Trading Treasuries (nominal and TIPS)

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Doc
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Doc wrote: Thu Feb 08, 2024 1:02 pm I've made two trades in the last month where I rolled a maturing bill.

The maturing date of the existing bill bought at auction in ROTH accounts and the trade date of the new bill are the same. But the settlement date of the new bill is the next day. NO PROBLEM.

These were not "auto roll" transactions.

In using the auto roll feature last year I was getting a delay of the new issue by one "maturing date" so I stopped doing it.

:confused
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Thu Feb 08, 2024 11:36 am <snip>
You are correct. I didn't try to do anything yesterday, but here's what happened today.
<snip>
Since I posted the reply the above snippet is from, the 10 bills bought at auction have appeared in my holdings, and the cost has been subtracted from my cash, so I now have a cash balance of -$2,862.83, and on my balances page I see this:

Image

It seems strange to me that they debit the cash account before the settlement date, unlike a purchase on secondary. This is the same thing that jeffyscott shared above. Thursday auctions with Tuesday settlement are weird at Schwab.

This is not sufficiently nasty that I will sell the required shares of SWVXX before Monday. The transaction history detail clearly shows a 2/13 settlement:

Image

However, I did sell a lesser amount of SWVXX shares for the following reason. VCSH paid a dividend on 2/6, and according to the transaction history it was reinvested on 2/7 (yesterday):

Image

So it looks like the cash to reinvest was already subtracted from my cash balance. However, in another account I manage, there also was a bond ETF dividend paid on 2/6 and reinvested on 2/7:

Image

And that account shows this on the Balances page:

Image

After a dividend is paid and before it is reinvested, the dividend amount shows on the Balances page as cash on hold. Typically I notice this, and don't try to use that cash before it's reinvested. However, in the second case above, I sold some TIPS and bought some TIPS for a bit more than the sales proceeds yesterday, and just sold enough SWVXX to cover the difference, forgetting about the cash on hold. Oops. I entered an order to sell 215.27 of SWVXX in that account.

However, in the first case above I didn't do any trades yesterday, when the dividend was reinvested, so now I'm thinking it was indeed reflected in my cash balances today. Anyway, to be on the safe side, I entered an order to sell 218.42 of SWVXX in that account.
Last edited by Kevin M on Thu Feb 08, 2024 1:39 pm, edited 1 time in total.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Thu Feb 08, 2024 1:02 pm I've made two trades in the last month where I rolled a maturing bill.

The maturing date of the existing bill bought at auction and the trade date of the new bill are the same. But the settlement date of the new bill is the next day. NO PROBLEM.

These were not "auto roll" transactions.

In using the auto roll feature last year I was getting a delay of the new issue by one "maturing date" so I stopped doing it.

:confused
This is why I want to test auto roll. If one is indeed out of 4w Ts for a week, it's useless to me.

For secondary trades, I frequently buy Treasuries the trading day before the settlement date of maturing Treasuries, since the settlement dates match up, and have never had a problem at Schwab. This doesn't mean that Schwab's auto roll works similarly. Auto roll works correctly at Fidelity, as we've discussed --auction purchase executes on auction day, and proceeds from the maturing T are used to settle the purchase on the same settlement date.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

Kevin M wrote: Thu Feb 08, 2024 1:29 pm Since I posted the reply the above snippet is from, the 10 bills bought at auction have appeared in my holdings, and the cost has been subtracted from my cash, so I now have a cash balance of -$2,862.83, and on my balances page I see this:

Image

It seems strange to me that they debit the cash account before the settlement date, unlike a purchase on secondary. This is the same thing that jeffyscott shared above. Thursday auctions with Tuesday settlement are weird at Schwab.
I had something similar since the Monday auction for bills that settled today. I ignored the large negative balance warning and everything worked out except that I couldn't buy more of the Schwab MM fund until today when the maturing bill proceeds were deposited.

I had automatic ETF dividend reinvestments in the same account that went OK (dividend paid on Tuesday and reinvested on Wednesday).
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Hi, I am trying to build my first bond ladder. I would like to build a 5 year ladder with TIPS, mostly to maintain a steady interest rate and to maintain purchasing power. I tried to use the tips ladder site, but I realized that the site is aiming to generate x amount of income each year, but I just want to divided money into 5 rungs. I seemed to have run into some issues though.

Tips appears to come in 5, 10, and 30 years only on the primary market. Not sure if it's tricky to buy secondary. Should I just fill the other rungs with nominal treasuries and just keep replacing the rung at 5 years with a new TIP until the ladder is completely TIPS?

TIPS are consider US Treasury securities, so I imagine that they are exempt from state tax. However, what about the cpi adjustment? Do we not pay state tax for the interest but pay taxes on the cpi adjustment (phantom income)?

Note that this will most likely be done from Fidelity and not Treasury direct.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Lyrrad wrote: Thu Feb 08, 2024 2:09 pm
Kevin M wrote: Thu Feb 08, 2024 1:29 pm Since I posted the reply the above snippet is from, the 10 bills bought at auction have appeared in my holdings, and the cost has been subtracted from my cash, so I now have a cash balance of -$2,862.83, and on my balances page I see this:

Image

It seems strange to me that they debit the cash account before the settlement date, unlike a purchase on secondary. This is the same thing that jeffyscott shared above. Thursday auctions with Tuesday settlement are weird at Schwab.
I had something similar since the Monday auction for bills that settled today. I ignored the large negative balance warning and everything worked out except that I couldn't buy more of the Schwab MM fund until today when the maturing bill proceeds were deposited.

I had automatic ETF dividend reinvestments in the same account that went OK (dividend paid on Tuesday and reinvested on Wednesday).
With my recent Thursday auction, where they sent a warning email, I don't believe that I got that red exclamation stop sign with the negative balance in red. As best I can recall, the only time that I saw that exact thing was the time I ended up with a violation.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Thu Feb 08, 2024 8:12 pm Hi, I am trying to build my first bond ladder. I would like to build a 5 year ladder with TIPS, mostly to maintain a steady interest rate and to maintain purchasing power. I tried to use the tips ladder site, but I realized that the site is aiming to generate x amount of income each year, but I just want to divided money into 5 rungs. I seemed to have run into some issues though.
Just divide the amount of money by 5, and use that for the desired annual real income (DARI). The amount to invest will be somewhat lower because the real yield is > 0%, so just increase it some until you get net purchase cost close to the amount you want to invest.

You can tweak your ladder more precisely using the #Cruncher TIPS ladder spreadsheet, which you can easily find with a forum search.

Example. I started with 10,000 DARI to build a 5y ladder from 2025 through 2029 with $50K. The cost is $47,902. I increased the DARI to $10,500 and the cost is $50,551. Since the minimum increment for TIPS is about $1,000, you probably can't get closer than that. You could get it to about $49,500 by just not buying one of the TIPS that is closest to $1K in cost.
gavinsiu wrote: Thu Feb 08, 2024 8:12 pmTips appears to come in 5, 10, and 30 years only on the primary market. Not sure if it's tricky to buy secondary. Should I just fill the other rungs with nominal treasuries and just keep replacing the rung at 5 years with a new TIP until the ladder is completely TIPS?
Buy on secondary. It's easy. I do it several days each week. There are tutorials that walk you through it, and we can help you.
TIPS are consider US Treasury securities, so I imagine that they are exempt from state tax. However, what about the cpi adjustment? Do we not pay state tax for the interest but pay taxes on the cpi adjustment (phantom income)?
Probably better to discuss this in Taxation of Treasury bills, notes and bonds - Bogleheads.org. The answer to your question is in the first post of the thread. If you have more questions about it, please ask in that thread.
Note that this will most likely be done from Fidelity and not Treasury direct.
Good. You can't buy TIPS on secondary from TD, and it's easy to do so at Fido.
  1. After logging in, hover mouse over News & Research in the top green banner, then click Fixed Income, Bonds & CDs.
  2. Click the Bonds tab (second tab from left).
  3. Click the TIPS (Secondary) link.
  4. Enter 12/2029 in the Maturity date "to" field. Leave the Maturity date as the default, currently 02/2024, unless you want your first TIPS to mature in 2025, in which case change it to 01/2025.
  5. Click the big blue button that says See 28 CUSIPS (assuming you entered the search dates as specified).
  6. Find a TIPS you want to buy, then click Buy at the left. Note that there are two TIPS that mature on some dates, especially January, so select the one you actually want to buy. I usually buy the one with the lower coupon.
  7. Select the account from the dropdown list.
  8. Enter the quantity.
  9. Click Preview Order
  10. Review the order, then click Place Order.
The bid/ask spreads are quite small, and you only pay half of it (the seller pays the other half). You may also pay a bit more than someone who buys a larger quantity, but these spreads also are quite small. I don't worry about it at all, especially since there's no other way to buy TIPS with maturities of less than five years, and I don't want to wait for auctions to build my ladders.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by AQ »

An interesting observation today when I looked up finance.yahoo.com. specifically I saw the trading volume for LTPZ is 52K. I placed an order with 500 shares. Does that mean my order accounts for 1% of trading volume? That would be stunning! I must misunderstand something?
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Re: Trading Treasuries (nominal and TIPS)

Post by exodusing »

AQ wrote: Fri Feb 09, 2024 10:37 am An interesting observation today when I looked up finance.yahoo.com. specifically I saw the trading volume for LTPZ is 52K. I placed an order with 500 shares. Does that mean my order accounts for 1% of trading volume? That would be stunning! I must misunderstand something?
That looks about right. Similarly https://www.nasdaq.com/market-activity/etf/ltpz

Bid/ask spread doesn't look bad.
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Thank you Kevin, I guess I was mostly concern that on the secondary market I might screw up and pay a large ask/bid spread and screwing up my return, you are saying that is unlikely. How much of spread may be too much?

The other issue is that I thought the accured interest will be too complicated, but the tax software should handle that if given the forms?

I did read that page but could not figure out if what is reported on 1099-OID would be state taxable. I am thinking for tips, there is not.

Thanks again for your help.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Fri Feb 09, 2024 11:15 am Thank you Kevin, I guess I was mostly concern that on the secondary market I might screw up and pay a large ask/bid spread and screwing up my return, you are saying that is unlikely. How much of spread may be too much?

The other issue is that I thought the accured interest will be too complicated, but the tax software should handle that if given the forms?

I did read that page but could not figure out if what is reported on 1099-OID would be state taxable. I am thinking for tips, there is not.

Thanks again for your help.
Let's discuss the tax questions in the tax thread.

Here are the bid/ask price spreads at Fidelity today for best price:

Image

So the bid/ask is about 0.05% for the maturities you're interested in, which means about 0.025% paid by the buyer. Here's an example of the calculation, using the Apr 2025 TIPS:

Ask: 97.066
Bid: 97.771

Ask/bid - 1 = 97.066/97.771 - 1 = 0.05%.

You get the same result using adjusted prices, but with those we can see the actual dollar difference:

Ask: 115.34
Bid: 115.28
Spread: 115.34/115.28 - 1 = 0.0005 = 0.05%.

Assuming you can get this price for quantity 10, the dollar difference would be 11,534 - 11,528 = $6, of which your share would be $3. But you can't get that price for quantity 10, so let's look at actual prices for quantity 10. To do that, I look at depth of book by clicking on the depth of book icon at the right of the search result row:

Image

From this we can see that we'd be using the min qty 1 quotes, and we have this:

Ask: 97.132
Bid: 96.937
Ask/bid - 1 = 97.132 / 96.937 - 1 = 0.002 = 0.2%

So it's definitely higher, with your cost about 0.1%, but still not something that would stop me from buying. However, this is the main reason I like Schwab better--their pricing for min qty 1 is as good or only slightly worse than for larger quantities. If you want to get the absolute best Treasury prices/yields, move your account to Schwab.

To get the small-quantity bid/ask in dollar terms, we must convert to adjusted prices by multiplying by the index ratio, which Fido call the inflation factor. For the Apr 2025 TIPS it's 1.18829.
Ask - Bid = 1.18829 * (97.132 - 96.937) = 0.23

So for quantity 10 that would be $23, of which you're paying half, so $11.50. Big deal? Nah. At Schwab I might save $10, and over the many purchases (and sales) I do, that adds up to low hundreds of dollars, but when we're talking investing tens or hundreds of thousands of dollars, it's peanuts in the grand scheme. Of course as a Boglehead, I care about the peanuts, :wink: , which is why I moved my accounts from Fido (and Vanguard) to Schwab.

For the record, here's the depth of book at Schwab right now:

Image

So for min qty 1, bid/ask is 97.057/97.019 - 1 = 0.00039 = 0.04%. Thanks you very much Mr. Schwab!
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Fri Feb 09, 2024 11:52 am At Schwab I might save $10, and over the many purchases (and sales) I do, that adds up to low hundreds of dollars, but when we're talking investing tens or hundreds of thousands of dollars, it's peanuts in the grand scheme. Of course as a Boglehead, I care about the peanuts, :wink: , which is why I moved my accounts from Fido (and Vanguard) to Schwab.
Hmm, so for the one-stop-shoppers, a question might be how many treasury trades does it take to offset the effective cost of Schwab's low yield checking account 🤔?

In my case, I figure that at Fidelity I would get maybe about $100 more in interest on checking. So about 10 trades of that size per year would be the break even point for me. Last year, it looks like I had 9 total (6 buy and 3 sell), so pretty much a toss-up.
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

A question about getting bonds from the secondary market, I pull up bonds maturing in 5 years

Image

This shows a huge difference in coupon and inflation rate. These are bond that drop to 5 years in maturity and could be from different time periods?
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Sorry for another quesiton. If you are starting out, are T-bills easier to deal with than TIPS? My thought was that you can probably setup a simple ladder for about 13-26 weeks. If there is a screwup, the negative effect is short term and you just make less money. Fidelity also autoroll possible. The shortest TIPS is 5 years, so you have to buy 1-4 years in secondary market and then you can't autoroll.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

gavinsiu wrote: Sat Feb 10, 2024 8:09 am This shows a huge difference in coupon and inflation rate. These are bond that drop to 5 years in maturity and could be from different time periods?
Yes, a TIPS with 5 years remaining could be newly issued or have been issued as long as 25 years ago. You can see the full list here: https://eyebonds.info/tips/tipslist_mat.html

I think if you click on a bond in the list you posted, you can also find the date it was issued (or the "dated date").
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Re: Trading Treasuries (nominal and TIPS)

Post by BBBob »

Vanguard is not posting the indicative yield for the 8/15/24 6-month T-Bill at https://personal.vanguard.com/us/FixedIncomeTrading

Does anyone know what it is, and/or why the omission?

Thanks as always.
Bob
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

You can look at what the yields are on existing treasuries that mature around the same time and/or yesterday's treasury yield curve or WSJ quotes. If it's a reissue, you can look at the current yield of the actual bill to be auctioned.

Indicative yield doesn’t really mean anything more than what current market yields are for that maturity.
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Re: Trading Treasuries (nominal and TIPS)

Post by BBBob »

Thanks for the suggestion, Jeffyscott. The predicted yields have always been so close to the final number, it never occurred to me that it could be done like that by a layman like me.
Best regards,
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Sat Feb 10, 2024 8:09 am A question about getting bonds from the secondary market, I pull up bonds maturing in 5 years

Image

This shows a huge difference in coupon and inflation rate. These are bond that drop to 5 years in maturity and could be from different time periods?
The higher the inflation factor, the longer ago it was issued, since there has been more inflation. For these, the coupons also are higher for the older TIPS, since yields were higher when they were issued.

For example, the 1/15/2029 with the 2.5% coupon was issued as a 20y TIPS in 2009, and the yield was 2.5% (same as the coupon). The 4/15/2029 with the 3.875% coupon was issued as a 30y TIPS in 1999, and the yield was 3.899%.

By contrast, the 7/15/2029 with the 0.25% coupon was issued as a 10y in 2019, and the yield was 0.282%.

I ignore the inflation factor, but I usually prefer the lower coupon, since there is less coupon reinvestment risk. Some might prefer the higher coupon for more cash flow.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Sat Feb 10, 2024 8:12 am Sorry for another quesiton. If you are starting out, are T-bills easier to deal with than TIPS? My thought was that you can probably setup a simple ladder for about 13-26 weeks. If there is a screwup, the negative effect is short term and you just make less money. Fidelity also autoroll possible. The shortest TIPS is 5 years, so you have to buy 1-4 years in secondary market and then you can't autoroll.
Nominal Treasuries and TIPS are completely different beasts. If you want to have high confidence in your after-inflation return, you want to own TIPS. If you want high confidence in your before-inflation return, buy nominal Treasuries.

There's also a huge difference in the risk/return tradeoffs of shorter term and longer term bonds. If you want to match short-term liabilities, short-term nominal Treasuries, like Tbills, are fine. If you want to match long-term, real (after inflation) liabilities, long-term TIPS are the way to go. If you want to match long-term, nominal liabilities, long-term nominal Treasuries are the ticket.

It doesn't matter which is easier to deal with, whether or not you can auto roll, or whether or not you buy on secondary or at auction. First you determine your goal, then you pick the type of bond that meets that goal.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Kevin M wrote: Sat Feb 10, 2024 4:26 pm Nominal Treasuries and TIPS are completely different beasts. If you want to have high confidence in your after-inflation return, you want to own TIPS. If you want high confidence in your before-inflation return, buy nominal Treasuries.

There's also a huge difference in the risk/return tradeoffs of shorter term and longer term bonds. If you want to match short-term liabilities, short-term nominal Treasuries, like Tbills, are fine. If you want to match long-term, real (after inflation) liabilities, long-term TIPS are the way to go. If you want to match long-term, nominal liabilities, long-term nominal Treasuries are the ticket.

It doesn't matter which is easier to deal with, whether or not you can auto roll, or whether or not you buy on secondary or at auction. First you determine your goal, then you pick the type of bond that meets that goal.
I am doing both. I have a part earmarked for unknown long term expenses that I want to maintain purchasing power so I plan to use tips and a shorter timeframe emergency cash+ that I plan to use tbills
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Re: Trading Treasuries (nominal and TIPS)

Post by hudson »

W. Bernstein said that short nominals and long TIPS were riskless. https://www.advisorperspectives.com/art ... at-age-104
I plan to do both along with a TIPS ladder to age 96. I’ll throw in some intermediate nominals including brokered or bank CDs depending on rates.

Bottom line: Hedge your bets.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Sat Feb 10, 2024 5:59 pm
Kevin M wrote: Sat Feb 10, 2024 4:26 pm Nominal Treasuries and TIPS are completely different beasts. If you want to have high confidence in your after-inflation return, you want to own TIPS. If you want high confidence in your before-inflation return, buy nominal Treasuries.

There's also a huge difference in the risk/return tradeoffs of shorter term and longer term bonds. If you want to match short-term liabilities, short-term nominal Treasuries, like Tbills, are fine. If you want to match long-term, real (after inflation) liabilities, long-term TIPS are the way to go. If you want to match long-term, nominal liabilities, long-term nominal Treasuries are the ticket.

It doesn't matter which is easier to deal with, whether or not you can auto roll, or whether or not you buy on secondary or at auction. First you determine your goal, then you pick the type of bond that meets that goal.
I am doing both. I have a part earmarked for unknown long term expenses that I want to maintain purchasing power so I plan to use tips and a shorter timeframe emergency cash+ that I plan to use tbills
Good for you! I'm doing something similar.

I hold all nominals with maturities out to Dec 2025 in taxable, but the amounts beyond Apr 2025 are relatively small. This isn't just for emergencies--it's for all residual expenses (I'm retired), and much more--it's basically all of my fixed income in taxable. Since short-term nominal Treasuries are not riskless in the long term, because of reinvestment risk and unexpected inflation risk, anything beyond what's required for my residual expenses is essentially part of my risk portfolio. I'm obviously not just using Tbills for this, since the longest dated bill is 1/23/2025 (52w bill auctioned on Jan 23); I don't pay much attention to whether I'm buying a bill, note, bond or STRIPS--I usually just buy the highest yield, but might accept a slightly lower yield for a bill or STRIPS (0% coupon) for maturities longer than six months, to reduce the reinvestment risk.

My IRA is comprised of almost 100% TIPS. A few months ago I started constructing liability matching ladder out to 2047 (when I will be 95 if I survive that long), and while I have a ways to go to complete it, as of Friday I have something maturing in every year except 2030, which I'll probably rectify next week, and of course the gap years, 2035-2039; the gap years will be covered half each by 2034 and 2040 maturities when the ladder is complete. Before starting to build the entire ladder, I put everything in my IRA into TIPS maturing between 2023 and 2027--much more than I need for a liability matching ladder. I've been filling in the longer maturity rungs with proceeds from selling some of my Apr 2024 TIPS, and before that my Jan 2024 TIPS.

Having woken up to the danger of unexpected, high inflation, I started buying TIPS in Apr 2022 when yields were negative. But I moved very slowly, just starting to dip my toe in the water, and bought only very short term TIPS at negative yields. I got my first positive yield, 0.47%, for an Apr 2026 TIPS, bought in mid June 2022. I bought my last TIPS with a negative yield in Aug 2022-- the Jul 2023 at -0.04%.

Here's a chart of ask yield vs. settlement date for my purchases at Vanguard and Fidelity through Aug 2023, after which I moved to Schwab and started tracking my trades differently:

Image

These were all 2027 or shorter maturities. Most of the TIPS I bought at negative yields have matured, with the proceeds rolled into TIPS with positive yields.

We discussed bid/ask spreads earlier. The bid/ask price spread to sell my Apr 2024s, and before that my Jan 2024s, typically is about 0.05-0.07% at Schwab--it would be higher at Fidelity. So I pay about 2.5 to 3.5 price basis points to buy longer maturities now rather than waiting for my shortest term TIPS to mature. I do so because I like the yields now, and want to minimize the regret I would feel if yields are lower when the short term TIPS mature. If yields are higher in April, I'll start selling my Jul 2024 TIPS to buy more longer-term TIPS. I'll put more than my residual living expenses in the longer rungs if yields continue to increase.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

hudson wrote: Sat Feb 10, 2024 8:34 pm W. Bernstein said that short nominals and long TIPS were riskless. https://www.advisorperspectives.com/art ... at-age-104
I plan to do both along with a TIPS ladder to age 96. I’ll throw in some intermediate nominals including brokered or bank CDs depending on rates.

Bottom line: Hedge your bets.
Short nominals and long TIPS are only riskless if you use them for the right purpose, which is what Bill said in his article:
A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run.
We really need to expand on this a bit, and qualify it in terms of the unit of account: dollars or purchasing power.

TIPS are riskless in the long run if the purpose is to match real liabilities. Bill probably doesn't bother with the qualification because most of our liabilities are real. An exception would be a mortgage payment due in 20 years, for which a 20-year nominal Treasury would be the riskless asset in terms of liability matching.

Similarly, a Tbill is riskless in terms of matching short-term, nominal liabilities. We could still have high unexpected inflation over a period of less than a year, in which case short-term TIPS could be better for matching our short-term liabilities. But for the very short term, TIPS are not much good, because of the 2-3 month lag in inflation adjustments. For example, on Tuesday we'll know the ref CPI for Apr 1, so there will be very little unexpected inflation protection left in the Apr 2024 TIPS.

As long as the Fed is not suppressing short term rates, the 1m bill yield should increase to reflect higher than expected inflation, so rolling 1m bills might be good enough for even a year of real liabilities. But that's a big "if". How did that work out in 2021-2022?

Image

Since the Fed was late to respond to high, unexpected inflation, the 1m Treasury yield was still only 0.04% when year over year inflation was 7.9% in Feb 2022. When YoY inflation peaked at 9.1% in Jun 2022, the 1m T yield still was only 1.06%. I'm not selling my Jan 2025 TIPS and buying 4w bills with the proceeds.

I've shared this many times before, but as an experiment I bought a small quantity of 7/15/2023 TIPS and nominal Treasuries on 6/8/2021, with yields of -2.89% (real) and 0.16% respectively. The cumulative nominal return of the TIPS at maturity was 8.56%, while for the nominal Treasury it was 0.34%. So even short-term TIPS bought at deeply negative real yields can end up being the winner with high, unexpected inflation.

Another thing to be cautious of with very short term TIPS is seasonality. Here are ask yields (blue) from Schwab on Friday:

Image

The ask yield of the Jul 2025 TIPS was only 1.55%, while it was 2.03% for Apr, 2.08% for Oct, and 2.69% for Jan 2025. How does that make sense, especially when the yield curve is generally sharply inverted at the short end? Seasonality factors in TIPS traders' expectations of relative nominal returns due to the well-known cyclical seasonality in CPI. There probably also are other "outlier" factors known to institutional TIPS traders that affect their nominal return estimates; I apply an outlier factor to further smooth the yield curve, but I don't place much confidence in the expected nominal return for TIPS with maturities of less than a year. I place more confidence in the seasonally-adjusted yields, but the outlier adjustments are just guess based on the smoothed curvature of the seasonally-adjusted yield curve.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by cvn74n2 »

I have bought a fair amount of TIPS on Schwab and Vanguard over the past year ($330,000+) but never received half between bid/ask spread (e.g. price improvement). I click on buy at the quantity level I want and the yield is the same as the ask yield that is displayed on the market depth screen. Sometimes I will hit refresh on the buy screen to see if there has been any movement on the price but have come to the conclusion that the price is the price and yield is the yield at that moment in time. If others are able to halve the spread, what am I doing wrong?
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

I just tried to buy some tbill on the auction on Fidelity, but notice that there is only 3 TBill on the primary market. All 3 are listed as "UNITED STATES TREAS BILLS ZERO", which should like they are Tbill since I read that they are sold at a discount. They have an action close date of 2/12 and appear to have maturity date of 3/2024, 5/2024, and 8/2024, which means they are 4 week, 8 weeks, and 13 weeks bill? I could start with a 13 week ladder? If I want to do 26 weeks, I have to wait?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

cvn74n2 wrote: Sun Feb 11, 2024 1:26 pm I have bought a fair amount of TIPS on Schwab and Vanguard over the past year ($330,000+) but never received half between bid/ask spread (e.g. price improvement). I click on buy at the quantity level I want and the yield is the same as the ask yield that is displayed on the market depth screen. Sometimes I will hit refresh on the buy screen to see if there has been any movement on the price but have come to the conclusion that the price is the price and yield is the yield at that moment in time. If others are able to halve the spread, what am I doing wrong?
You're doing nothing wrong. You pay the ask price at the time your order is executed, which will be close to if not the same as the ask price you see on your order preview screen.

What I mean when I say that you pay half the bid/ask spread is that the spread is split between the buyer and the seller--at least that seems to me to be the rational way to view it. If we assume that the frictionless price is the mid point between bid and ask, then each party pays half of the spread. I can think of no other rational way to view it.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Sun Feb 11, 2024 2:19 pm I just tried to buy some tbill on the auction on Fidelity, but notice that there is only 3 TBill on the primary market. All 3 are listed as "UNITED STATES TREAS BILLS ZERO", which should like they are Tbill since I read that they are sold at a discount. They have an action close date of 2/12 and appear to have maturity date of 3/2024, 5/2024, and 8/2024, which means they are 4 week, 8 weeks, and 13 weeks bill? I could start with a 13 week ladder? If I want to do 26 weeks, I have to wait?
Nope. The maturities are 42-day, 13-week and 26-week. Think about it, August, month 8, is six months from Feb, month 2 (8-2=6).

Four weeks is 28 days and 8 weeks is 56 days, and 42 days is six weeks, so if you buy all of these at auction you'll have 6w, 13w and 26 week rungs in your ladder.

Also, you can build any ladder you want from the 596 Treasuries that are available on the secondary market. I have Treasuries maturing on Feb 15 (next week), as well as 3/12, 3/14, 3/15, 3/21, etc.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Kevin M wrote: Sun Feb 11, 2024 2:32 pm Nope. The maturities are 42-day, 13-week and 26-week. Think about it, August, month 8, is six months from Feb, month 2 (8-2=6).

Four weeks is 28 days and 8 weeks is 56 days, and 42 days is six weeks, so if you buy all of these at auction you'll have 6w, 13w and 26 week rungs in your ladder.

Also, you can build any ladder you want from the 596 Treasuries that are available on the secondary market. I have Treasuries maturing on Feb 15 (next week), as well as 3/12, 3/14, 3/15, 3/21, etc.
Thanks, I thought of this it was 4, 8, and 13 because I thought this was the only denomination. OK, if I buy all 3, I could get a 3 rung ladder from 6-26. How would I set the ladder to automated it. I would set the 26 week to auto roll and then when 6w expires, i can buy a 26 weeks and set it to autoroll, and when the 13w matures, we buy 26 weeks and autoroll?
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Re: Trading Treasuries (nominal and TIPS)

Post by Stubbie »

I have been building a TIPS ladder for the past 2 years and have read the pros and cons of the different strategies for filling the gap years of 2035 through 2039. Since, depending on inflation, TIPS and nominals have historically traded off on being the more advantageous investment, has anyone just gone ahead and filled those gap years with STRIPS? My thought is to buy the newly issued TIPS each year using the proceeds from the already owned STRIPS for that corresponding year. Perhaps the relatively short holding period of the STRIPS would soften any huge difference in the TIPS and STRIPS return over that period of time?
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

I just made my first trade on 3/28/2024 maturity date. The other 2 Tbill I view earlier are no longer available. I supposed if there were issues, the money would only be tied up until 3/28. How often do new bonds show up? Thanks!
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Re: Trading Treasuries (nominal and TIPS)

Post by HueyLD »

gavinsiu wrote: Mon Feb 12, 2024 11:23 am I just made my first trade on 3/28/2024 maturity date. The other 2 Tbill I view earlier are no longer available. I supposed if there were issues, the money would only be tied up until 3/28. How often do new bonds show up? Thanks!
https://home.treasury.gov/system/files/ ... hedule.pdf for upcoming treasury auctions.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Stubbie wrote: Mon Feb 12, 2024 10:08 am I have been building a TIPS ladder for the past 2 years and have read the pros and cons of the different strategies for filling the gap years of 2035 through 2039. Since, depending on inflation, TIPS and nominals have historically traded off on being the more advantageous investment, has anyone just gone ahead and filled those gap years with STRIPS? My thought is to buy the newly issued TIPS each year using the proceeds from the already owned STRIPS for that corresponding year. Perhaps the relatively short holding period of the STRIPS would soften any huge difference in the TIPS and STRIPS return over that period of time?
There are two risks with this strategy: 1) Interest rate risk, 2) unexpected inflation risk.

The interest rate risk is that the changes in real and nominal yields will be different, so the price changes will be different. To investigate this, I created the chart below, which shows the yield of the 10 year CMT minus the yield of the 10 year inflation indexed CMT:

Image

For zero risk we'd need to see a flat line; i.e., such that the difference between the yields was constant. What we see is very different than a flat line, indicating that there would be significant interest rate risk.

Or perhaps you're talking about buying a STRIPS that matures in 2029 to buy the 2039 TIPS with the proceeds from the maturing STRIPS. My guess is that that would introduce even more interest rate risk. We could look at the 10y inflation adjusted CMT yield minus the 5y CMT yield, but in thinking about it I realize that this may not help much, since the STRIPS is not constant maturity, but would mature in 2029 at 100. That eliminates interest rate risk for the STRIPS, but not for the TIPS, so you still have the risk of change in the hypothetical 2039 TIPS price relative to the known price of the STRIPS at maturity. Not sure this would be better or worse than holding the 2039 STRIPS and selling it in 2029 to buy the TIPS.

The unexpected inflation risk should be obvious. For the 2039 TIPS, you'd be holding the 2039 STRIPS; there is a 2/15/2039 stripped interest Treasury with an ask yield of 4.56% today--there are no Treasuries maturing in Jan 2039. We hold TIPS to help protect us against unexpected inflation, and holding a nominal Treasury for five years, until the 2039 TIPS is issued in Jan 2029, does not accomplish that. I would not want to take this risk in building a TIPS ladder.

If you'd be looking for a Treasury maturing in Jan 2029, there are no STRIPS maturing then. The only Treasuries maturing in Jan 2029 are a couple of non-STRIPS with 1.75% and 4.00% coupons and 4.14% and 4.13% yields maturing on Jan 31, 2029, which should match the date the Jan 2029 TIPS are issued. But you have the exact same issue with unexpected inflation.

In buying the 2040 TIPS with the intention of selling enough of it to buy the 2039 in Jan 2029, you eliminate the unexpected inflation risk, and the interest rate risk should be minimal, since you're only looking at one year difference in maturity; i.e., the price change of the 2040 and the hypothetical price change of the 2039 should be fairly small. You could get about the 2039 average maturity by buying something like 4/5 of the 2040 and 1/5 of the 2034 to sell to buy the 2039 in 2029.

I plan to by 2.5X more than I need of the 2034 and 2040 to cover the 5 gap years. I have a year to decide exactly what to do when the 2035 is issued in Jan 2025. I'm thinking I'll sell 1/5 of the required 2035 purchase amount of the 2040, and 4/5 of the required 2035 purchase amount of the 2034. I might move all of my excess 2034 into the 2035. I currently hold 25% of what I need for the 2040 and 18% for the 2034. I have been selling some of my Apr 2024s to buy the longer maturities in my ladder, and plan to continue doing so as long as I'm happy with the yields.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

gavinsiu wrote: Mon Feb 12, 2024 11:23 am I just made my first trade on 3/28/2024 maturity date. The other 2 Tbill I view earlier are no longer available. I supposed if there were issues, the money would only be tied up until 3/28. How often do new bonds show up? Thanks!
The 13w and 26w bill auctions already happened today, which is why you no longer see them. You can buy them on the secondary market if you want to own them. Well, you can only buy the 13w at Fido, but you could buy the 26w at Schwab.

The 13w is CUSIP 912797FH5. The auction price and yield were 98.677972 and 5.388% respectively. The best price/yield now at Fido are 98.656 and 5.361, but that's for min qty 500 ($500K face value). I suspect you are interested in much smaller quantities. For min qty 1, the price and yield at Fido are 98.659 and 5.353. So if you buy 10, you'd pay $9,865.90 compared to $9,867.80 at auction. Note that the secondary price is lower than the auction price, but the yield is lower too; I think this is because if you buy on secondary today, settlement is tomorrow, 2/13, while the auction settlement is Thursday 2/15. At any rate, you get a better price on secondary, so why not buy it?

The 26w is CUSIP 912797KB2. Auction price and yield were 97.439361 and 5.285%. This is not available on the secondary market yet at Fido because it is a new issue. As we've seen before, it is available at Schwab; I see a price of 97.45189 and yield of 5.258, so a slightly higher price, but only about a buck more for $10,000 face value, so I would buy it if I wanted to own it; settlement is 2/15, as it is for the auction (must be so, since it hasn't been issued yet). At Fido there are some zero-coupon STRIPS that mature on the same date, 8/15/2024, with a price of 97.518 for min qty 1 of the highest yielding one, 5.264% for this min qty. You could buy some of these for about $8 more for $10K than the bill at auction.
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Re: Trading Treasuries (nominal and TIPS)

Post by Stubbie »

Kevin M wrote: Mon Feb 12, 2024 12:23 pm
Stubbie wrote: Mon Feb 12, 2024 10:08 am I have been building a TIPS ladder for the past 2 years and have read the pros and cons of the different strategies for filling the gap years of 2035 through 2039. Since, depending on inflation, TIPS and nominals have historically traded off on being the more advantageous investment, has anyone just gone ahead and filled those gap years with STRIPS? My thought is to buy the newly issued TIPS each year using the proceeds from the already owned STRIPS for that corresponding year.
There are two risks with this strategy: 1) Interest rate risk, 2) unexpected inflation risk.

In buying the 2040 TIPS with the intention of selling enough of it to buy the 2039 in Jan 2029, you eliminate the unexpected inflation risk, and the interest rate risk should be minimal, since you're only looking at one year difference in maturity; i.e., the price change of the 2040 and the hypothetical price change of the 2039 should be fairly small. You could get about the 2039 average maturity by buying something like 4/5 of the 2040 and 1/5 of the 2034 to sell to buy the 2039 in 2029.
Kevin, thank you very much for this explanation. I had started buying a slug of the 2040 TIPS. You confirmed my initial understanding of why this was the better solution. I appreciate you willingly sharing your knowledge and backing it up with the appropriate charts and other information.
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Re: Trading Treasuries (nominal and TIPS)

Post by Praye »

Kevin M wrote: Mon Feb 12, 2024 12:23 pm
In buying the 2040 TIPS with the intention of selling enough of it to buy the 2039 in Jan 2029, you eliminate the unexpected inflation risk, and the interest rate risk should be minimal, since you're only looking at one year difference in maturity; i.e., the price change of the 2040 and the hypothetical price change of the 2039 should be fairly small. You could get about the 2039 average maturity by buying something like 4/5 of the 2040 and 1/5 of the 2034 to sell to buy the 2039 in 2029.

I plan to by 2.5X more than I need of the 2034 and 2040 to cover the 5 gap years. I have a year to decide exactly what to do when the 2035 is issued in Jan 2025. I'm thinking I'll sell 1/5 of the required 2035 purchase amount of the 2040, and 4/5 of the required 2035 purchase amount of the 2034. I might move all of my excess 2034 into the 2035. I currently hold 25% of what I need for the 2040 and 18% for the 2034. I have been selling some of my Apr 2024s to buy the longer maturities in my ladder, and plan to continue doing so as long as I'm happy with the yields.
I'd like to better understand the details of dealing with TIPS gap years in this way. When you refer to using "4/5" 2040 and "1/5" 2034 to buy 2039s, why is "5" the denominator? Is it because there are 5 gap years? In my case I hold extra 2033s and extra 2040s to fund my gap years. That means I have 6 gap years (2034-2039, I've not bought any of the new 2034s yet). So would I use "6" as my denominator? If so, then I assume that means I should sell 5/6 of my 2033s and 1/6 of my 2040s to buy the new 2034.

What do I apply the fractions "1/6" and "5/6" to? The quantity or the dollar amount of extra 2033 and 2044 TIPS I own?

Thanks for any help you can offer!
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

Thanks, Fidelity has a schedule on their site and list 8, 13, and 26 as having auction every week or so, so I think there may be an opportunity to buy the other rung next week. This may end up with some gaps, but that should be OK.
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Re: Trading Treasuries (nominal and TIPS)

Post by 123 »

I've just started to explore the potential value/risks of TIPS in an IRA. I understand that likely the best practice with TIPS is to hold to maturity. I current hold nominal treasuries which I automatically roll over for my fixed income allocation. I can see potential value in a mix of nominal treasuries and TIPS.

Of course I don't know the future of interest or inflation rates. For a particular maturity year in a TIPS ladder am I better off holding a 30-year TIPS or would a consecutive series of reinvested 5-year, or 10-year TIPS yield the same ultimate result? Why?

Is holding a TIPS where the maturity date is beyond the investor's expected lifetime a mistake (i.e. 80 year-old investor buys a 30-year TIPS)?
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Re: Trading Treasuries (nominal and TIPS)

Post by Artsdoctor »

123 wrote: Mon Feb 12, 2024 4:02 pm I've just started to explore the potential value/risks of TIPS in an IRA. I understand that likely the best practice with TIPS is to hold to maturity. I current hold nominal treasuries which I automatically roll over for my fixed income allocation. I can see potential value in a mix of nominal treasuries and TIPS.

Of course I don't know the future of interest or inflation rates. For a particular maturity year in a TIPS ladder am I better off holding a 30-year TIPS or would a consecutive series of reinvested 5-year, or 10-year TIPS yield the same ultimate result? Why?

Is holding a TIPS where the maturity date is beyond the investor's expected lifetime a mistake (i.e. 80 year-old investor buys a 30-year TIPS)?
You can certainly buy consecutive 5-year TIPS but (1) usually, your real yield will be greater the farther out you go with maturity [not always], (2) it's a bit of a bother to keep renewing when you don't necessarily have to, and (3) if the real rates are good now, you'd risk reinvestment risk in the future.

I personally wouldn't buy TIPS which are maturing well past my anticipated lifetime, but very smart people have. The thought would probably be that if you're buying at excellent real yields (say, > 2.5%), the chances are greater than not that a beneficiary could still sell at a reasonable rate in the future. That's a judgment call.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Praye wrote: Mon Feb 12, 2024 2:04 pm
Kevin M wrote: Mon Feb 12, 2024 12:23 pm
In buying the 2040 TIPS with the intention of selling enough of it to buy the 2039 in Jan 2029, you eliminate the unexpected inflation risk, and the interest rate risk should be minimal, since you're only looking at one year difference in maturity; i.e., the price change of the 2040 and the hypothetical price change of the 2039 should be fairly small. You could get about the 2039 average maturity by buying something like 4/5 of the 2040 and 1/5 of the 2034 to sell to buy the 2039 in 2029.

I plan to by 2.5X more than I need of the 2034 and 2040 to cover the 5 gap years. I have a year to decide exactly what to do when the 2035 is issued in Jan 2025. I'm thinking I'll sell 1/5 of the required 2035 purchase amount of the 2040, and 4/5 of the required 2035 purchase amount of the 2034. I might move all of my excess 2034 into the 2035. I currently hold 25% of what I need for the 2040 and 18% for the 2034. I have been selling some of my Apr 2024s to buy the longer maturities in my ladder, and plan to continue doing so as long as I'm happy with the yields.
I'd like to better understand the details of dealing with TIPS gap years in this way. When you refer to using "4/5" 2040 and "1/5" 2034 to buy 2039s, why is "5" the denominator? Is it because there are 5 gap years? In my case I hold extra 2033s and extra 2040s to fund my gap years. That means I have 6 gap years (2034-2039, I've not bought any of the new 2034s yet). So would I use "6" as my denominator? If so, then I assume that means I should sell 5/6 of my 2033s and 1/6 of my 2040s to buy the new 2034.

What do I apply the fractions "1/6" and "5/6" to? The quantity or the dollar amount of extra 2033 and 2044 TIPS I own?

Thanks for any help you can offer!
Yeah, the idea is to roughly match the average modified duration of the TIPS you will sell to the modified duration of the TIPS you'll buy. So technically we should be looking at duration rather than maturity. Duration is less than maturity for coupon bonds--the larger the coupon, the bigger the difference, since more of the return is earlier with higher coupons.

The duration of the 2040 with its 2.125% coupon is 13.4 (term to maturity is 16.0 years), and for the 2034 with a 1.750% it's 9.0 compared to the term of 9.9 years. So the average duration of the two is 11.2, which is pretty close to the duration of 11.3 I estimate for the hypothetical 2037 below in the last table.

To calculate duration of the 2035 we assume a yield and coupon. Assuming 2% for both for the 2035 gives a duration of 9.8, which I'll round to 10 for the example calculation, and we need to solve an equation like this:

Code: Select all

x*9.0 + (1-x)*13.4 = 10

9.0*x +13.4 - 13.4*x = 10

(13.4 - 9.0)*x = 13.4 - 10

4.4*x = 3.4

x =3.4/4.4

x = 0.77 and 1-x = 0.23
where x is the fraction of the dollar amount of TIPS we want to buy of the 2035 with the proceeds of the 2034. If I round x and 1-x to 0.8 and 0.2 respectively, that gets me to 4/5 in the 2034 and 1/5 in the 2040 (I hadn't done this calculation before). If I use the seasonally adjusted yield of the 2034, 1.96%, as the yield for the 2035, and use the coupon rate that would be associated with that yield, 1.875%, and I use the resulting mduration of 9.81 in the calculation above, x = 0.82, so even a little closer to 4/5 in the 2034.

Doing the same calculation using the 2040 SA yield of 2.06% (same as the ask yield to 2 decimal places) and assuming a 2.000% coupon gives a mod duration of 12.81, and using that we get 0.13 for x and 0.87 for 1-x, which is about 1/5 in the 2034 and 4/5 in the 2040, if we round to 0 decimal places, which is probably close enough.

If I used 1.96% as the yield for the 2035 and 2035, 2% for the 2037, and 2.06% for the 2038 and 2039 to calculate the modified durations, I get this table of weights to put in the 2034 and 2040:

Code: Select all

ModDur	Maturity	2034	2040
------	----------	----	----
9.81	01/15/35	0.8	0.2
10.55	01/15/36	0.7	0.3
11.32	01/15/37	0.5	0.5
12.07	01/15/38	0.3	0.7
12.81	01/15/39	0.1	0.9
	Sum wts ->	2.4	2.6
So maybe rather than 2.5X extra in each of the 2034 and 2040, I should put 2.4X extra in the 2034 and 2.6X in the 2040, which would mean entering 3.4 and 3.6 as the multipliers for the 2034 and 2040 respectively in the ladder spreadsheet. I just made that change, but it doesn't change the number I need to buy of each by much.

When we get closer to Jan 2025, I can rejigger the numbers and fine tune how much of each to sell, but at this point it looks like about 80% of the 2035 cost from the 2034s and 20% from the 2040s.

I can rerun these calculations for your scenario of using the 2033s and 2040s, but first I'll let this post marinate for a day or three, and see if anyone sees any issues with my calculations. If no ones points out any errors in a few days, and if you can't do the calcs yourself, remind me if I haven't gotten back to it.
Last edited by Kevin M on Tue Feb 13, 2024 10:33 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

123 wrote: Mon Feb 12, 2024 4:02 pm I've just started to explore the potential value/risks of TIPS in an IRA. I understand that likely the best practice with TIPS is to hold to maturity. I current hold nominal treasuries which I automatically roll over for my fixed income allocation. I can see potential value in a mix of nominal treasuries and TIPS.

Of course I don't know the future of interest or inflation rates. For a particular maturity year in a TIPS ladder am I better off holding a 30-year TIPS or would a consecutive series of reinvested 5-year, or 10-year TIPS yield the same ultimate result? Why?
If your goal is to match future real liabilities, then the least risky way to do it is to match the maturity of the TIPS to the year of the expected liabilities. This is because you don't know what the 5y or 10y yields will be in five or ten years, so you don't know the amount of inflation adjusted principal rolling these will give you in 30 years. Most of us are looking for the least risky way to match our expected real liabilities, so we buy a rung maturing each year to the extent possible (can't do it for 2035-2039 yet).

If you want to take some risk in the hopes that yields will be higher in 5 or 10 years, then rolling those would be a way to place that bet. I bought a boatload of TIPS with maturities of less than five years over the last year and a half or so with that in mind, and that bet has paid off, since I started buying at negative yields. I'm now in the process of selling the shortest maturity TIPS, currently Apr 2024s, to buy the missing rungs in my ladder. I just sold 10 of my Apr 2024s today to buy 12 of the Jan 2030s at 1.89%, which was the only year in which I didn't have any TIPS maturing between 2024 and 2047 (excluding the gap years of 2035-2039 of course, which we have been discussing) until today.
123 wrote: Mon Feb 12, 2024 4:02 pm Is holding a TIPS where the maturity date is beyond the investor's expected lifetime a mistake (i.e. 80 year-old investor buys a 30-year TIPS)?
It depends what your purpose is. I can think of two reasons to do this: 1) Bequests to heirs, 2) betting that longer-term TIPS yields will fall and you'll be able to sell them at a profit. Other than that, the longest maturity of a liability matching TIPS ladder should be the long end of your expected lifetime.

I currently own some 2047s, but only about 74% of my desired annual real amount (DARA) of inflation adjusted principal so far, and I will be 95 in 2047 if I live that long. That's pushing it, but although my dad died at 82, my mom is 93 and still walks more than a mile a day with her walker. And I've seen some writing about life extending medical advances, so who knows. Maybe when I've filled all my rungs through 2047, with enough extra in the 2034 and 2040 to cover the gap years, I might extend the ladder even further.

The longest maturity now available is 2053, when I would be 101. There is a longevity thread on reddit that I think I'll start following. OTOH, I could think of worse things to leave my kids than some 2053 TIPS currently at a yield of 2.14%. There probably will be plenty of stocks too, and of course they're buying stocks in their retirement accounts.
If I make a calculation error, #Cruncher probably will let me know.
MtnBiker
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Re: Trading Treasuries (nominal and TIPS)

Post by MtnBiker »

Kevin M wrote: Mon Feb 12, 2024 5:39 pm

If I used 1.96% as the yield for the 2035 and 2035, 2% for the 2037, and 2.06% for the 2038 and 2039 to calculate the modified durations, I get this table of weights to put in the 2034 and 2040:

Code: Select all

ModDur	Maturity	2034	2040
---------	----------	----	----
9.81	01/15/35	0.8	0.2
10.55	01/15/36	0.7	0.3
11.32	01/15/37	0.5	0.5
12.07	01/15/38	0.3	0.7
12.81	01/15/39	0.1	0.9
	Sum wts ->	2.4	2.6
So maybe rather than 2.5X extra in each of the 2034 and 2040, I should put 2.4X extra in the 2034 and 2.6X in the 2040, which would mean entering 3.4 and 3.6 as the multipliers for the 2034 and 2040 respectively in the ladder spreadsheet. I just made that change, but it doesn't change the number I need to buy of each by much.

When we get closer to Jan 2025, I can rejigger the numbers and fine tune how much of each to sell, but at this point it looks like about 80% of the 2035 cost from the 2034s and 20% from the 2040s.

I can rerun these calculations for your scenario of using the 2033s and 2040s, but first I'll let this post marinate for a day or three, and see if anyone sees any issues with my calculations. If no ones points out any errors in a few days, and if you can't do the calcs yourself, remind me if I haven't gotten back to it.
I haven't tried to check your calculations, but find it interesting that under your assumed yields for the yet-to-be-issued gap-year TIPS, the calculated amounts to roughly match the average modified duration of the TIPS are not that different from what would calculate if (ignoring coupons) trying to match maturities (1/5 of the 2040 and 4/5 of the 2034 to sell to buy the 2035 in 2025 or later, and so on...).

Just thinking ahead, the modified duration of each extra TIPS held (to cover the gap years) changes continuously with time, no? So, for duration matching purposes, the modified duration today is less important than the modified duration on the future planned sale date(s) (if known in advance). If taking modified duration into account, you would use different durations for converting 2034s and 2040s to 2035s in 2025 than you would use for converting 2034s and 2040s to 2039s in 2029. Correct? Or is the result of the calculation independent of the assumed sale date?
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TheTimeLord
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Re: Trading Treasuries (nominal and TIPS)

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Anyone looking at the upcoming 20 year bond auction? I find myself conflicted as to my possible participation. It would be a departure from my current path of keeping all nominal bond purchases 2 years or less in duration, the majority 6 months or less.
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Re: Trading Treasuries (nominal and TIPS)

Post by hudson »

TheTimeLord wrote: Tue Feb 13, 2024 9:02 am Anyone looking at the upcoming 20 year bond auction? I find myself conflicted as to my possible participation. It would be a departure from my current path of keeping all nominal bond purchases 2 years or less in duration, the majority 6 months or less.
I just looked at the payout; it could be around 4.5%...not bad.
If I could get a 4 or 5 year nominal treasury or CD at 4.5% or better, I might bite.
Twenty years at 4.5% could be OK or not. Nobody knows...as you already know.
I might buy a small amount; I wouldn't bet the farm.
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

hudson wrote: Tue Feb 13, 2024 9:14 am
TheTimeLord wrote: Tue Feb 13, 2024 9:02 am Anyone looking at the upcoming 20 year bond auction? I find myself conflicted as to my possible participation. It would be a departure from my current path of keeping all nominal bond purchases 2 years or less in duration, the majority 6 months or less.
I just looked at the payout; it could be around 4.5%...not bad.
If I could get a 4 or 5 year nominal treasury or CD at 4.5% or better, I might bite.
Twenty years at 4.5% could be OK or not. Nobody knows...as you already know.
I might buy a small amount; I wouldn't bet the farm.
I agree, I am looking at making a small purchase. When rates spiked this morning after the CPI release I looked at the 20 yield and with it north of 4.5% it started me pondering.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

TheTimeLord wrote: Tue Feb 13, 2024 9:02 am Anyone looking at the upcoming 20 year bond auction?
No, but for comparison purposes on the secondary market just now I saw 20 year at 4.59% vs. 20 year TIPS at 2.22%. The 2.37% BEI wouldn't be enough to lead me to take the 20 year inflation risk.

Also a 20 year zero at 4.77%. A 14 or 15 year zero has about the same yield as the 20 year Treasury, FWIW (duration of the 20 year bond is about 13 years, based on an online calculator).
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

jeffyscott wrote: Tue Feb 13, 2024 9:19 am
TheTimeLord wrote: Tue Feb 13, 2024 9:02 am Anyone looking at the upcoming 20 year bond auction?
No, but for comparison purposes on the secondary market just now I saw 20 year at 4.59% vs. 20 year TIPS at 2.22%. The 2.37% BEI wouldn't be enough to lead me to take the 20 year inflation risk.

Also a 20 year zero at 4.77%. A 14 or 15 year zero has about the same yield as the 20 year Treasury, FWIW (duration of the 20 year bond is about 13 years, based on an online calculator).
In my case this would be complementing my TIPS ladder and the traditional counterbalance to a future recession possibility. But who knows what I will do since I am a fan of Bernstein's risk free short duration nominals, long duration TIPS observation.

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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

^ So your intention would be to have this as something to potentially sell, in order to buy stocks (rebalancing) when there's a recession?
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Re: Trading Treasuries (nominal and TIPS)

Post by TheTimeLord »

jeffyscott wrote: Tue Feb 13, 2024 10:10 am ^ So your intention would be to have this as something to potentially sell, in order to buy stocks (rebalancing) when there's a recession?
It is sort of two-fold. First something that would be throwing off a reasonable yield (could be recency bias) and second something I would expect to appreciate in value in a traditional recessionary environment where The Fed is actively cutting rates and we have lowered GDP projections (could be my misunderstanding of economic dynamics). At this point unless rates get to around 4.75% I will probably decide I am overthinking things and pass.
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Re: Trading Treasuries (nominal and TIPS)

Post by MtnBiker »

MtnBiker wrote: Mon Feb 12, 2024 8:12 pm
Kevin M wrote: Mon Feb 12, 2024 5:39 pm

If I used 1.96% as the yield for the 2035 and 2035, 2% for the 2037, and 2.06% for the 2038 and 2039 to calculate the modified durations, I get this table of weights to put in the 2034 and 2040:

Code: Select all

ModDur	Maturity	2034	2040
---------	----------	----	----
9.81	01/15/35	0.8	0.2
10.55	01/15/36	0.7	0.3
11.32	01/15/37	0.5	0.5
12.07	01/15/38	0.3	0.7
12.81	01/15/39	0.1	0.9
	Sum wts ->	2.4	2.6
So maybe rather than 2.5X extra in each of the 2034 and 2040, I should put 2.4X extra in the 2034 and 2.6X in the 2040, which would mean entering 3.4 and 3.6 as the multipliers for the 2034 and 2040 respectively in the ladder spreadsheet. I just made that change, but it doesn't change the number I need to buy of each by much.

When we get closer to Jan 2025, I can rejigger the numbers and fine tune how much of each to sell, but at this point it looks like about 80% of the 2035 cost from the 2034s and 20% from the 2040s.

I can rerun these calculations for your scenario of using the 2033s and 2040s, but first I'll let this post marinate for a day or three, and see if anyone sees any issues with my calculations. If no ones points out any errors in a few days, and if you can't do the calcs yourself, remind me if I haven't gotten back to it.
I haven't tried to check your calculations, but find it interesting that under your assumed yields for the yet-to-be-issued gap-year TIPS, the calculated amounts to roughly match the average modified duration of the TIPS are not that different from what would calculate if (ignoring coupons) trying to match maturities (1/5 of the 2040 and 4/5 of the 2034 to sell to buy the 2035 in 2025 or later, and so on...).

Just thinking ahead, the modified duration of each extra TIPS held (to cover the gap years) changes continuously with time, no? So, for duration matching purposes, the modified duration today is less important than the modified duration on the future planned sale date(s) (if known in advance). If taking modified duration into account, you would use different durations for converting 2034s and 2040s to 2035s in 2025 than you would use for converting 2034s and 2040s to 2039s in 2029. Correct? Or is the result of the calculation independent of the assumed sale date?
Carrying this one step further, I did the following calculation.

First, any effects from decreasing duration will become more evident as you get closer to maturity. So, using your examples, I considered the hypothetical conversion planned to be done in 2029. I estimated the modified duration of the 2040 in 2029 to be 9.8 yr (11 year term) and the 2034 in 2029 to be 4.8 yr (5 year term). (I assumed that the yields in 2029 are unchanged from today, but the results aren't very sensitive to the assumed yield.)

The estimated duration of the 2039 in 2029 (assuming 2% yield/coupon) would be about 9.0 yr (10 year term). Plugging those values into your formula and solving for x gives x=0.16 and (1-x)=0.84.

Above you quoted values of 0.1 and 0.9, respectively. Although you didn't report the results to two significant digits, it does appear that the results are different when rounded to 1 significant digit if you match future duration at the time of conversion instead of matching today's duration.
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