Treasuries - New or Market?

[mystang52]

Is there any advantage to buying a Treasure on the market, vs a new issue, or vice versa?

 

[audreyh1]

It comes down to personal preference/investing style.

Overall it’s probably a wash. It depends on how much time you want to spend looking for good deals on the secondary market versus a more set it and forget it type approach with using the auction.

 

[JoeWras]

If you buy new at auction and hold to maturity, your tax calculation will be extremely simple, just like a CD.

If you buy secondary, and/or sell early, you will have more tax tasks and may get more forms or more boxes filled on the 1099-INT. This is generally not a huge deal, but it can get a bit confusing.

 

[Midpack]

The return is about a wash but there is a difference…

Interest income from Treasury bonds is exempt from state and local income taxes, but subject to federal income taxes. There may also be tax consequences when you sell Treasurys that you bought on the secondary market. If you buy a bond for less than face value on the secondary market and either hold it until maturity or sell it at a profit, the gain will be subject to federal and state taxes. This is different than buying a Treasury bill at Original Issue Discount (OID). When a bond is sold or matures, gains resulting from purchasing a bond at a discount in the secondary market are treated as capital gains while OID gains are taxed as income.

 

[njhowie]

If you buy secondary, and/or sell early, you will have more tax tasks and may get more forms or more boxes filled on the 1099-INT. This is generally not a huge deal, but it can get a bit confusing.

Fidelity, or whoever your broker is takes care of it all. You do the import from within your tax software and that's it - no confusion, no additional tasks, no different than your normal process of importing your 1099s.

However, there are a number of advantages to purchasing in the secondary market vs. auction.

1. When you buy at auction, like new issue CDs, you're generally placing your order in advance of the issue date. Rates may change between the time you place your order and the time of auction, and the yield you get will adjust accordingly. Unlike CDs where the rate you get will not change between the time you place your order and when it's issued. With secondary, you place the order you own it immediately and know everything.

2. You have many, many more maturities available. On any particular auction date there are a few (generally 5 or less) maturities being sold. In the secondary market, you have hundreds to choose from every day of the week - as short or long a maturity as you want.

3. Though the market is generally efficient, it's not always the case, and you could do a little better by purchasing in the secondary market.

 

[jldavid47]

You usually do slightly better if you buy at auction because you don't lose the bid/ask spread.

 

[Montecfo]

Fidelity, or whoever your broker is takes care of it all. You do the import from within your tax software and that's it - no confusion, no additional tasks, no different than your normal process of importing your 1099s.

I prefer the secondary market. But I have found that prepaid interest (which should offset reported interest) is not included in 1099 reporting, at least for my broker. So you have to make sure and capture that as an offset or you will overpay taxes.

 

[Montecfo]

You usually do slightly better if you buy at auction because you don't lose the bid/ask spread.

How so? Treasuries are offered at an "ask" price. You can't turn around and sell at the same price.

I guess you mean this in theory.

 

[njhowie]

I prefer the secondary market. But I have found that prepaid interest (which should offset reported interest) is not included in 1099 reporting, at least for my broker. So you have to make sure and capture that as an offset or you will overpay taxes.

I double-checked this using my info from Fidelity because someone on this site indicated a while back they did not. I can confirm that Fidelity does in fact report prepaid interest properly on the 1099 - both the print version as well as the datalink/import to your tax software (Turbotax for certain).

 

[jazz4cash]

I double-checked this using my info from Fidelity because someone on this site indicated a while back they did not. I can confirm that Fidelity does in fact report prepaid interest properly on the 1099 - both the print version as well as the datalink/import to your tax software (Turbotax for certain).

I think that may have been me. I recall stumbling on the issue and having to work around the problem. Where is the pre-paid interest reported on the 1099 or does the amount reported exclude prepaid interest?

Looking at last year’s 1099 from Fido I have a note on the last page of the doc titled ‘Tax Summary-Not Reported to IRS’. It lists an amount for ‘accrued interest paid on purchases’. I don’t want to derail but I need to flesh this out.

 

[UpQuark]

Is there any advantage to buying a Treasure on the market, vs a new issue, or vice versa?

I'm still learning about it all but today I found out (nothing surprising to experienced people but was new to me), that despite the 20 yr bond being listed in the 'New Issue' tab (on Fidelity website), that tomorrow it is just a "re-issue" and that means the coupon is for sure what it was last month, but the price will be the market price (apparently same as would be on the secondary market just less by a teensy amount).

I am up on the computer now because I just can't decide whether I want to buy any or not -- I'm not sure what time tomorrow it goes off the website, but I get up so late in the morning (yay retirement!) tonight is my last chance to decide.

 

[audreyh1]

With a 4 3/4% coupon it will sell at a premium.

Looks like recent trade has yield of 4.23%?

 

[UpQuark]

With a 4 3/4% coupon it will sell at a premium.

Looks like recent trade has yield of 4.23%?

Yes it looks like the price will be quite a bit above par (hope I'm using the terminology correctly).

So I just don't know what to do. Both people on YouTube and Fidelity fixed income people think DCA'ing in is a workable strategy for long durations right now because (apparently) there are many different factors that affect the long duration yields and I guess they are expected to go up and down, at least for the next several months.

 

[audreyh1]

It’s out of my league, I don’t do anything longer than 5 yrs.