Trading Treasuries (nominal and TIPS)

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Artsdoctor
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Re: Trading Treasuries (nominal and TIPS)

Post by Artsdoctor »

Thorwald wrote: Tue May 07, 2024 8:47 am
jeffyscott wrote: Sun May 05, 2024 10:11 am
Thorwald wrote: Sun May 05, 2024 9:12 am Could someone give simple instructions on how to participate in a 30year bond auction at Schwab using the auction example:
Auction Date May 09, 2024
Original Issue Date May 15, 2024
You can go to "trade" and "bonds" and there's a link for "treasury auctions" below the rate table.
We didn't understand each other. After all, there is no price for these bonds as of today. I don't see that price, as I understand it will be set in the form of an auction, but there is no way, at least I don't see how, to set an auction price limit or a YTM limit. You can only place a Market Order meaning yes I will buy, but I do not know at what YTM. Buying a cat in a bag. What if there is some asymmetry in the market and a very low YTM comes out?
By definition, this is what an auction is. You can guess what the yield will be based on what's happening in the secondary market but you won't know the exact yield until after the auction (and this is for any fixed income instrument, not just treasuries).

If that uncertainty bothers you, then consider purchasing your treasury on the secondary market. You'll know exactly what you're going to get.

Some people "straddle the fence": they're willing to have the uncertainty associated with a T-bill auction because the maturity is relatively short. However, they're not willing to have that same uncertainty when it comes to notes or bonds because the maturity is longer and they're "committed" the YTM of the auction. The problem with buying a note or bond on the secondary market in a taxable account is that there are tax complexities that people don't understand and/or don't want to deal with although this can be surmounted with a little work ahead of time.

Fortunately, treasuries have small spreads so you have both options. It's just a matter of what you're comfortable with.
Thorwald
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Re: Trading Treasuries (nominal and TIPS)

Post by Thorwald »

jeffyscott wrote: Tue May 07, 2024 8:59 am You will get the price/yield that is set at auction. Unless you have something like $10 million to invest, you can only place a non-competitive bid and you get whatever results from the auction. You can wait until the morning of the auction to submit the order, then there would little time for any change to yields. Alternatively you can buy on the secondary market at a known price/yield.
Thank you. This solves my dilemmas. I did not know that I only has access to non-competitive bid. Thanks again for your reply.
ccw
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Re: How to calculate the YTM of US Treasury in Secondary Market

Post by ccw »

Kevin M wrote: Fri May 03, 2024 4:29 pm I use the spreadsheet YIELD function to calculate yield to maturity for notes and bonds, which have coupons. The YIELD function also works for bills if you use the correct frequency and day count convention parameters.
One problem with the Excel or Google Sheet Yield function is that it does NOT count in the tax for the coupon interest. So the actual money we get will be LESS than the value calculated by Yield or shown in Schwab result.

Currently in Schwab results of all US Treasuries in secondary market, if sorting by ytm, the maximum one is 91282CCG4 with 5.404%. But that does not count in the tax. If take the tax into consideration, then the results will be different. So this is a bit misleading.
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Kevin M
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Re: How to calculate the YTM of US Treasury in Secondary Market

Post by Kevin M »

ccw wrote: Wed May 08, 2024 9:45 am
Kevin M wrote: Fri May 03, 2024 4:29 pm I use the spreadsheet YIELD function to calculate yield to maturity for notes and bonds, which have coupons. The YIELD function also works for bills if you use the correct frequency and day count convention parameters.
One problem with the Excel or Google Sheet Yield function is that it does NOT count in the tax for the coupon interest. So the actual money we get will be LESS than the value calculated by Yield or shown in Schwab result.

Currently in Schwab results of all US Treasuries in secondary market, if sorting by ytm, the maximum one is 91282CCG4 with 5.404%. But that does not count in the tax. If take the tax into consideration, then the results will be different. So this is a bit misleading.
This isn't an issue with the spreadsheet YIELD function, or what you see at Schwab. The economic standard for calculating yield does not factor in taxes. How could it, since people's tax rates are different?

To factor in taxes, you must calculate taxable equivalent yield (TEY) or after tax yield (ATY), for which there are standard formulas: [Wiki] Taxable Equivalent Yield (TEY) - Bogleheads.org
If I make a calculation error, #Cruncher probably will let me know.
ccw
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Re: How to calculate the YTM of US Treasury in Secondary Market

Post by ccw »

Kevin M wrote: Wed May 08, 2024 11:38 am
ccw wrote: Wed May 08, 2024 9:45 am
Kevin M wrote: Fri May 03, 2024 4:29 pm I use the spreadsheet YIELD function to calculate yield to maturity for notes and bonds, which have coupons. The YIELD function also works for bills if you use the correct frequency and day count convention parameters.
One problem with the Excel or Google Sheet Yield function is that it does NOT count in the tax for the coupon interest. So the actual money we get will be LESS than the value calculated by Yield or shown in Schwab result.

Currently in Schwab results of all US Treasuries in secondary market, if sorting by ytm, the maximum one is 91282CCG4 with 5.404%. But that does not count in the tax. If take the tax into consideration, then the results will be different. So this is a bit misleading.
This isn't an issue with the spreadsheet YIELD function, or what you see at Schwab. The economic standard for calculating yield does not factor in taxes. How could it, since people's tax rates are different?

To factor in taxes, you must calculate taxable equivalent yield (TEY) or after tax yield (ATY), for which there are standard formulas: [Wiki] Taxable Equivalent Yield (TEY) - Bogleheads.org
OK. I see. Thank you.
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Re: Trading Treasuries (nominal and TIPS)

Post by FoundingFather »

Kevin M wrote: Tue May 24, 2022 7:50 pm There has been lots of interest in buying Treasuries (nominal and TIPS) lately, and I thought it would be useful to have a single thread where we could discuss buying (and selling) Treasuries. There hasn't been much talk about selling, but you might want to sell at some point, so I used "Trading" in the title rather than "Buying".

------------------- EDIT -----------------

I'm going to start adding links to key replies in this thread and to other web pages that provide useful info, so folks can use this post as sort of a reference, rather than searching the entire thread for key information.
What a great contribution you and this thread are to this community! Thanks to you, I have successfully bought individual nominal treasuries and TIPS for the first time. The truly amazing part is that I actually knew what I was doing when I did it! :wink:

Just wanted to say thank you! 8-) 👍

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"I do not think myself equal to the Command I am honored with." -George Washington (excerpt from Journals of the Continental Congress, 16 June 1775)
gavinsiu
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

In regards to buying TIPS, I have filled a rolling ladder with 1-5 years in TIPS. When the 1 year mature, I plan to buy another one. However, 5 years TIPS are only offered a certain time per year, wouldn't I be unable to buy the rung on the primary market because the bond would expire before the money is available from the previous bond? Note I am using Fidelity.

I could buy secondary I guess, too.
BirdFood
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Re: Trading Treasuries (nominal and TIPS)

Post by BirdFood »

gavinsiu wrote: Tue May 14, 2024 3:47 pm In regards to buying TIPS, I have filled a rolling ladder with 1-5 years in TIPS. When the 1 year mature, I plan to buy another one. However, 5 years TIPS are only offered a certain time per year, wouldn't I be unable to buy the rung on the primary market because the bond would expire before the money is available from the previous bond? Note I am using Fidelity.

I could buy secondary I guess, too.
5 year TIPS are offered four times per year--two new auctions and two reopenings (All from Treasury, not secondary market--'reopening' just means that the coupon rate is already set.)

So you could put the money in short-term bills for a few weeks to keep it earning something until the next one comes up, or, yes, you could buy the TIPS a few days later on the secondary market--they'll usually be almost the same thing.

If anyone says my facts are wrong, probably believe them, not me.
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Re: Trading Treasuries (nominal and TIPS)

Post by Richard1580 »

gavinsiu wrote: Tue May 14, 2024 3:47 pm In regards to buying TIPS, I have filled a rolling ladder with 1-5 years in TIPS. When the 1 year mature, I plan to buy another one. However, 5 years TIPS are only offered a certain time per year, wouldn't I be unable to buy the rung on the primary market because the bond would expire before the money is available from the previous bond? Note I am using Fidelity.

I could buy secondary I guess, too.
My experience at Vanguard is that if a bill matures on the same day that another bill (which you are purchasing) settles, you can use the proceeds of the former to cover the latter.

Best bet is to call the bond desk at Fidelity and ask them if it will be a problem.
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

gavinsiu wrote: Tue May 14, 2024 3:47 pm... I have filled a rolling ladder with 1-5 years in TIPS. When the 1 year mature, I plan to buy another one. However, 5 years TIPS are only offered a certain time per year, wouldn't I be unable to buy the rung on the primary market because the bond would expire before the money is available from the previous bond? ... (underline added)
I'm confused by the underlined portion, gavinsiu. Don't you mean to say "the new bond will be issued before", instead? Assuming this is what you mean, it is not a problem since the new bond will be issued after the old one has matured.

All TIPS mature on the 15th of the month. With the Treasury's current schedule, whenever a 5-year or 10-year TIPS matures, a new TIPS of the same maturity will be issued the last day of that month. The auction is one to two weeks before that. [*] If you want to use 5-year TIPS for your ladder, then the redemption money from the old bond maturing will be available about two weeks before the new one is issued. You will have to forgo inflation-indexing for that short period. And your broker may or may not let you earn a reasonable return on the funds during that period.

Using 10-year TIPS for your 5-year ladder might be preferable.
  • First, on the secondary market, buy five 10-year TIPS maturing January or July of 2025, 2026, 2027, 2028, and 2029.
  • When each one matures, buy the existing one maturing 5 years later on the secondary market. E.g, when the January or July 2025 matures, buy the January or July 2030.
  • Secondary market purchases settle the next day so you won't lose inflation indexing nor have funds sitting idle for two weeks.
* You can see this in the "Auction" and "Issued" columns of these web pages for 5-year and 10-year TIPS.
gavinsiu
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Re: Trading Treasuries (nominal and TIPS)

Post by gavinsiu »

#Cruncher wrote: Wed May 15, 2024 8:19 am I'm confused by the underlined portion, gavinsiu. Don't you mean to say "the new bond will be issued before", instead? Assuming this is what you mean, it is not a problem since the new bond will be issued after the old one has matured.

All TIPS mature on the 15th of the month. With the Treasury's current schedule, whenever a 5-year or 10-year TIPS matures, a new TIPS of the same maturity will be issued the last day of that month. The auction is one to two weeks before that. [*] If you want to use 5-year TIPS for your ladder, then the redemption money from the old bond maturing will be available about two weeks before the new one is issued. You will have to forgo inflation-indexing for that short period. And your broker may or may not let you earn a reasonable return on the funds during that period.

Using 10-year TIPS for your 5-year ladder might be preferable.
  • First, on the secondary market, buy five 10-year TIPS maturing January or July of 2025, 2026, 2027, 2028, and 2029.
  • When each one matures, buy the existing one maturing 5 years later on the secondary market. E.g, when the January or July 2025 matures, buy the January or July 2030.
  • Secondary market purchases settle the next day so you won't lose inflation indexing nor have funds sitting idle for two weeks.
* You can see this in the "Auction" and "Issued" columns of these web pages for 5-year and 10-year TIPS.
Thanks, I am under the mistakening impression that bonds mature on the same day and the new bond is issued. I am glad that this is not the case. Thanks for the continuing education.
silvergga
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Re: Trading Treasuries (nominal and TIPS)

Post by silvergga »

Richard1580 wrote: Tue May 14, 2024 4:48 pm
gavinsiu wrote: Tue May 14, 2024 3:47 pm In regards to buying TIPS, I have filled a rolling ladder with 1-5 years in TIPS. When the 1 year mature, I plan to buy another one. However, 5 years TIPS are only offered a certain time per year, wouldn't I be unable to buy the rung on the primary market because the bond would expire before the money is available from the previous bond? Note I am using Fidelity.

I could buy secondary I guess, too.
My experience at Vanguard is that if a bill matures on the same day that another bill (which you are purchasing) settles, you can use the proceeds of the former to cover the latter.

Best bet is to call the bond desk at Fidelity and ask them if it will be a problem.
Does that mean that if I have a bill maturing on 6/6/24, I can place a trade to buy in to a Vanguard fund (say VUSXX) before market close on 6/4/24?

I have been placing such trades on 6/5/24. Wondering if I can do it 1 day earlier.

Understand you are talking about buying another bill, but I think the settlement date aspect should be similar.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

silvergga wrote: Wed May 15, 2024 4:44 pm Does that mean that if I have a bill maturing on 6/6/24, I can place a trade to buy in to a Vanguard fund (say VUSXX) before market close on 6/4/24?

I have been placing such trades on 6/5/24. Wondering if I can do it 1 day earlier.
Money market or any mutual fund settles in one day. A trade submitted before market close on 6/4 would settle 6/5, a day before the 6/6 bill matures. So that wouldn't work (or shouldn't, anyway).
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