take place one day earlier than the usual Thursday.
- Sell bill before maturity and before the auto roll order is placed.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Mon Nov 21, 2022 9:16 pm <snip>
I would not buy the Jan 2023 now, which means I should consider selling what I own and buying a longer maturity. I'll think some more about that tomorrow.
<snip>
OK, I've done some analysis, and here's what I come up with. First, I own 100 of the Jan 2023, so I would get the best sell price (min qty 100), and I would get the best ask price for the replacement, which would be either the Apr or Jul 2023.

First I looked at it using quoted prices and yields:

Image

The net price bid/ask is 23 to 24 basis points, but I think the yield bid minus ask is more relevant for making the decision.

For the Jan 23 -> Apr 23, the total of the two bid/ask spreads is 1.09%, and the incremental yield pickup is 1.61%, so I would come out ahead I think. From the quoted yields, it appears that the Jan 23 -> Jul 23 does not come out ahead by as much.

Next, I calculated the seasonally-adjusted (SA) yields, and get this:

Image

So using SA yields, the Jan 23 -> Jul 23 has a net yield gain of 1.64% (= 2.62% - 0.98%), vs. 0.87% for Jan 23 -> Apr 23.

So it looks like selling the Jan 23 and buying the Jul 23 is the better swap, but I'd appreciate any comments before I pull the trigger on this. This is in an IRA, so no tax consequences.

Thanks,

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Kevin M wrote: Mon Nov 21, 2022 8:18 pm
protagonist wrote: Mon Nov 21, 2022 7:37 pm
Kevin M wrote: Mon Nov 21, 2022 1:55 pm
Yield for the 3/14/23 is 4.39%. You still pick up decent incremental yield at 5 to 6 months: yield for the 5/11/2023 is 4.59%.

I just built a ladder for a friend at 1,2,3,6,9 and 12 months.

Kevin
Yield on the 4/15/23 TIPS is 2.68% real.
Are you buying 3-6 mo. nominals instead of TIPS because you are betting that inflation will be below 1.8-1.9% annualized between now and then?

By the way, if you want to lock in short term nominal rates, I noticed that Andrews FCU is offering a 7 month CD at 5% APY for new money only....another alternative you might want to know about. It is easy to join. https://www.andrewsfcu.org/Learn/Resour ... cate-Rates
We took the proceeds from his matured PSECU CD and split it about 50/50 between TIPS and nominals. For TIPS, we used the Apr and Jul 2023 and the Jan 2024.

My taxable-equivalent yield (TEY) is 4.94% for the 3/14/2023 bill I bought today at 4.35%, so not worth chasing 5%. This was my purchase (not my friend's) using proceeds from an expired box spread at Fidelity.

I have IRA CDs at Andrews now, but I need to evaluate breaking them, since they are at 3.00% APY at about 3, 8 and 9 months remaining till maturity. It would be more convenient to break these and put the proceeds into another CD at Andrews, but it wouldn't be new money, so it wouldn't work. Also, the 5% CD is capped at $100K, and I have much more than that in the IRA CDs. The yields on their other certificates are significantly less than for Treasuries of same maturities.

Thanks,

Kevin
I hadn't noticed the $100K cap. I suppose it could be done if you withdrew the money and then re-deposited at Andrews...certainly not worth the hassle if you can get a 4.94% TEY. I get that.
I'm still trying to figure why you bought 50% nominals maturing around the same time as the 4/15/23 TIPS instead of all TIPS. Are you hedging your bets, in case inflation goes away between now and roughly 6 months from now? 2.68% seems like a great TIPS yield given that October inflation was about 0.4%/month. But yes, the Fed is being very aggressive.
I am not disagreeing with your choice....just interested in your logic.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Tue Nov 22, 2022 7:56 pm I hadn't noticed the $100K cap. I suppose it could be done if you withdrew the money and then re-deposited at Andrews...certainly not worth the hassle if you can get a 4.94% TEY. I get that.
I'm still trying to figure why you bought 50% nominals maturing around the same time as the 4/15/23 TIPS instead of all TIPS. Are you hedging your bets, in case inflation goes away between now and roughly 6 months from now? 2.68% seems like a great TIPS yield given that October inflation was about 0.4%/month. But yes, the Fed is being very aggressive.
I am not disagreeing with your choice....just interested in your logic.
Basically, yes. Although BEI is a better predictor of future inflation than trailing year over year inflation, it is not great. To the extent the BEI is realized, the nominals and TIPS will have about the same nominal return. If realized inflation is higher than initial BEI, TIPS will do better, and vice versa.

Today the Apr 2023 TIPS ask yield was 2.36%, but that's only 1.63% seasonally adjusted (SA), and I make my decisions based on the SA yields.

My preferred maturity now is Jul 2023, which was 2.06% ask, 2.29% SA when I pulled quotes today. This is only 10 bps below the Jan 2024 SA yield of 2.39% today. I have also bought a lot of the Jan 2024 TIPS.

Not that I care, but it has been shared on this forum that David Swensen recommends 50% each in nominals and TIPS.

As I've shared, DW and I are buying TIPS in IRAs and short-term nominal Ts in taxable, and I think that is getting us to about 50/50 for 2022 purchases.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by drzzzzz »

Lyrrad wrote: Tue Nov 22, 2022 11:07 am
user9532 wrote: Tue Nov 22, 2022 10:06 am How do I turn off auto-roll on a T-bill at Fidelity? I want to reinvest it for a different duration.
- Call Fidelity and talk to a fixed income specialist
- Cancel the order that appears for the auction once it appears. This might be more difficult for 17 week auction most weeks (if auto roll is or becomes available for this duration), since the auction is announced on Tuesday and occurs Wednesday morning. This is occurring for the 4 and 8 week auctions this week since the auction will take place one day earlier than the usual Thursday.
- Sell bill before maturity and before the auto roll order is placed.
You can call Fidelity and they will turn it off for whatever bond you want. You also will see it listed as an upcoming transaction under orders/activity and can cancel yourself there prior to the auction.
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Re: Trading Treasuries (nominal and TIPS)

Post by acegolfer »

Q on auto rolling 4-wk T-bill. Is there any gap between maturity and new purchase? Or, maturity and new purchase date are the same?
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

acegolfer wrote: Wed Nov 23, 2022 9:16 am Q on auto rolling 4-wk T-bill. Is there any gap between maturity and new purchase? Or, maturity and new purchase date are the same?
No gap if you are placing the buy yourself.

If you are using an auto roll the gap could be zero, one week, or forever depending on your brokerage.
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Re: Trading Treasuries (nominal and TIPS)

Post by user9532 »

acegolfer wrote: Wed Nov 23, 2022 9:16 am Q on auto rolling 4-wk T-bill. Is there any gap between maturity and new purchase? Or, maturity and new purchase date are the same?
My 4-wk T-bill set on auto-roll was maturing on 11/29/22. Today I called Fidelity to cancel the autoroll. But they had already placed an order for the 11/23 auction which couldn't be cancelled. So in my case there was no gap.

Thanks Lyrrad and drzzzzz for your responses above. Well, I should have called Fidelity yesterday.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

acegolfer wrote: Wed Nov 23, 2022 9:16 am Q on auto rolling 4-wk T-bill. Is there any gap between maturity and new purchase? Or, maturity and new purchase date are the same?
At Schwab there is a one week gap between maturity and issue date of the rolled security. There is no gap at Fidelity or TreasuryDirect.

I only have tried Fidelity and TreasuryDirect.

At Fidelity I think you lose access to funds between the auction and settlement/issue date, which can be an issue when bonds are using auto roll. I put my bills in a separate account for this reason. If I have non rolling bills, or I want to buy more, I transfer in $X,000 once the auction is announced, place the order and immediately transfer funds out. If I don’t transfer out before the auction, I lose access to the funds until settlement, even if I have maturing bills on the settlement date. I’m just buying 4 and 8 week bills, but I’d open another account if I wanted to roll 13 and 26 weeks, since they have different auction/settlement dates.

At TreasuryDirect you get debited on issue date, and then credited the difference between par value and the new auction price every subsequent reinvestment date.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

user9532 wrote: Wed Nov 23, 2022 11:09 am
acegolfer wrote: Wed Nov 23, 2022 9:16 am Q on auto rolling 4-wk T-bill. Is there any gap between maturity and new purchase? Or, maturity and new purchase date are the same?
My 4-wk T-bill set on auto-roll was maturing on 11/29/22. Today I called Fidelity to cancel the autoroll. But they had already placed an order for the 11/23 auction which couldn't be cancelled. So in my case there was no gap.

Thanks Lyrrad and drzzzzz for your responses above. Well, I should have called Fidelity yesterday.
Yeah, usually you can cancel the auction order online when it appears on Wednesday for a Thursday auction, but the auction was moved up this week.

I think you can sell the bill on Tuesday when the auction settles and get the funds on Wednesday. You may lose or gain a tiny bit. Perhaps you can sell later today and before Tuesday, but I’m not sure what you can do with the proceeds if the purchase hasn’t settled yet, and/or if the initial purchase hasn’t been paid for yet.
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Re: Trading Treasuries (nominal and TIPS)

Post by kalarama »

QQ: On the WSJ TIPS page, what does the "CHG" column specify? I see that it is positive when yields go down (like today), but can't figure out exactly the number refers to. I took a snapshot of the WSJ tips data on 11/22 and 11/23 and compared the bid & asked prices and yields between the two dates and I can't come up with the number in the "CHG" column.

https://www.wsj.com/market-data/bonds/tips
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

kalarama wrote: Wed Nov 23, 2022 7:13 pmOn the WSJ TIPS page, what does the "CHG" column specify?
The WSJ quotes prices in 32nd's of a point. For example, the 11/23/2022 ask price for the Feb 2052 is "69.02" = 69+2/32. On 11/22/2022 it was "67.20" = 67+20/32. [*] The 11/23 "CHG" column shows "46" meaning the price was 46 32nds higher than a day earlier:
46 = 32 * (69 - 67) + 2 - 20

* I happen to have saved a copy of the WSJ quotes from 11/22. In the past, the WSJ web page let you look up historical quotes. But now, it only shows the most recent day.
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Re: Trading Treasuries (nominal and TIPS)

Post by Iconicus »

I just bought my first TIPS just now. On Fidelity's platform, it couldn't have been simpler (I've read posts in other threads that claim otherwise). I'm starting to build a ladder to SS for when I retire mid-next year so I bought the 7/15/23. The only thing that almost tripped me up is that I wanted to buy $10k but when I entered 10 it came out to $12k so I backed off to 8 bonds. I guess I didn't take into account the 1.275 inflation factor. So, if anyone is intimidated by all the complicated technical analysis that goes on in this thread, don't think it means that the trade process is complicated. I found it to be simple.
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Re: Trading Treasuries (nominal and TIPS)

Post by Holocene »

I also purchased my first treasuries on the secondary market today at Fidelity, largely because of this thread. I decided to move my short-term cash from Ally savings to t-bills to capture the higher rates. I bought some of the 6 month bill at auction this week, but decided to buy some shorter term bills as well. Rather than wait, I bought 4 different bills on the secondary market. It was very easy once I knew what to do and the orders filled immediately. I got rates of 4.06-4.48% (2-5 month duration) on the secondary t-bills. The auction for the 26 week bill has a rate of 4.68%. I'm happy with this compared to 3% at Ally (and it was 2.75% when I decided to make the move) and will be state tax free as well. Wish I had made the move earlier.

I'm also considering moving a lot of my bond allocation from bond funds to individual TIPS in my IRA. I bought some of the 5 year at auction in October and looking to buy some more in the 2025-2029 range. I was intimidated by the secondary market for TIPS, but after reading through this thread, I feel a lot more comfortable. I'm still thinking it through, so haven't made any purchases yet. But I think having a guaranteed real return would be nice for my fixed income allocation.

I want to thank everyone who has participated in this discussion, and especially to Kevin for starting it and providing so much detail on the mechanics of trading on the secondary market and the things to look for when you do it. The screenshots from Fidelity were especially helpful to me. All of the discussion about TIPS has also really helped me to learn a lot.
Thanks everyone. :sharebeer
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Glad to hear that a few more folks have gotten comfortable buying Treasuries on the secondary market. That's the purpose of this thread!

Thanks for sharing your experiences, Holocene and Iconicus.

I slept in today, so as a left-coaster, wasn't able to buy any Treasuries today. ;-)

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Mezzinmi »

If CDs and Treasury bills are yielding the same, is there an advantage of having one over the other in a tax-deferred acct (traditional IRA)?
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