1-year Treasury Bill auction

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

1-year Treasury Bill auction

Post by Kevin M » Fri Jul 13, 2018 1:49 pm

I had been thinking about placing an order at the 1-year Treasury auction, which now is open. Fidelity is showing "Expected Yield" of 2.380%, while Vanguard is showing "Indicative Yield" of 2.339%. Any ideas on why they are showing different expected/indicative yields--about 4 basis points difference?

This bill matures 7/18/2019. The closest Treasury I can find is a note maturing 7/15/2019, CUSIP 912828S43, for which I see an ask yield of 2.359% at both Fidelity and Vanguard (minimum quantity 200). This would seem to place the expected yield about in the middle of what's shown at Fidelity and Vanguard.

Using the higher expected yield of 2.38% would provide a taxable-equivalent yield (TEY) of 2.673% for me at 28% federal and 8% state marginal tax rates = 2.38% * (1-27%)/ (1 - 27% - 8%). Since I now have a savings account with an APY of 2.50% guaranteed until 12/31/2019, this bill doesn't look particularly attractive, offering only 17 basis points of additional yield for extending maturity from 0 years to 1 year. The savings account has no term risk and no reinvestment risk over the one-year period--it actually has less reinvestment risk since the rate is guaranteed for more than five months more than the Treasury.

I probably would only be buying 20 of the bills, so less than $20K, and as some people like to point out, that would only be about $35 more in interest for the Treasury before taxes. Doesn't seem worth it for the extra term risk, unless I might sell the Treasury before maturity if rates fell enough to make it worth it, and then I'd have the extra hassle of the tax accounting.

If my 0-year alternative was Vanguard Treasury money market fund, which currently has a TEY of 2.07% for me (SEC yield 1.84%), the 1-year bill would offer a yield premium of 60 basis points for extending maturity by one year, which would be excellent. But the much higher rate of the savings account completely changes the calculation.

Thoughts?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Fri Jul 13, 2018 2:10 pm

Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
I had been thinking about placing an order at the 1-year Treasury auction, which now is open. Fidelity is showing "Expected Yield" of 2.380%, while Vanguard is showing "Indicative Yield" of 2.339%. Any ideas on why they are showing different expected/indicative yields--about 4 basis points difference?
I assume you mean the 52 week bill. The announcement was yesterday and the auction is not for another 4 days. So the indicative yield is yesterday's close plus 5 days change or what it is today plus 4 days change. It's an estimate. Vanguard and Fidelity are using different ways to estimate the change.
Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
... unless I might sell the Treasury before maturity if rates fell enough to make it worth it, and then I'd have the extra hassle of the tax accounting.
Hopefully either broker is doing the calculation correctly and will report it to you without fuss.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Fri Jul 13, 2018 2:54 pm

Doc wrote:
Fri Jul 13, 2018 2:10 pm
I assume you mean the 52 week bill.
Of course. Vanguard refers to this as "1 Year US Treasury Bill" in the "Issue" column of their Treasury auction page. Of course "52-Week Bill" is the official Security Description, and the term is 364 days. I think everyone knows what is meant when we say 1-year instead of 52 weeks, 3-month instead of 13 weeks, and 6 month instead of 26 weeks. If they don't, they would be confused by the descriptions they would see on the Vanguard Treasury auction page.
The announcement was yesterday and the auction is not for another 4 days. So the indicative yield is yesterday's close plus 5 days change or what it is today plus 4 days change. It's an estimate. Vanguard and Fidelity are using different ways to estimate the change.
Yesterday's close of what? The Treasury with the closest maturity, and if two of the same, the bill, if there is one, or the one with the lowest coupon? Here's what Vanguard says:
The Indicative Yield is an estimate based off the most recently issued Treasury security of similar maturity that is currently available among active platform participants.
So most recently issued security with similar maturity would be the most recently-issued 1-year bill, I guess. In this case that would be CUSIP 912796QM4, the 1-year bill auctioned a month ago. At Vanguard I see ask yield for this bill of 2.334, but we should expect a 12-month to have slightly higher yield than an 11-month. I see same ask yield for the same offer at Fidelity, but also a slightly higher yield of 2.336 for a different offer.

Obviously Vanguard and Fidelity are using a different method to estimate indicative/estimated yield. Just wondering if anyone has more insight into their methods. Fidelity seems to be assuming a slightly higher premium for the additional month of maturity.

At any rate, would you bother with the Treasury for an additional 17 basis points of TEY for the extra term risk and more reinvestment risk relative to the savings account? I know you tend to use funds for your short-term Treasuries, but what if you didn't?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Fri Jul 13, 2018 3:14 pm

Kevin M wrote:
Fri Jul 13, 2018 2:54 pm
At any rate, would you bother with the Treasury for an additional 17 basis points of TEY for the extra term risk and more reinvestment risk relative to the savings account? I know you tend to use funds for your short-term Treasuries, but what if you didn't?
I can't answer that. We don't have the same objective for short term assets. For me liquidity is the most important factor and that means Treasuries.

Last week I sold assets at Schwab and was able to buy something with the money at Vanguard a few minutes later. No cost.

I consider any liquid asset with maturity less than one year as "cash". Our cash investments are just over 0.4% of our portfolio and most of that is in Vanguard Ultra Short Fund. Seventeen basis point won't buy me more than a couple of Starbuck's. :D
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: 1-year Treasury Bill auction

Post by #Cruncher » Fri Jul 13, 2018 3:18 pm

If you're going to precisely compare a T-Bill or a T-Note to a bank savings account or CD, I'd suggest converting their stated yields to an Annual Percentage Yield (APY) which is what the bank quotes. For a T-Bill, first compute the price based on its stated yield -- which I'm assuming is the discount rate. (The formula is given in this TreasuryDirect PDF file.) Then use the price to compute the APY. I'll use your 'Vanguard ... "Indicative Yield" of 2.339%' to illustrate.

Code: Select all

price  = 100 * (1 - rate    * days / 360)
97.635 = 100 * (1 - 0.02339 * 364  / 360)
APY    = (100 / price)  ^ (365 / days) - 1
2.429% = (100 / 97.635) ^ (365 / 364)  - 1
It's simpler to do for a T-Note. I'll use your 'note maturing 7/15/2019, CUSIP 912828S43, for which I see an ask yield of 2.359%' to illustrate.

Code: Select all

APY    = (1 + yield   / 2) ^ 2 - 1
2.373% = (1 + 0.02359 / 2) ^ 2 - 1

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Fri Jul 13, 2018 6:36 pm

Doc wrote:
Fri Jul 13, 2018 3:14 pm
We don't have the same objective for short term assets. For me liquidity is the most important factor and that means Treasuries.
Liquidity is of prime importance for my cash (the shortest-term asset), but if I can earn additional yield without sacrificing liquidity, why not do so? How are Treasuries any more liquid than a savings account that I can link as an external account to my brokerage account?
Last week I sold assets at Schwab and was able to buy something with the money at Vanguard a few minutes later. No cost.
I have regularly bought individual fixed-income securities as well as fund shares with nothing in my settlement fund at Fidelity or Vanguard, then after the order is executed, I do a transfer from an external bank account to the settlement fund to cover the purchase.
I consider any liquid asset with maturity less than one year as "cash". Our cash investments are just over 0.4% of our portfolio and most of that is in Vanguard Ultra Short Fund.
My definition of cash is no term risk and miniscule-to-no credit risk, so the ultra-short bond fund does not qualify, nor does a 1-year Treasury.
Seventeen basis point won't buy me more than a couple of Starbuck's.
That supports my inclination to not take an additional year of term risk for 17 basis points.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Fri Jul 13, 2018 7:01 pm

#Cruncher wrote:
Fri Jul 13, 2018 3:18 pm
If you're going to precisely compare a T-Bill or a T-Note to a bank savings account or CD, I'd suggest converting their stated yields to an Annual Percentage Yield (APY) which is what the bank quotes.
Thanks for the suggestion.
For a T-Bill, first compute the price based on its stated yield -- which I'm assuming is the discount rate. (The formula is given in this TreasuryDirect PDF file.)

I'm not sure what Fidelity and Vanguard are showing as estimated/indicative yield, but I assume it's coupon-equivalent yield, or what is referred to as "investment rate", not discount rate, in the Treasury auction results. I base my comparisons on investment rate, not discount rate.

I figured out the investment rate formula used for bills of six months or less on my own, and it's the same as shown in the PDF file you link to, except I found that 365 days works for the recent auctions, instead of 366 as shown in the pdf file. I assume they use something like days in the year between settlement date and same date a year later, which currently is 365. They don't explain it in the coupon equivalent yield example for "bills of not more than one-half year to maturity" in the pdf file, but the example for the bills of more than one-half year to maturity uses maturity date minus settlement date for days in year.

I also found that the spreadsheet YIELD formula using frequency = 1 (and day count convention = 1) works for 6-month or less bills. For 1-year bills, using the YIELD formula with frequency = 2 works. This is a lot simpler than using the formula in the pdf file for 1-year bills.
It's simpler to do for a T-Note. I'll use your 'note maturing 7/15/2019, CUSIP 912828S43, for which I see an ask yield of 2.359%' to illustrate.

Code: Select all

APY    = (1 + yield   / 2) ^ 2 - 1
2.373% = (1 + 0.02359 / 2) ^ 2 - 1
Since the same YIELD formula is used to get investment rate for a 1-year bill as for a note (frequency parameter = 2), I assume this would be the appropriate formula for a 1-year bill as well?

Converting to APY seems to be the same as using frequency = 1 instead of 2 in the YIELD function (to 3 decimal places at least). Can you elaborate on why this is the appropriate comparison (although it only makes a difference of about 1 basis point)?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
linenfort
Posts: 2077
Joined: Sat Sep 22, 2007 9:22 am
Location: #96151D

Re: 1-year Treasury Bill auction

Post by linenfort » Fri Jul 13, 2018 7:18 pm

The Wall Street Journal also says 1-Year as opposed to “52-week” bill.
It’s just more user-friendly.
bogleheads, don't knock state lotteries. They helped defund the mafia.

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sat Jul 14, 2018 7:00 am

linenfort wrote:
Fri Jul 13, 2018 7:18 pm
The Wall Street Journal also says 1-Year as opposed to “52-week” bill.
It’s just more user-friendly.
Schwab uses 52 weeks.
It's just more accurate. :D
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
welderwannabe
Posts: 757
Joined: Fri Jun 16, 2017 8:32 am

Re: 1-year Treasury Bill auction

Post by welderwannabe » Sat Jul 14, 2018 7:17 am

Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
Since I now have a savings account with an APY of 2.50% guaranteed until 12/31/2019, this bill doesn't look particularly attractive, offering only 17 basis points of additional yield for extending maturity from 0 years to 1 year. The savings account has no term risk and no reinvestment risk over the one-year period--it actually has less reinvestment risk since the rate is guaranteed for more than five months more than the Treasury.
I assume you have shared on the forum where you are getting a savings account with rate guarantee at 2.50%? Care to share the details? That seems like a sweet deal. I would be hesitant to mess around with tbills too if I had access to that.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sat Jul 14, 2018 9:18 am

Kevin M wrote:
Fri Jul 13, 2018 6:36 pm
Liquidity is of prime importance for my cash (the shortest-term asset), but if I can earn additional yield without sacrificing liquidity, why not do so? How are Treasuries any more liquid than a savings account that I can link as an external account to my brokerage account?
If indeed you can get immediate credit in you brokerage account by initiating a pull from your savings account there is no difference. Once upon a time there was a difference between checking and savings accounts the checking being a demand deposit account and the latter not. Maybe this is no longer the case.
Kevin M wrote:
Fri Jul 13, 2018 6:36 pm
My definition of cash is no term risk and miniscule-to-no credit risk, so the ultra-short bond fund does not qualify, nor does a 1-year Treasury.
It is my understanding that short term high quality fixed income securites with maturities (durations?) less than one year are considered cash for asset allocation purposes. So a 52 week Treasury is cash but the ultra-short bond fund may not be considered cash. In the latter case I don't have more than $1500 in cash in my investment accounts. So I don't really care what the yield is. :D
Kevin M wrote:
Fri Jul 13, 2018 2:54 pm
At any rate, would you bother with the Treasury for an additional 17 basis points of TEY for the extra term risk and more reinvestment risk relative to the savings account?
When you are calculating the TEY do you have to adjust your tax rates for Social Security taxation phase in? If so your state tax rate could be as high as 185% of the bracket rate. I don't know how much this might affect the TEY.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 11:05 am

welderwannabe wrote:
Sat Jul 14, 2018 7:17 am
I assume you have shared on the forum where you are getting a savings account with rate guarantee at 2.50%? Care to share the details? That seems like a sweet deal. I would be hesitant to mess around with tbills too if I had access to that.
It's Poppy Bank, but it's a local deal, it may be available only at two relatively new branches, and I think you can only open the account at a branch office. I don't see this savings rate advertised on their website (the advertised rates are pitiful), but they do advertise a 1-year CD at 2.50% APY, and it looks like you can open the CD account online. However, if the 1-year Treasury yield is close to the expected yield, I would prefer the Treasury over the CD, as it would have a higher TEY for me.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
welderwannabe
Posts: 757
Joined: Fri Jun 16, 2017 8:32 am

Re: 1-year Treasury Bill auction

Post by welderwannabe » Sat Jul 14, 2018 11:06 am

Kevin M wrote:
Sat Jul 14, 2018 11:05 am
I would prefer the Treasury over the CD, as it would have a higher TEY for me.

Kevin
Makes sense. I live in a no income tax state so that benefit of Treasuries is meaningless to me. Thanks for sharing though.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 11:48 am

Doc wrote:
Sat Jul 14, 2018 9:18 am
If indeed you can get immediate credit in you brokerage account by initiating a pull from your savings account there is no difference.
I don't need immediate credit. Trades settle in T+1 (Treasuries) or T+2, and all that matters is that the cash is in the settlement fund by the settlement date--at least that's the way it works for me at Vanguard and Fidelity. The way cash gets to the settlement fund, which is a money market fund, is by buying shares of the fund, and fund purchases settle in T+1, so always in time for the shortest settlement of brokerage trades.

You can link either a savings or checking account as the external account, and a pull from either one works the same way.
It is my understanding that short term high quality fixed income securites with maturities (durations?) less than one year are considered cash for asset allocation purposes.
That may be the definition used in financial markets, but it's not a definition that works for me. I require liquidation-price certainty for my cash, so any maturity/duration greater than 0 does not qualify as cash for me.

Incidentally, Vanguard's definition of "short-term reserves" is consistent with my definition, as they only include money market funds in short-term reserves for asset allocation purposes (e.g., in the Portfolio Watch tool). Treasury bills are included in the "Bonds and bond funds" category. But I wouldn't care if Vanguard included T bills in the short-term reserves category--I still wouldn't consider them as cash.

Fidelity, on the other hand, does include Treasuries with less than one year to maturity (bills, notes, bonds--doesn't matter) in the "short term" category. Doesn't change my working definition of "cash".

I don't really care what we call it, but for me, there's a clear dividing line between no term risk (0-year maturity/duration = liquidation-price certainty) and some term risk. I consider something with liquidation-price certainty as more liquid than something without it, but of course you can define it differently for your purposes than I do for mine.
When you are calculating the TEY do you have to adjust your tax rates for Social Security taxation phase in? If so your state tax rate could be as high as 185% of the bracket rate. I don't know how much this might affect the TEY.
Good point, but I'm above the SS tax phase in, so I already pay federal income tax on 85% of my SS survivor benefits (not yet collecting retirement benefits), and CA does not tax SS benefits, so this has no impact on my TEY. The more general point is that it's a good idea to use tax software or some other empirical method to check one's marginal tax rates, as various phase-ins and phase-outs can effect them.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 12:36 pm

welderwannabe wrote:
Sat Jul 14, 2018 11:06 am
Makes sense. I live in a no income tax state so that benefit of Treasuries is meaningless to me. Thanks for sharing though.
Then the 1-year CD at 2.50% would provide a higher return, assuming you would hold the 1-year Treasury to maturity--at least based on the estimated yields currently displayed at Fidelity and Vanguard. It's a good yield for a 1-year CD, although DepositAccounts.com shows the highest 1-year CD at 2.60%, two at 2.55%, and one at 2.51%, so Poppy is the fifth highest. Brokered 1-year CDs at Vanguard and Fidelity now are only 2.30%.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

bondsr4me
Posts: 900
Joined: Fri Oct 18, 2013 7:08 am

Re: 1-year Treasury Bill auction

Post by bondsr4me » Sat Jul 14, 2018 1:19 pm

I recently bought some secondary Treasuries maturing 8/15/18 with YTM of 1.823% and 1.833%.

With rates on the rise, I am keeping things highly liquid for now.

I don’t want to go out too far right now, but that’s just me.

I used VG for these purchases and am quite happy with the VG platform.

Have a great weekend,

Don

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sat Jul 14, 2018 3:33 pm

Kevin M wrote:
Sat Jul 14, 2018 11:48 am
Doc wrote: ↑Sat Jul 14, 2018 9:18 am
If indeed you can get immediate credit in you brokerage account by initiating a pull from your savings account there is no difference.
I don't need immediate credit. Trades settle in T+1 (Treasuries) or T+2, and all that matters is that the cash is in the settlement fund by the settlement date--at least that's the way it works for me at Vanguard and Fidelity. The way cash gets to the settlement fund, which is a money market fund, is by buying shares of the fund, and fund purchases settle in T+1, so always in time for the shortest settlement of brokerage trades.

You can link either a savings or checking account as the external account, and a pull from either one works the same way.
You are right you don't need the immediate credit. Just need to get it there by the settlement date.

Occasionally I need to move dollars from one broker to another. In this case you can't use a pull from the receiving broker because the pull is actually going to a correspondent bank and I don't have an actual account there. If I do a push I'm never sure when it is going to get to the second broker because it goes through the settlement bank for that broker which could add another day. But I can push it from Broker A to the checking account at my bank and immediately initiate a pull transaction at Broker B from the same bank. Even if that pull gets hung up at the Broker's correspondent bank I am OK becaue I already have a credit for that amount.

I don't know if you can do this with a savings account because it is not a "demand" deposit. Did you ever try this two step process to move money from one broker to another?
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sat Jul 14, 2018 3:37 pm

Kevin M wrote:
Sat Jul 14, 2018 11:48 am
Doc wrote: ↑Sat Jul 14, 2018 9:18 am
If indeed you can get immediate credit in you brokerage account by initiating a pull from your savings account there is no difference.
I don't need immediate credit. Trades settle in T+1 (Treasuries) or T+2, and all that matters is that the cash is in the settlement fund by the settlement date--at least that's the way it works for me at Vanguard and Fidelity. The way cash gets to the settlement fund, which is a money market fund, is by buying shares of the fund, and fund purchases settle in T+1, so always in time for the shortest settlement of brokerage trades.

You can link either a savings or checking account as the external account, and a pull from either one works the same way.
You are right you don't need the immediate credit. Just need to get it there by the settlement date.

Occasionally I need to move dollars from one broker to another. In this case you can't use a pull from the receiving broker because the pull is actually going to a correspondent bank and I don't have an actual account there. If I do a push I'm never sure when it is going to get to the second broker because it goes through the correspondent bank for both brokers which could add another day. But I can push it from Broker A to the checking account at my bank and immediately initiate a pull transaction at Broker B from the same bank. Even if that pull gets hung up at the Broker's correspondent bank I am OK becaue I already have a credit for that amount.

I don't know if you can do this with a savings account because it is not a "demand" deposit. You might to have cleared funds to transfer back out. Did you ever try this two step process to move money from one broker to another?

Of course having a margin account at both brokers would solve the problem but Mrs. Doc will not allow one at Vanguard. :annoyed
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
linenfort
Posts: 2077
Joined: Sat Sep 22, 2007 9:22 am
Location: #96151D

Re: 1-year Treasury Bill auction

Post by linenfort » Sat Jul 14, 2018 3:56 pm

Doc wrote:
Sat Jul 14, 2018 7:00 am
linenfort wrote:
Fri Jul 13, 2018 7:18 pm
The Wall Street Journal also says 1-Year as opposed to “52-week” bill.
It’s just more user-friendly.
Schwab uses 52 weeks.
It's just more accurate. :D
I wasn’t quibbling. I was just saying it’s not his idiosyncrasy.
Last edited by linenfort on Sat Jul 14, 2018 9:07 pm, edited 1 time in total.
bogleheads, don't knock state lotteries. They helped defund the mafia.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 4:33 pm

Doc wrote:
Sat Jul 14, 2018 3:33 pm
You are right you don't need the immediate credit. Just need to get it there by the settlement date.

Occasionally I need to move dollars from one broker to another. In this case you can't use a pull from the receiving broker because the pull is actually going to a correspondent bank and I don't have an actual account there. If I do a push I'm never sure when it is going to get to the second broker because it goes through the settlement bank for that broker which could add another day. But I can push it from Broker A to the checking account at my bank and immediately initiate a pull transaction at Broker B from the same bank. Even if that pull gets hung up at the Broker's correspondent bank I am OK becaue I already have a credit for that amount.

I don't know if you can do this with a savings account because it is not a "demand" deposit. Did you ever try this two step process to move money from one broker to another?
I only move money between Vanguard and Fidelity. To enable doing this directly, I opened a cash management account (CMA) at Fidelity. A CMA works like a checking account, so I was able to set it up as an external bank account at Vanguard.

To move money from Vanguard to Fidelity, I sell shares of a fund (typically money market), specifying the Fidelity CMA as the destination bank account. The cash always arrives at the Fidelity CMA the next business day, and then I transfer it into my settlement fund. Transfers between the CMA and the settlement fund are essentially instantaneous.

To move money from Fidelity to Vanguard, I buy shares of a fund (typically money market), specifying the Fidelity CMA as the source bank account. If I want it for a brokerage trade, I buy shares of the brokerage settlement fund, and the money is available to settle trades the next business day. Actually, it might essentially be available the same day, because it's a margin account, and the unsettled cash from the purchase of the settlement fund shares might offset any margin debit from a purchase the same day--not sure about that.

However, Vanguard puts a 7-10 day hold on any cash transferred in before you can transfer it out of Vanguard. For this reason I don't consider Vanguard as a first-tier source of liquidity unless the money has already been there for the 7-10 day hold period.

Prior to opening the CMA, I would use Ally bank as the hub bank. Typically a transfer from Fidelity arrives at Ally the next business day, at which point I could use the money to buy shares of a fund at Vanguard, so this would take T+2 for the money to be available for settling a brokerage trade at Vanguard. Typically a transfer from Vanguard to Ally takes two business days, so would be T+3 to use at Fidelity to settle a trade--obviously not good enough, which is why I opened the CMA.

It doesn't matter whether it's a checking or savings account at Ally--the timing is the same. However, I'd normally use a checking account for this kind of thing to avoid worrying about the limit of six free outgoing transfers per month for savings accounts.

I guess I could have wired the funds from Vanguard to Ally, but for some reason I never thought of doing that. I assumed I would be charged a fee, but just checked, and as a Flagship client, Vanguard does not charge a fee for wire transfers--normally it is $10. Ally does not charge a fee for incoming wires, so it would be free.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: 1-year Treasury Bill auction

Post by #Cruncher » Sat Jul 14, 2018 4:57 pm

Kevin M wrote:
Fri Jul 13, 2018 7:01 pm
I'm not sure what Fidelity and Vanguard are showing as estimated/indicative yield, but I assume it's coupon-equivalent yield, or what is referred to as "investment rate", not discount rate, in the Treasury auction results. I base my comparisons on investment rate, not discount rate.
I was probably wrong in my first post to assume that the rate stated by Fidelity and Vanguard is the discount rate. More likely it is the "investment rate" aka "bond equivalent yield". One thing making me think this is the following from the Treasury Yield Curve Methodology (referenced in the notes at the bottom of Daily Treasury Yield Curve Rates):
... the current inputs are the most recently auctioned 4-, 13-, 26-, and 52-week bills, plus the most recently auctioned 2-, 3-, 5-, 7-, and 10-year notes and ... 30-year bond, … The inputs for the four bills are their bond equivalent yields. (underline added)

Kevin M in same post wrote:Converting to APY seems to be the same as using frequency = 1 instead of 2 in the YIELD function (to 3 decimal places at least). Can you elaborate on why this is the appropriate comparison (although it only makes a difference of about 1 basis point)?
While there is a big difference between discount rate and bond equivalent yield, you're right Kevin, that there is only a small difference (at current rate levels) between bond equivalent yield and Annual Percentage Yield (APY). If it weren't for my apparently mistaken assumption that the yields stated by Fidelity and Vanguard were discount rates, I wouldn't have bothered to make my first post. However, from a theoretical perspective (and in practical terms if interest rates were a lot higher) APY is the correct yield measure for comparing T Bills or T Notes to bank savings accounts or CDs.

On a related matter, I was curious about the different ways of computing bond equivalent yield for a 52-week T Bill. I computed them three different ways for the following examples of 52-week auctions:

Code: Select all

  1  Issue date               06/07/1990    06/24/1999    06/21/2018
  2  Maturity date            06/06/1991    06/22/2000    06/20/2019
  3  Discount rate                7.650%        4.890%        2.275%
  4  Days to maturity [r]            364           364           364
  5  Days in year [y]                365           366           365
  6  Price [P]                92.2650000    95.0556667    97.6997222
  7  a [(r / 2y) - 0.25]       0.2486301     0.2472678     0.2486301
  8  b [r / y]                 0.9972603     0.9945355     0.9972603
  9  c [(P - 100) / P]        -0.0838346    -0.0520151    -0.0235444
 10  Equivalent yield         8.2373244%    5.1637975%    2.3471694%
 11  APY                      8.4074343%    5.2308281%    2.3609803%
 12  Bond equivalent yield    8.2377817%    5.1641568%    2.3472069%
 13  YIELD function           8.2377186%    5.1641568%    2.3471892%
Here are the three methods illustrated in the above table:
  • (Row 10) The very complicated method (using a quadratic equation no less) that the Treasury explains at the bottom of this PDF file (Calculate Coupon Equivalent Yield For bills of more than one half-year to maturity)
  • (Row 12) My method which first computes APY and then converts to bond equivalent yield
  • (Row 13) Using the Excel YIELD function
Notes
  • I don't know why the Treasury method is so complicated. My guess is that it was developed before the days of scientific calculators. Despite being complicated, it does not give the exact result, but only an approximation.
  • My method (row 12) and the YIELD method (row 13) give results much closer to each other for a 366 day year than for a 365 day year. We don't know how the YIELD function works. It is a "black box": parameters in -- results out. Since the formulas I use to convert to APY and then to bond equivalent yield are simple and I know they are correct, I prefer them in this case.
  • The difference between bond equivalent yield and APY is only about 0.01% points at current interest rate levels, it is 0.17% points in the formula example and 0.07% points for the June 1999 auction.
If anyone wishes to play with these calculations for other 52-week T-Bills: Select All, Copy, and Paste the following at cell A1 of a blank Excel sheet, format cells B1 & B2 as dates, and then change the assumptions in rows 1:3.

Code: Select all

Issue date	33031
Maturity date	33395
Discount rate	0.0765
Days to maturity [r]	=B2-B1
Days in year [y]	=DATE(YEAR(B1)+1,MONTH(B1),DAY(B1))-B1
Price [P]	=100*(1-B3*(B4/360))
a [(r / 2y) - 0.25]	=B4/(2*B5)-0.25
b [r / y]	=B4/B5
c [(P - 100) / P]	=(B6-100)/B6
Equivalent yield	=(-B8+SQRT(B8^2-4*B7*B9))/(2*B7)
APY	=(100/B6)^(B5/B4)-1
Bond equivalent yield	=2*((1+B11)^0.5-1)
YIELD function	=YIELD(B1,B2,0%,B6,100,2,1)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 5:41 pm

Some more observations about Treasury rate calculations, APY, etc.

(I see that #Cruncher posted a reply while I was writing this, but I'm going to go ahead and submit it before reading #Cruncher's latest post).
#Cruncher wrote:
Fri Jul 13, 2018 3:18 pm
<snip>For a T-Bill, first compute the price based on its stated yield -- which I'm assuming is the discount rate.<snip>

Code: Select all

price  = 100 * (1 - rate    * days / 360)
As I said, for Bills I look at "investment rate", which is according to a footnote in the Treasury auction results for Bills is "Equivalent coupon-issue yield". Here is the formula that works for investment rate for Bills of six-month maturity or less:

Code: Select all

investment rate = 365/days * (100/price - 1)
where days = maturity date minus settlement date, so 364 for a 1-year Bill, 182 for a 6-month Bill, etc.

Solving for price:

Code: Select all

price = 100 / ( investment rate * days / 365 + 1 )
As I mentioned, investment rate also can be calculated using the spreadsheet YIELD function, with frequency = 1 for Bills of six-month maturity or less, and frequency = 2 for 1-year Bills. Note that YIELD can be used for Bills of any maturity, but the investment rate formula shown above doesn't work for 1-year Bills.

However, for some reason using the PRICE function with investment rate as the yield does not generate the exact price that was used as input to the YIELD function for Bills of 6-month maturity or less. In other words, these functions are not exactly the inverse of each other for these Bills, with frequency parameter = 1, and I don't know why.

But the PRICE function does generate the exact price if used with investment rate as the yield for 1-year Bills or or notes; i.e., where the frequency parameter is 2. So for 1-year Bills and notes, with frequency parameter = 2, PRICE and YIELD are inverse functions as expected.

So, I would use the first formula to calculate price for Bills of 6-month maturity or less, and the PRICE function for Bills of 1-year maturity (or for notes or bonds).

As a side note, my observation is that Fidelity uses YIELD with frequency = 1 for Bills of 6-month maturity or less, and with frequency = 2 for Bills with maturity greater than six months and for notes of any maturity. I determined this by downloading the Treasuries Fidelity indicates as 6-month or 1-year maturity in their yield summary table, doing the yield calculations with frequency equal to 1 or 2, and comparing to the yield indicated by Fidelity for bills and notes. Each of these maturities included both bills and notes.
Then use the price to compute the APY. I'll use your 'Vanguard <snip>

Code: Select all

APY    = (100 / price)  ^ (365 / days) - 1
I verified that this works correctly for bills of any maturity assuming daily compounding (note that not all bank accounts compound daily). I computed the APY using the formula above, with price and days from the auction results for several bills of 3-month, 6-month and 1-year maturities. I then calculated APR using the NOMINAL spreadsheet function with APY as effective_rate and 365 as periods_per_year (also can do with a formula, but using NOMINAL is easier). I then calculated terminal value as:

Code: Select all

price * (1 + APR/365) ^ days
In all cases, the result was 100.000000, which of course is the price of a Bill at maturity.

So I think I'm convinced that this makes sense for Bills.
It's simpler to do for a T-Note. I'll use your 'note maturing 7/15/2019, CUSIP 912828S43, for which I see an ask yield of 2.359%' to illustrate.

Code: Select all

APY    = (1 + yield   / 2) ^ 2 - 1
I haven't yet figured out how to derive this or verify that it works.
Kevin M wrote:
Fri Jul 13, 2018 7:01 pm
Since the same YIELD formula is used to get investment rate for a 1-year bill as for a note (frequency parameter = 2), I assume this would be the appropriate formula for a 1-year bill as well?
Close, but not exact. For the 1-year bill I checked, it's off in the fifth decimal place. The correct value using the price formula shown earlier is 2.36098%, while using the formula immediately above gives 2.36096%. Running the latter value through the same verification process, the terminal value is 99.999983 instead of 100.000000. So this formula does not work exactly for a 1-year Bill.
Kevin M wrote:
Fri Jul 13, 2018 7:01 pm
Converting to APY seems to be the same as using frequency = 1 instead of 2 in the YIELD function (to 3 decimal places at least).
I don't know what I was looking at to come to this conclusion, as it is not correct.
Kevin M wrote:
Fri Jul 13, 2018 7:01 pm
Can you elaborate on why this is the appropriate comparison (although it only makes a difference of about 1 basis point)?
As demonstrated above, if you want to end up with the exact same terminal values, you must convert to APY to accurately compare a Bill to a bank account with daily compounding.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sat Jul 14, 2018 5:47 pm

Kevin M wrote:
Sat Jul 14, 2018 4:33 pm
Typically a transfer from Fidelity arrives at Ally the next business day, at which point I could use the money to buy shares of a fund at Vanguard, so this would take T+2 for the money to be available for settling a brokerage trade at Vanguard
This whole idea gets confused by the words we use. What I get from this statement is the T- 2 = money available for settlement. But the money doesn't actually have to be there by settlement. If you do a buy/sell type trade you are ok if both transactions "settle" on the same day regardless of the trade dates. But you are also ok if the buy is T-1 and the "sell" (or order to transfer in) is a T-2 settlement provided both have the same trade date. So if you can initiate a transfer in from your broker's site you have established that date as the trade date and can use that credit to buy something else even though the money doesn't arrive for several more days.

I use this idea frequently to make buys at Vanguard. To make buys at Schwab I just make the buy and then have the Vg sell proceeds go directly to Schwab. I sometimes have to eat some margin costs if the money doesn't get the there on the right day but it's only a couple of bps per day and saving that little is not worth the extra hassle of going through the bank. It would also add one day at least because the money can't leave Vg until the trade settles.

Trying to do all this with a high yield savings account at a bank that don't have a decades long personal and business relationship with would give me ulcers.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sat Jul 14, 2018 6:33 pm

Doc wrote:
Sat Jul 14, 2018 5:47 pm
Trying to do all this with a high yield savings account at a bank that don't have a decades long personal and business relationship with would give me ulcers.
I wouldn't use a savings account to do "all of this", but that doesn't mean I don't consider the savings account as highly liquid, other than the 6/month limitation on outgoing transfers.

I have a checking account at the same bank as my new 2.5% savings account, and of course can instantly transfer between them. I already have that checking account set up as an external bank account at Fidelity and Vanguard. So to fund a brokerage purchase at Fidelity or Vanguard, once the trade executes, I simply transfer from savings to checking (say five minutes), then buy shares of the settlement fund specifying the external checking account as the source.

I don't expect to do this often--I've already decided against buying at the 1-year Treasury auction--still considering the next 2-year auction. As securities in my muni/Treasury/CD ladder mature, I'll either roll the excess proceeds into another security right away, or perhaps put it into Vanguard Prime or Treasury MM if I expect to deploy the proceeds quickly.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sun Jul 15, 2018 8:02 am

Kevin M wrote:
Sat Jul 14, 2018 6:33 pm
I wouldn't use a savings account to do "all of this", but that doesn't mean I don't consider the savings account as highly liquid, other than the 6/month limitation on outgoing transfers ...
That works. I was under the impression that a "stand alone" account was likely needed to get your high yield. You've got a good work around with what you do.

Still won't work for me as I put more weight on negative correlation of T's in times of market stress than I do to the small after tax benefit in yield available from a high yield savings account. That said I will check out what's available at the two banks we use.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
indexfundfan
Posts: 2176
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: 1-year Treasury Bill auction

Post by indexfundfan » Sun Jul 15, 2018 8:10 am

Kevin M wrote:
Sat Jul 14, 2018 4:33 pm
To move money from Vanguard to Fidelity, I sell shares of a fund (typically money market), specifying the Fidelity CMA as the destination bank account. The cash always arrives at the Fidelity CMA the next business day, and then I transfer it into my settlement fund. Transfers between the CMA and the settlement fund are essentially instantaneous.

Typically a transfer from Vanguard to Ally takes two business days, so would be T+3 to use at Fidelity to settle a trade--obviously not good enough, which is why I opened the CMA.
This is interesting:

Vanguard -> Fidelity CMA : arrives T+1
Vanguard -> Ally : arrives T+2

Is T+1 for other funds (e.g. Prime MMF) as well?

My experience is that T+1 only happens if the money comes from the Vanguard settlement fund; otherwise it is T+2.
My signature has been deleted.

MikeG62
Posts: 1051
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: 1-year Treasury Bill auction

Post by MikeG62 » Sun Jul 15, 2018 9:27 am

Kevin M wrote:
Fri Jul 13, 2018 2:54 pm

...At any rate, would you bother with the Treasury for an additional 17 basis points of TEY for the extra term risk and more reinvestment risk relative to the savings account? I know you tend to use funds for your short-term Treasuries, but what if you didn't?

Kevin
I would not.
Kevin M wrote:
Sat Jul 14, 2018 11:48 am
Doc wrote:
Sat Jul 14, 2018 9:18 am

...It is my understanding that short term high quality fixed income securites with maturities (durations?) less than one year are considered cash for asset allocation purposes.
That may be the definition used in financial markets, but it's not a definition that works for me. I require liquidation-price certainty for my cash, so any maturity/duration greater than 0 does not qualify as cash for me.

Kevin
I consider as cash equivalents instruments with remaining maturities of a couple of months to be cash equivalents.

Back in the day when I was an accountant, that meant securities maturing within 90 days. I am a little more conservative than that.
Real Knowledge Comes Only From Experience

diy60
Posts: 168
Joined: Wed Sep 07, 2016 6:54 pm

Re: 1-year Treasury Bill auction

Post by diy60 » Sun Jul 15, 2018 9:55 am

#Cruncher wrote:
Sat Jul 14, 2018 4:57 pm

We don't know how the YIELD function works. It is a "black box": parameters in -- results out. Since the formulas I use to convert to APY and then to bond equivalent yield are simple and I know they are correct, I prefer them in this case.
Half way down this linked page (in the Remarks section) it shows the calculus behind the YIELD formula, I think.

https://support.office.com/en-us/articl ... 3c9727a4fe

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sun Jul 15, 2018 10:02 am

MikeG62 wrote:
Sun Jul 15, 2018 9:27 am
I consider as cash equivalents instruments with remaining maturities of a couple of months to be cash equivalents.
What are 'Cash Equivalents'
Cash equivalents are investments securities that are for short-term investing, and they have high credit quality and are highly liquid.

Cash equivalents, also known as "cash and equivalents," are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments.
Read more: Cash Equivalents https://www.investopedia.com/terms/c/ca ... z5LKmNpntm

From a link in that article to short term debt:
Short-term debt, also known as short-term or current liabilities, refers to any financial obligation that is either due within a 12-month period or due within the current fiscal year.
Read more: Short-Term Debt https://www.investopedia.com/terms/s/sh ... z5LKmv4Z3M
Morningstar wrote:Short- term bonds mature in one to four years. Bonds that pay you back in less than a year (like the 90-day Treasury bill) are called ultrashort bonds or cash equivalents.
http://www.morningstar.com/InvGlossary/ ... -bond.aspx

I tried to look up the GAAP definition a few days ago and got something more in line with MikeG62. But on further looking
Examples of cash equivalents are:

Commercial paper
Marketable securities
Money market funds
Short-term government bonds
Treasury bills
https://www.accountingtools.com/article ... e-security

And:
Marketable security
February 02, 2018
A marketable security is an easily traded investment that is readily converted into cash, usually because there is a strong secondary market for the security.
...
Marketable securities are recorded as a current asset, since they have a maturity of less than one year.
https://www.accountingtools.com/article ... e-security

My take on this is that less than one year counts provided the debt is marketable and high quality. Certainly 52 week T-bills fit that criteria as well as high credit rating commercial paper. Brokered CD's with less than one year to maturity may not qualify depending on their market depth.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

MikeG62
Posts: 1051
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: 1-year Treasury Bill auction

Post by MikeG62 » Sun Jul 15, 2018 11:21 am

Doc wrote:
Sun Jul 15, 2018 10:02 am
MikeG62 wrote:
Sun Jul 15, 2018 9:27 am
I consider as cash equivalents instruments with remaining maturities of a couple of months to be cash equivalents.
I tried to look up the GAAP definition a few days ago and got something more in line with MikeG62. But on further looking
Examples of cash equivalents are:

Commercial paper
Marketable securities
Money market funds
Short-term government bonds
Treasury bills
https://www.accountingtools.com/article ... e-security
From a GAAP checklist I found online defining cash equivalents...

"Cash and equivalents include: (1) currency on hand (2) demand deposits with banks or financial institutions (3) other kinds of accounts that have the general characteristics of demand deposits (4) short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments maturing within three months from the date of acquisition qualify."

I never really understood or agreed with the "from the date of acquisition" language as that would exclude from cash equivalents an instrument with an original maturity of 120 days that matures tomorrow. Never made sense to me. But there are many things in GAAP that often don't make sense.

GAAP is not the be all and end all anyway. It's clearly a matter of personal preference.

I began buying 6-month treasuries last month. I plan to buy the same number of bonds each month for the next 5 months (creating a ladder of Treasuries maturing monthly (and likely being rolled over into new 6-month Treasuries) beginning in December). I don't consider the bonds I purchased last month or the ones I am buying next week (the second tranche) to be cash equivalents. However, come October I will view the ones maturing in December to be cash equivalents and in November the ones maturing in January to be cash equivalents and so on and so forth. I suppose I could just as well draw the line at maturing in 30 days too. As long as I can get my hands on the money in a relatively short period of time that feels like a cash equivalent to me. Of course, I will always have a buffer of true cash (in a MM or online savings account) to bridge me until the next Treasuries mature "just in case" a need arises.
Real Knowledge Comes Only From Experience

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sun Jul 15, 2018 1:08 pm

indexfundfan wrote:
Sun Jul 15, 2018 8:10 am
This is interesting:

Vanguard -> Fidelity CMA : arrives T+1
Vanguard -> Ally : arrives T+2

Is T+1 for other funds (e.g. Prime MMF) as well?
Yes, T+1 for VG Prime MM -> Fidelity CMA, for example. This is for an old-platform mutual fund account, so there is no settlement fund.

Checking a recent example in my transaction histories, on 6/12/2018 sold shares of Prime MM, and on 6/13/2018 cash arrived in the Fidelity CMA.

As a recent example of VG -> Ally, sold Prime MM shares on 7/9, and was deposited into Ally checking on 7/11.
My experience is that T+1 only happens if the money comes from the Vanguard settlement fund; otherwise it is T+2.
I think you're on to something here (except that its' still T+1 for Prime MM -> Fidelity CMA).
I generally don't keep anything in the Federal MM settlement fund in my brokerage accounts, so only thing I transfer out of the settlement fund is interest or matured proceeds from fixed-income securities. Checking some of those transactions for my Vanguard brokerage account, I see that it was indeed T+1 for transfers from cash/settlement-fund to Ally checking.

I had recalled some T+1 transfers from VG to Ally, but I never connected the dots and realized that it was for transfers from brokerage cash/settlement-fund.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
indexfundfan
Posts: 2176
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: 1-year Treasury Bill auction

Post by indexfundfan » Sun Jul 15, 2018 1:21 pm

Kevin M wrote:
Sun Jul 15, 2018 1:08 pm
indexfundfan wrote:
Sun Jul 15, 2018 8:10 am
This is interesting:

Vanguard -> Fidelity CMA : arrives T+1
Vanguard -> Ally : arrives T+2

Is T+1 for other funds (e.g. Prime MMF) as well?
Yes, T+1 for VG Prime MM -> Fidelity CMA, for example. This is for an old-platform mutual fund account, so there is no settlement fund.

Checking a recent example in my transaction histories, on 6/12/2018 sold shares of Prime MM, and on 6/13/2018 cash arrived in the Fidelity CMA.

As a recent example of VG -> Ally, sold Prime MM shares on 7/9, and was deposited into Ally checking on 7/11.
My experience is that T+1 only happens if the money comes from the Vanguard settlement fund; otherwise it is T+2.
I think you're on to something here (except that its' still T+1 for Prime MM -> Fidelity CMA).
I generally don't keep anything in the Federal MM settlement fund in my brokerage accounts, so only thing I transfer out of the settlement fund is interest or matured proceeds from fixed-income securities. Checking some of those transactions for my Vanguard brokerage account, I see that it was indeed T+1 for transfers from cash/settlement-fund to Ally checking.

I had recalled some T+1 transfers from VG to Ally, but I never connected the dots and realized that it was for transfers from brokerage cash/settlement-fund.

Kevin
As an experiment, I'm going to try to sell some Prime MMF and have the proceeds go into Fido CMA next week.

If I remember correctly, several years ago, I could request a sale of the CA MMF by wire in the morning and the proceeds would appear in my bank the same day in the evening. This does not work anymore.
My signature has been deleted.

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Sun Jul 15, 2018 2:00 pm

MikeG62 wrote:
Sun Jul 15, 2018 11:21 am
Of course, I will always have a buffer of true cash (in a MM or online savings account) to bridge me until the next Treasuries mature "just in case" a need arises.
Ah! A new definition ;-). What you are calling "true cash" is my definition of cash.

As I said, I understand that financial markets define "cash" as anything with one year or less to maturity, but I don't care about anyone else's definitions. I could refer to it as "0-year maturity, high-quality fixed income", or "zero term risk and little-to-no credit risk fixed income", but "cash" is less of a mouthful. True cash isn't bad though :twisted: .

Like you, I keep an eye on soon-to-mature fixed income securities, and how much of that I have influences how much cash I hold (or at least that is my intention). For example, I have a big slug of CDs and munis maturing in 2.6 months (more than my current cash allocation), and as that time gets closer, my intention is to deploy more of my cash into longer-maturity fixed income.

But as of now, the only thing that looks marginally attractive in a taxable account is the 2-year Treasury, which looks like it provides barely 20 bps/year of maturity over my 2.5% savings account. Just using the Fidelity summary yield page numbers (which probably overstates it a bit), 2-year Treasury yield is 2.59%, which for me is TEY of 2.91%.

In other words, cash at 2.5% is substituting for what might otherwise be in rungs of a ladder at less than 2-year maturity. Treasuries out to 6-month maturity have lower TEY, and the consensus here seems to be that it's not worth 17 or 18 basis points to buy the 1-year Treasury.

There is one other somewhat enticing option, which is the Andrews FCU 9-month CD at 2.75% (and I recently saw a 9-month special CD at 3%, but not available to me). Although I'm already a member of Andrews, it's still a bit of a hassle to open the CD, figure out how to fund it without losing a few days interest at 2.5%, and mark it in my calendar to make sure it doesn't roll over to a 1-year CD at a crappy rate upon maturity (the default for this CD). Still giving it some thought.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

MikeG62
Posts: 1051
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: 1-year Treasury Bill auction

Post by MikeG62 » Sun Jul 15, 2018 2:22 pm

Kevin M wrote:
Sun Jul 15, 2018 2:00 pm
MikeG62 wrote:
Sun Jul 15, 2018 11:21 am
Of course, I will always have a buffer of true cash (in a MM or online savings account) to bridge me until the next Treasuries mature "just in case" a need arises.
Ah! A new definition ;-). What you are calling "true cash" is my definition of cash.

Kevin
:wink:
Real Knowledge Comes Only From Experience

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sun Jul 15, 2018 2:45 pm

Kevin M wrote:
Sun Jul 15, 2018 1:08 pm
My experience is that T+1 only happens if the money comes from the Vanguard settlement fund; otherwise it is T+2.
I think you're on to something here (except that its' still T+1 for Prime MM -> Fidelity CMA).
Fidelity CMA is a bank. Money in your settlement fund to a bank is T-1. If that bank is the correspondent bank for your other broker the settlement fund to your broker is T-2.

Sometimes you can have a mutual fund sale go directly to a bank T-1. If that bank is the correspondent to another broker then you get to T-2.

Does this make sense?
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Doc
Posts: 8511
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: 1-year Treasury Bill auction

Post by Doc » Sun Jul 15, 2018 2:57 pm

MikeG62 wrote:
Sun Jul 15, 2018 2:22 pm
Kevin M wrote:
Sun Jul 15, 2018 2:00 pm
MikeG62 wrote:
Sun Jul 15, 2018 11:21 am
Of course, I will always have a buffer of true cash (in a MM or online savings account) to bridge me until the next Treasuries mature "just in case" a need arises.
Ah! A new definition ;-). What you are calling "true cash" is my definition of cash.

Kevin
:wink:
But I don't need "true cash" to buy something. I only need "cash equivalents". :D
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: 1-year Treasury Bill auction

Post by #Cruncher » Sun Jul 15, 2018 8:22 pm

Kevin M wrote:
Sat Jul 14, 2018 5:41 pm
As I mentioned, investment rate also can be calculated using the spreadsheet, YIELD function with frequency = 1 for Bills of six-month maturity or less, and frequency = 2 for 1-year Bills. Note that YIELD can be used for Bills of any maturity, ...
For the 4-week bill issued 7/12/2018, the 13-week bill issued 7/12/2018, and the 26-week bill issued 7/12/2018 the YIELD function with frequency = 1 produces exactly the same result as the Treasury's Equivalent yield (aka Investment Rate) formula. This is because YIELD uses the same formula as the Treasury. (See my response to diy60 below.) For the 52-week bill issued 6/21/2018 YIELD with frequency = 2 produces approximately the same value as the Treasury's formula (differs in the 5th decimal place). But the Treasury uses a completely different formula for this T-bill than it uses for the shorter term bills. (See page 2 of this TreasuryDirect PDF file.)

The following table [*] shows the result of the Treasury's formulas on row 10 and the result of the YIELD function on rows 13 and 14. Rows 11 & 12 shows my calculation that first computes Annual Percentage Yield (APY) and then converts that to the bond equivalent yield.

Code: Select all

Row                              4-week      13-week      26-week      52-week
  1  Issue date              07/12/2018   07/12/2018   07/12/2018   06/21/2018
  2  Maturity date           08/09/2018   10/11/2018   01/10/2019   06/20/2019
  3  Discount rate               1.850%       1.945%       2.100%       2.275%
  4  Days to maturity [r]            28           91          182          364
  5  Days in year [y]               365          365          365          365
  6  Price [P]               99.8561111   99.5083472   98.9383333   97.6997222
     ... a, b, & c ...
 10  Equivalent yield          1.87840%     1.98176%     2.15201%     2.34717%
 11  APY                       1.89477%     1.99655%     2.16362%     2.36098%
 12  Bond equivalent yield     1.88588%     1.98668%     2.15205%     2.34721%
 13  YIELD (freq = 1)          1.87840%     1.98176%     2.15201%     2.36090%
 14  YIELD (freq = 2)          1.86296%     1.98719%     2.16970%     2.34719%
Kevin M in same post wrote:
[#Cruncher] wrote:It's simpler to do for a T-Note.[Calculate Annual Percentage Yield (APY) given the bond equivalent yield] ...

Code: Select all

APY    = (1 + yield   / 2) ^ 2 - 1
I haven't yet figured out how to derive this or verify that it works.
There is nothing to derive, Kevin. This is simply the definition of APY for a bond that pays interest semi-annually. It is the Equation in the Wikipedia entry, Annual Percentage Yield, with N = 2.

diy60 wrote:
Sun Jul 15, 2018 9:55 am
Half way down this linked page (in the Remarks section) it shows the calculus behind the YIELD formula, I think.
https://support.office.com/en-us/articl ... 3c9727a4fe
Thanks, diy60. I assume you mean the formula that follows If there is one coupon period or less until redemption, YIELD is calculated as follows:

Image
where:
A = number of days from the beginning of the coupon period to the settlement date (accrued days).
DSR = number of days from the settlement date to the redemption date.
E = number of days in the coupon period.

(For frequency = 1, the "coupon period" starts one year before maturity.)

I tested this for the 4, 13, and 26 week bills and it produces exactly the same results as the YIELD function with frequency = 1. (There is a typo in the formula: "par" should be "pr" indicating the price parameter.) The formula looks very complicated but it is simplified a lot for a zero-coupon bond when the "rate" parameter is zero. It then reduces to the same formula the Treasury uses to compute the Coupon Equivalent Yield For bills of not more than one half-year to maturity (at the top of page 2 of this TreasuryDirect PDF file):
i = ( ( 100 - P ) / P ) * ( y / r )
where:
I is Coupon Equivalent Yield
P is price
y is days in year
r is days until maturity


* To use this table for another T-bill Select All, Copy, and Paste the following at cell A1 of a blank Excel sheet, format cells B1:B2 as dates, and enter the assumptions in cells B1:B3.

Code: Select all

Issue date	43293
Maturity date	43321
Discount rate	0.0185
Days to maturity [r]	=B2-B1
Days in year [y]	=DATE(YEAR(B1)+1,MONTH(B1),DAY(B1))-B1
Price [P]	=100*(1-B3*(B4/360))
a [(r / 2y) - 0.25]	=IF(B4<183,"n/a",B4/(2*B5)-0.25)
b [r / y]	=IF(B4<183,"n/a",B4/B5)
c [(P - 100) / P]	=IF(B4<183,"n/a",(B6-100)/B6)
Equivalent yield	=IF(B4<183,((100-B6)/B6)*(B5/B4),(-B8+SQRT(B8^2-4*B7*B9))/(2*B7))
APY	=(100/B6)^(B5/B4)-1
Bond equivalent yield	=2*((1+B11)^0.5-1)
YIELD (freq = 1)	=YIELD(B1,B2,0%,B6,100,1,1)
YIELD (freq = 2)	=YIELD(B1,B2,0%,B6,100,2,1)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Mon Jul 16, 2018 12:49 pm

#Cruncher wrote:
Sun Jul 15, 2018 8:22 pm
<snip>For the 52-week bill issued 6/21/2018 YIELD with frequency = 2 produces approximately the same value as the Treasury's formula (differs in the 5th decimal place).<snip>[/url].)
Thanks for the deep dive on all of this. Since the Treasury only displays rates to the 3rd decimal place, at least in their PDF auction results documents, as do Fidelity and Vanguard on their bond-trading platforms, and since the third decimal place is tenths of a basis point and the fifth decimal place is thousandth's of a basis point, I'm happy sticking with the YIELD function.
[#Cruncher] wrote:
Kevin M in same post wrote:
[#Cruncher] wrote:It's simpler to do for a T-Note.[Calculate Annual Percentage Yield (APY) given the bond equivalent yield] ...

Code: Select all

APY    = (1 + yield   / 2) ^ 2 - 1
I haven't yet figured out how to derive this or verify that it works.
There is nothing to derive, Kevin. This is simply the definition of APY for a bond that pays interest semi-annually. It is the Equation in the Wikipedia entry, Annual Percentage Yield, with N = 2.
There may be nothing to derive, but there is something to understand that I really didn't understand!

My hangup was that I've always thought of bond PRICE as essentially the same as PV (present value), and therefore YIELD as the same as RATE. So I've always thought of yield as the constant discount rate that equalizes price (present value) and the sum of all future discounted cash flows--you even see it defined that way. But because of the bond-equivalent yield (BEY) convention, this isn't actually the case.

BEY calculates the semi-annual yield, then multiplies by 2 to get yield. In other words, the semi-annual coupon payment has the same discounted value as the annual coupon payment, which is not the case for a true present value calculation.

This article helped me understand it: Bond Equivalent Yield Convention. From that article:
This convention doesn’t follow the time value of money rules where you would compound the semi-annual yield to calculate the effective annual yield. Instead the doubling convention is followed across the market.
This article, from the same series, CFA Exam Level 1, Fixed Income Securities, also was helpful: Calculate Bond-Equivalent Yield of Annual-Pay Bonds. The formula shown in that article is essentially the inverse of your APY formula:
BEY of annual-pay bond = 2 x [(1+ yield on annual-pay bond)^0.5 -1]
To confirm that YIELD actually is calculating BEY, I calculated yield on a 10-year bond, coupon = 2%, price = 95, frequency = 2 (day count convention = 1), to get 2.570193%. I then calculated RATE with number_of_periods = 20, payment_per_period = 2%/2*100, present_value = -95, and future_value = 100, then multiplied by 2 to get 2.570193%.

Of course another way to verify it is by calculating PV using rate = yield/2, number_of_periods = 20, payment_amount = 2%/2*100, and future_value = 100 gives the result -95.00000, where yield is calculated using YIELD.

The key is understanding that the "yield" in your APY equation is actually BEY, which is a nominal rate with two compounding periods per year, and it's a nominal rate that is used in the APY calculation (as per the Wiki article on APY).

One quibble I'd have with this is with a coupon note or bond, you don't actually know the coupon reinvestment rate, so you don't actually know that you'll earn the same return as a time deposit account with a known APY (e.g., a direct CD with interest reinvested). I guess as long as your reinvestment rate is closer to the yield than to 0%, the APY would be a better comparison.

For a T-Bill (zero-coupon), there is no reinvestment risk, so converting to APY makes perfect sense to me.

Of course in my particular situation of comparing to a savings account with a rate guaranteed through 12/31/2019, there also is some reinvestment risk in comparing to a 2-year note, since I don't know the savings rate for the last five months or so for the 2-year holding period.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: 1-year Treasury Bill auction

Post by #Cruncher » Mon Jul 16, 2018 3:47 pm

Kevin M wrote:
Mon Jul 16, 2018 12:49 pm
#Cruncher wrote:
Sun Jul 15, 2018 8:22 pm
For the 52-week bill ... YIELD with frequency = 2 produces approximately the same value as the Treasury's formula (differs in the 5th decimal place) ….)
Since the Treasury only displays rates to the 3rd decimal place, ... and since the … fifth decimal place is thousandth's of a basis point, I'm happy sticking with the YIELD function.
Of course. For practical use the YIELD function is quite satisfactory. Except for curiosity, I'd never suggest anyone use the Treasury's byzantine formula (2nd section on page 2 of this TreasuryDirect PDF file) for T-bills maturing in more than one-half year.

Kevin M in same post wrote:... I've always thought of bond PRICE as essentially the same as PV (present value) .... So I've always thought of yield as the constant discount rate that equalizes price (present value) and the sum of all future discounted cash flows ... But because of the bond-equivalent yield (BEY) convention, this isn't actually the case. (underline added)
But the "BEY convention" does not keep this from being "actually the case". I'm assuming that your use of the past tense here means you now agree, and this paragraph is only a history of what you formerly thought. Am I reading you correctly, Kevin?

Kevin M in same post wrote:One quibble I'd have with this is with a coupon note or bond, you don't actually know the coupon reinvestment rate, so you don't actually know that you'll earn the same return as a time deposit account with a known APY (e.g., a direct CD with interest reinvested).
That's a good quibble, but it applies to BEY as much as APY.

kaeltor
Posts: 83
Joined: Sat May 12, 2018 11:20 am

Re: 1-year Treasury Bill auction

Post by kaeltor » Mon Jul 16, 2018 4:07 pm

Where do you have your money at 2.5% in a savings account? Ally only giving 1.75% currently and inflation is almost at 3% sheesh...

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Mon Jul 16, 2018 6:42 pm

#Cruncher wrote:
Mon Jul 16, 2018 3:47 pm
Kevin M in same post wrote:... I've always thought of bond PRICE as essentially the same as PV (present value) .... So I've always thought of yield as the constant discount rate that equalizes price (present value) and the sum of all future discounted cash flows ... But because of the bond-equivalent yield (BEY) convention, this isn't actually the case. (underline added)
But the "BEY convention" does not keep this from being "actually the case". I'm assuming that your use of the past tense here means you now agree, and this paragraph is only a history of what you formerly thought. Am I reading you correctly, Kevin?
I didn't word that well, so let me try again. Basically, I'm just working through bond-equivalent yield, as I've never worked with it much, mostly because I usually just simplify and assume annual coupons in my models.

My confusion started from your use of "yield" in the formula to convert bond yield to APY. APY is an effective annual rate, and is computed from the nominal annual rate. These are the terms used in the Wiki article on APY (that you linked to), and the terms I'm familiar with (e.g., from using the spreadsheet NOMINAL and EFFECT functions). I have always thought of bond yield as an effective annual rate, but that if that were correct, there would be no reason to apply your formula. Hence, my confusion.

For a bond that pays semi-annual coupons, the present value formula gives you bond price based on a semi-annual yield (not an annual yield). Because of the BEY convention, the semi-annual yield is doubled to get annual yield. This understates the effective return you would earn if you were able to reinvest the semi-annual coupons at the semi-annual yield, since it ignores compounding the semi-annual coupons.

You are saying that to more accurately compare to the APY of a bank deposit account, which factors in compounding, you should assume compounding of the semi-annual yield. Since BEY doubles the semi-annual yield instead of compounding it, BEY functions as a nominal annual interest rate instead of an effective annual interest rate. The formula for APY using BEY as the nominal interest rate provides the assumed compounding that you are suggesting one should use in comparing to the APY of a bank deposit account.
#Cruncher wrote:
Mon Jul 16, 2018 3:47 pm
Kevin M in same post wrote:One quibble I'd have with this is with a coupon note or bond, you don't actually know the coupon reinvestment rate, so you don't actually know that you'll earn the same return as a time deposit account with a known APY (e.g., a direct CD with interest reinvested).
That's a good quibble, but it applies to BEY as much as APY.
Perhaps, which is why I said that if your reinvestment rate is closer to the bond yield than to 0%, using APY probably is a better comparison, and that's probably more likely the case if my coupon payments were to go into the savings account at 2.5% APY, with my 2-year taxable-equivalent yield (TEY) at say 2.9%. In other words, the APY formula assumes semi-annual compounding at 2.9% TEY, and 2.5% is closer to 2.9% than to 0%. Using BEY would assume semi-annual compounding at 0%.

If the coupon were to go into a money market account earning close to 0%, as we had for some years not too long ago, then BEY probably would be a better comparison, since there would be essentially no compounding of the coupon.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Mon Jul 16, 2018 6:51 pm

kaeltor wrote:
Mon Jul 16, 2018 4:07 pm
Where do you have your money at 2.5% in a savings account? Ally only giving 1.75% currently and inflation is almost at 3% sheesh...
I answered this question upthread: viewtopic.php?f=10&t=253896&p=4023403#p4019701.

Even Vanguard Prime money market now is paying 2.05%. I minimize the amount I keep at Ally these days, but still like it as a hub bank for a number of reasons.

We don't know what inflation is, only what it has been. Although June year over year CPI was 2.87%, it was only 2.07% at the beginning of the year. We don't know whether it will go up or down from here, although the trend certainly has been mostly up so far this year.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: 1-year Treasury Bill auction

Post by #Cruncher » Mon Jul 16, 2018 11:31 pm

Kevin M wrote:
Mon Jul 16, 2018 6:42 pm
My confusion started from your use of "yield" in the formula to convert bond yield to APY. APY is an effective annual rate, and is computed from the nominal annual rate.
What often confuses me are terms like "nominal rate" and "effective rate". I can never remember what they signify. The simple terms "yield" or "rate", on the other hand, have never confused me since I think of them as primarily per period. How they are expressed [e.g., as Bond Equivalent Yield (BEY) or Annual Percentage Yield (APY)] is secondary. [1]

If a $100 par bond pays $1 interest every six months, it's yield is 1% per period. That this is expressed as a BEY of 2.00% is only a convention. Likewise it is only a convention to express the return on a bank CD as an APY. [2] Of course if one is comparing two different investments, it's best to use the same convention for both.

Kevin M in same post wrote:If the coupon were to go into a money market account earning close to 0%, as we had for some years not too long ago, then BEY probably would be a better comparison, since there would be essentially no compounding of the coupon.
Yes, BEY would be closer. But it would still significantly overstate the growth rate if the time period is extended. Consider a $100 10-year bond that pays a $1 interest coupon every six month period. The following table shows the compound growth rate assuming the coupons are reinvested at 0%, 1%, or 2% per period.

The compound growth rate expressed as a BEY varies between 1.832% and 2.187%. This is much greater than the difference between the 2.00% BEY and 2.01% APY when coupons are reinvested at 1% per period.

Code: Select all

Reinvestment rate per six month period        0%        1%        2%
In 10 years $1 per period grows to         20.00     22.02     24.30 [3]
Total value including $100 principal      120.00    122.02    124.30 
Compound growth rate per period           0.916%    1.000%    1.093% [4]
BEY convention                            1.832%    2.000%    2.187%
APY convention                            1.840%    2.010%    2.199%
  1. Some Excel functions simply return the rate per period (e.g., IRR and RATE), and it's up to the user if he wants to express it for another time period. Other Excel functions return the yield expressed annually. E.g., YIELD expresses it as a BEY, while XIRR returns it as a pseudo APY for a 365-day year.
  2. It's not because reinvested interest on the CD will compound at the APY. The same APY is stated whether or not the depositor chooses to reinvest interest.
  3. Example calculation: 24.30 = (1.02 ^ 20 - 1) / 0.02
  4. Example calculation: 1.093% = (124.30 / 100) ^ (1 / 20) - 1

Call_Me_Op
Posts: 6997
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: 1-year Treasury Bill auction

Post by Call_Me_Op » Tue Jul 17, 2018 11:38 am

Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
IUsing the higher expected yield of 2.38% would provide a taxable-equivalent yield (TEY) of 2.673% for me at 28% federal and 8% state marginal tax rates = 2.38% * (1-27%)/ (1 - 27% - 8%).
Where does the 27% come from?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Tue Jul 17, 2018 3:12 pm

Call_Me_Op wrote:
Tue Jul 17, 2018 11:38 am
Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
IUsing the higher expected yield of 2.38% would provide a taxable-equivalent yield (TEY) of 2.673% for me at 28% federal and 8% state marginal tax rates = 2.38% * (1-27%)/ (1 - 27% - 8%).
Where does the 27% come from?
I expect to be in the 12% federal income tax bracket in 2018, but I have qualified dividends that span the 0% and 15% QD/LTCG tax rates. Therefore, every marginal dollar of ordinary income, taxed at 12%, pushes an additional dollar of QD/LTCG from 0% to 15%, for a combined marginal tax rate of 27%.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

kaeltor
Posts: 83
Joined: Sat May 12, 2018 11:20 am

Re: 1-year Treasury Bill auction

Post by kaeltor » Tue Jul 17, 2018 3:36 pm

Kevin M wrote:
Mon Jul 16, 2018 6:51 pm
kaeltor wrote:
Mon Jul 16, 2018 4:07 pm
Where do you have your money at 2.5% in a savings account? Ally only giving 1.75% currently and inflation is almost at 3% sheesh...
I answered this question upthread: viewtopic.php?f=10&t=253896&p=4023403#p4019701.

Even Vanguard Prime money market now is paying 2.05%. I minimize the amount I keep at Ally these days, but still like it as a hub bank for a number of reasons.

We don't know what inflation is, only what it has been. Although June year over year CPI was 2.87%, it was only 2.07% at the beginning of the year. We don't know whether it will go up or down from here, although the trend certainly has been mostly up so far this year.

Kevin
Thank you for the explanation!

How does the expense ratio play into the the total yield for the Vanguard Prime money market account?

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Tue Jul 17, 2018 5:17 pm

kaeltor wrote:
Tue Jul 17, 2018 3:36 pm
How does the expense ratio play into the the total yield for the Vanguard Prime money market account?
SEC yield is net of expense ratio, so what you see is what you get. Actually, when yields are increasing, as they have been, you're actually earning a bit more, since SEC yield is the average yield for the previous seven days.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Wed Jul 18, 2018 9:43 am

Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
I had been thinking about placing an order at the 1-year Treasury auction, which now is open. Fidelity is showing "Expected Yield" of 2.380%, while Vanguard is showing "Indicative Yield" of 2.339%. Any ideas on why they are showing different expected/indicative yields--about 4 basis points difference?
The 1-year (52-week) Treasury Bill was auctioned at a price of 97.639056, "high rate" of 2.335%, and "investment rate" of 2.410% (https://www.treasurydirect.gov/instit/a ... 0717_1.pdf). Note that the high rate is closer to the Vanguard Indicative Yield, while the investment rate is closer to the Fidelity Expected Yield. I wonder if Vanguard's indicative yield is meant to be an estimate of the high rate rather than the investment rate.
Kevin M wrote:
Fri Jul 13, 2018 1:49 pm
Using the higher expected yield of 2.38% would provide a taxable-equivalent yield (TEY) of 2.673% for me at 28% federal and 8% state marginal tax rates = 2.38% * (1-27%)/ (1 - 27% - 8%). Since I now have a savings account with an APY of 2.50% guaranteed until 12/31/2019, this bill doesn't look particularly attractive, offering only 17 basis points of additional yield for extending maturity from 0 years to 1 year.
My TEY calculated from actual investment rate (bond equivalent yield, or BEY) is 2.707%. That's a yield premium of 20.7 basis points over my savings account at 2.50% APY, so just above the Larry Swedroe guideline of 20 bps/year of maturity.

Following #Cruncher's suggestion to convert BEY to APY for comparing to the bank account, APY = 2.425%. My TEY calculated from this APY is 2.723%, so 22.3 basis points more than the bank account APY. So 2.3 basis points over the 20 bps/year of maturity guideline.

The Andrews 9-month CD at 2.75% APY still is a better deal from a pure yield perspective, providing about 33 basis points of additional yield per year of additional maturity. I'm still investigating the hassle factor, now much interest I'll lose in doing the transfer to buy the CD, and whether or not I can assign beneficiaries so I can hold the CD as payable on death (POD). My taxable brokerage accounts are trust accounts, so the latter is not a factor for buying Treasuries.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

kaeltor
Posts: 83
Joined: Sat May 12, 2018 11:20 am

Re: 1-year Treasury Bill auction

Post by kaeltor » Wed Jul 18, 2018 5:02 pm

Kevin M wrote:
Tue Jul 17, 2018 5:17 pm
kaeltor wrote:
Tue Jul 17, 2018 3:36 pm
How does the expense ratio play into the the total yield for the Vanguard Prime money market account?
SEC yield is net of expense ratio, so what you see is what you get. Actually, when yields are increasing, as they have been, you're actually earning a bit more, since SEC yield is the average yield for the previous seven days.

Kevin
Yes but if I sell I will have to pay capital gains no? That's the reason why I've been staying at ally for now...

User avatar
Kevin M
Posts: 10002
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 1-year Treasury Bill auction

Post by Kevin M » Wed Jul 18, 2018 8:04 pm

kaeltor wrote:
Wed Jul 18, 2018 5:02 pm
Kevin M wrote:
Tue Jul 17, 2018 5:17 pm
kaeltor wrote:
Tue Jul 17, 2018 3:36 pm
How does the expense ratio play into the the total yield for the Vanguard Prime money market account?
SEC yield is net of expense ratio, so what you see is what you get. Actually, when yields are increasing, as they have been, you're actually earning a bit more, since SEC yield is the average yield for the previous seven days.

Kevin
Yes but if I sell I will have to pay capital gains no? That's the reason why I've been staying at ally for now...
No. Retail money market fund share price is maintained at $1/share, so there is no capital gain or loss when you sell shares.

The only reason to prefer Ally is if you want the FDIC insurance, and don't want to switch to a bank or credit union with a higher-yielding savings account. Personally, I'm comfortable with what I consider to be the tiny amount of credit risk in something like Prime money market, so I switched to it pretty much as soon as the yield increased above the Ally 11-month no-penalty CD rate at the time.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Post Reply