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Why would Individuals buy Treasuries or Treasury Funds?
Old 08-26-2017, 06:37 PM   #1
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Why would Individuals buy Treasuries or Treasury Funds?

As an individual investor bank FDIC interest rates are so much higher than comparable maturity treasuries ( example 5 year CD 2.4% 10 year treas 2.2%). This has led me to dump any treasury funds as well as BND and AGG total bond funds. I can beat the income of treasuries with a ladder of CD's and overall lower duration. A small allocation of approx. 15%-20% corporate bonds, LQD or VCIT give me higher income with lower duration, risk and expense ratio when compared to the indexes

The fact I'm giving up mortgages is not a consideration since I already have enough with other holdings. Likewise liquidity is not an issue with adequate cash reserves and a portion of the CD's maturing each year.

I feel that the CD's below the 250k cap per bank are one area the small guy has an advantage over the institutional investors.

Thoughts?
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Old 08-26-2017, 06:53 PM   #2
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If i ever see a 30 year treasury at 13% Im buying it, lots of them.
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Old 08-26-2017, 07:08 PM   #3
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Last time I saw that I had a 18% mortgage!
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Old 08-26-2017, 07:37 PM   #4
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.. Thoughts?.
I've never looked a this, but probably the CDs are less liquid if you need to sell before maturity and if you have to redeem early you get whacked a penalty. It might be worthwhile to take your question to the bond specialists wherever it is that you are trading.

But it may be as you say, somebody parking a large amount of money is not going to want to break it into guaranteed CD-size chunks, where that is not a big deal for an individual with smaller money.
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Old 08-26-2017, 09:10 PM   #5
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While penalties vary by bank, they are typically 1/2 a year of interest. What I have done is split my $250k into five $50k CDs so if I need some liquidity I can just redeem one or more CDs without having to redeem the entire $250k.
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Old 08-27-2017, 01:27 AM   #6
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What makes Treasuries attractive is their Tax Exempt interest.
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Old 08-27-2017, 02:42 AM   #7
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What makes Treasuries attractive is their Tax Exempt interest.
Just to be clear: state and local only. Feds still tax the interest paid.

-BB
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Old 08-27-2017, 04:05 AM   #8
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Thanks for the input. To clarify these CD's are in a tax deferred brokerage account. The state tax advantage of treasuries is not a factor here. Also I realize that I'm giving up liquidity with brokered CD's but the ladder and adequate other sources should be enough.
The CD's represent about 60% of my fixed income holdings. I still hold DBLTX and PIMIX mutual funds in tax deferred as well as Series I bonds in a treasury account.

At this point of my life and with current market conditions any excess earnings (it's not much) are going to be reinvested in the CD ladder.
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Old 08-27-2017, 08:31 AM   #9
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Originally Posted by foxfirev5 View Post
As an individual investor bank FDIC interest rates are so much higher than comparable maturity treasuries ( example 5 year CD 2.4% 10 year treas 2.2%) ... I feel that the CD's below the 250k cap per bank are one area the small guy has an advantage over the institutional investors.
Totally agree with you ... I have no idea why one buys treasuries when FDIC CDs with short term withdrawal penalties pay so much more.

If I had to venture a guess, those buying treasuries would be individuals who do not "trust" the banks that offer the higher CD rates especially if they are online only.

But, I had the same question as you.
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Old 08-27-2017, 11:41 AM   #10
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And some individuals choose not to go through the hassle of buying individual securities (bonds or cds) and choose to invest in mutual funds to do the job. There is still a reason to invest in both treasuries and corporate bonds. When times are tough, the market value of the Treasuries rises in relation to corporate bonds.

Rather than spending time qualifying the issuer, using a fund or etf takes care of the paperwork and research, and provides an easy exit when needed.

- Rita
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Old 08-27-2017, 04:40 PM   #11
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We still hold about 10-12% of our fixed income in Tips.
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Old 08-29-2017, 01:53 PM   #12
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A ladder of CD's is great as long as inflation stays low. Not so much if it kicks high.

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Old 08-29-2017, 02:02 PM   #13
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Last time I saw that I had a 18% mortgage!
My 1st mortgage was for 14%, and I later patted myself on the back for being lucky when it climbed even higher. Oh boy, mortgage interest deduction galore!

If one remembers that, then he also remembers when interests on credit cards and auto loans were tax deductible.
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Old 08-29-2017, 02:16 PM   #14
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While penalties vary by bank, they are typically 1/2 a year of interest. What I have done is split my $250k into five $50k CDs so if I need some liquidity I can just redeem one or more CDs without having to redeem the entire $250k.


Wait. That much cash?
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Old 08-29-2017, 02:20 PM   #15
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And some individuals choose not to go through the hassle of buying individual securities (bonds or cds) and choose to invest in mutual funds to do the job. There is still a reason to invest in both treasuries and corporate bonds. When times are tough, the market value of the Treasuries rises in relation to corporate bonds.

Rather than spending time qualifying the issuer, using a fund or etf takes care of the paperwork and research, and provides an easy exit when needed.

- Rita
Same with using somebody like Fidelity to build a brokered CD ladder. You don't care about the bank because the bank is FDIC insured. Fidelity automatically peanut butters the amounts among the banks to keep you below FDIC insurance limits.
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Old 08-29-2017, 04:27 PM   #16
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Wait. That much cash?
Really more a bond substitute than cash. The CDs I was referring to I bought about 3 1/2 years ago from PenFed. 3% for 5 years with no credit or interest rate risk. Better than any credit worthy, five year bonds available at the time.
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Old 08-29-2017, 04:41 PM   #17
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Why would Individuals buy Treasuries or Treasury Funds?
One reason could be that Treasuries are not subject to bank failures.
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Old 08-29-2017, 05:19 PM   #18
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Neither are FDIC insured CDs as long as you stay under the limits.
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Old 08-29-2017, 09:03 PM   #19
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Treasuries are the most liquid debt instrument. For the prior 8-9 years you could buy a 5 year US Treasury at say 2.25 and when the yield curve was higher before interest rates were raised in 2 years you hold for 2 years earning 4.5% and sell when 3 year yields 1.25 percent and make another 3% or 7.5% in two years and buy the 5 year again. At present this strategy is not as profitable as you would only make an additional one percent at present rates but still for the ultimate safety you would get 4.6% over 2 years, assuming rates do not change.

Or say Bond Prices return to the 2013 when 5 year sold for 2.2% yield and 3 year for 1.5% you sell the bond after holding for two years pocket a 1% profit and reinvest at the higher 2.2% yield, no early withdrawal penalties for treasuries, in fact the price will include accrued interest
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Old 08-30-2017, 05:28 AM   #20
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I agree, and I've been setting up a CD ladder each quarter this year as I'm headed into OMY stage. Going forward, each year, each quarter, CD comes due and I'll roll it into 5 yr with presumably highest interest. Going forward, every quarter I'll have one coming due in case of need. Not the highest returns, but part of a balanced portfolio that provides some stability and safety. Stocks more interesting and potentially rewarding, but prudence dictates some balance at this point in life. DW likes familiarity of CD, FDIC assurance, and safety.
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