New Issue and Reopened Issue Bonds

[CaptainO]

Can anyone tell me the difference between a “new issue” and a “reopened issue” in regards to Treasury bonds? I understand that a previous bond can be reopened, but from what I’ve been able to find out, it is opened under the terms it was originally issued. So, if it was originally issued with a 2% coupon (interest rate) that’s what the rate will be for the reopened issue. Apparently, the cost of the bond fluctuates, though… So, for example, say last month’s “new issue” for a 30 year bond sold with a 3.5% coupon/interest rate. Then, a month later they reopen a 30 year bond that was originally issued a year ago with a 2% coupon. Do they lower the price of say, a $1000 bond to $850 (or whatever the difference of the coupon rates computes out to) so you are essentially getting current 3.5% rates? Or, how does it work?

 

[rbmrtn]

From the treasurydirect site...

In a reopening, we auction additional amounts of a previously issued security. Reopened securities have the same maturity date and interest rate as the original securities, but a different issue date and usually a different price.

Individual - Treasury Bonds: FAQs

 

[akck]

As mentioned, the price is what changes. One thing to remember is that you're comparing it to a shorter maturity bond. For instance, on a 30 year bond re-issued 10 years later, it should be priced to make the yield comparable to a 20 year maturity bond. In your example, the yield of the re-issue would likely be less than the 3.5% due to the year difference.

 

[FIRE'd@51]

You can get an indication of the current prices of all outstanding issues here:

U.S. Treasury Quotes - Markets Data Center - WSJ.com

 

[CaptainO]

As mentioned, the price is what changes. One thing to remember is that you're comparing it to a shorter maturity bond. For instance, on a 30 year bond re-issued 10 years later, it should be priced to make the yield comparable to a 20 year maturity bond. In your example, the yield of the re-issue would likely be less than the 3.5% due to the year difference.

Geez, I didn't think of that, but it makes sense. So, how does one determine with any sort of accuracy what kind of rate they'll get before they purchase? This whole Treasury bond buying process is starting to seem kind of mystical to me. Even on a new issue, apparently you don't know what rate you'll get until after the auction, and it's too late to turn back.

 

[CaptainO]

You can get an indication of the current prices of all outstanding issues here:

U.S. Treasury Quotes - Markets Data Center - WSJ.com

Ok, I think this may be helpful, if I can understand it a little better. These quotes must be issues on the "secondary" market that people are bidding on, correct? So, if someone were to buy a reopend issue through Treasury Direct, they might consult this chart the day before to get an idea of what kind of prices/rates they could expect?

 

[FIRE'd@51]

Ok, I think this may be helpful, if I can understand it a little better. These quotes must be issues on the "secondary" market that people are bidding on, correct? So, if someone were to buy a reopend issue through Treasury Direct, they might consult this chart the day before to get an idea of what kind of prices/rates they could expect?

Yes, exactly. The final price will be set by the bidders at the Treasury Auction.

 

[CaptainO]

Yes, exactly. The final price will be set by the bidders at the Treasury Auction.

Ok, thank you. That helps. Still think it's a little weird that you don't know exactly what you're buying until after you buy it. But this sheds some light.

 

[FIRE'd@51]

Still think it's a little weird that you don't know exactly what you're buying until after you buy it. But this sheds some light.

That's true of new issues as well purchased at auction through Treasury Direct, since the yield isn't determined exactly until the auction takes place. You submit a bid for a $-amount of notes/bonds. As what they call a non-competitive bidder you are guaranteed the $-amount but don't know the actual yield until after the auction. The total $ amount allocated to the non-competitve bidders is subtracted from the total amount issued and put aside. Competitive bidders submit yield bids for the rest until it's all gone. Everyone (competitive and non-competitive) gets the highest accepted yield.

 

[bamsphd]

Even on a new issue, apparently you don't know what rate you'll get until after the auction, and it's too late to turn back.

Just like when placing "market" stock orders, buying an open-ended mutual fund, or buying lottery tickets.

In practice, the nice thing about non-competitive bids is that you get to buy Treasuries at the wholesale price with no commission, spread, or other additional fees. The downside is you have to submit your bid before the price has been decided, don't always know exactly how much you will be spending, and then have to wait a while for the transaction to complete.

I purchase the rungs of my treasury TIPS ladder with new issue non-competitive bids. I don't get to invest precise dollar and cents amounts, but the "secondary" prices really are close enough for my purposes. Knowing I'm paying the same price as the largest Wall Street bank adequately compensates for the downsides in my opinion.

If you want precise prices, you can wait until after the auction and purchase the same security on the "secondary" market. However you will not get the wholesale price on the "secondary" market.

 

[CaptainO]

I purchase the rungs of my treasury TIPS ladder with new issue non-competitive bids.

Why specifically "new issue"? Is there something more advantageous to that than a reopened issue?

 

[CaptainO]

If you want precise prices, you can wait until after the auction and purchase the same security on the "secondary" market. However you will not get the wholesale price on the "secondary" market.

Also, would you, or anyone else, be so kind as to expand a little on purchasing in the secondary market (pros/cons)? I assume one needs a broker. Vanguard states that it only submits non-competitive bids, so I assume also that they are not purchasing on the secondary market. What type of broker is needed to submit a bid on the secondary market?

 

[haha]

Also, would you, or anyone else, be so kind as to expand a little on purchasing in the secondary market (pros/cons)? I assume one needs a broker. Vanguard states that it only submits non-competitive bids, so I assume also that they are not purchasing on the secondary market. What type of broker is needed to submit a bid on the secondary market?

If vanguard does not do that, almost any broker other than Vanguard does.

In regard to your other question, I am not the poster, but I assume he just meant in distinction to secondary market. There is no practical difference for most bonds with re-openings, although there is are definite things you need to understand with TIP re-issues. Also, re-opened regular treasuries may have different coupons and discounts or premia relative to the current run.

 

[akck]

Also, would you, or anyone else, be so kind as to expand a little on purchasing in the secondary market (pros/cons)? I assume one needs a broker. Vanguard states that it only submits non-competitive bids, so I assume also that they are not purchasing on the secondary market. What type of broker is needed to submit a bid on the secondary market?

You'll be looking at a bid/ask spread, which can be big in some cases. You can buy something and it will immediately show a loss due to the spread. I utilize E*Trade for bond purchases. You are limited to what people are selling there, so the selection can be limited.

 

[bamsphd]

Why specifically "new issue"? Is there something more advantageous to that than a reopened issue?

My ladder uses 5 year TIPS. Currently every rung of that ladder was originally issued on April 15th and matures on April 15th five years later. While there is no guarantee that Treasury will maintain that pattern, for as long as I have been maintaining my ladder a rung has matured in April and the treasury has offered a new 5 year TIPS in April. Thus I normally maintain my ladder by purchasing a "new issue" at auction the same month as my oldest bond matures.

I did replace one rung once using a reopened issue. TIPS yields had I thought temporarily dipped to absurd lows so I skipped the "new issue" and purchased the same bond at the reopened auction later in the year. Treasury usually reopens the 5 year TIPS a few times during the year, so if you miss the first auction you will have additional chances to buy the same bond at auction.

Also, would you, or anyone else, be so kind as to expand a little on purchasing in the secondary market (pros/cons)? I assume one needs a broker. Vanguard states that it only submits non-competitive bids, so I assume also that they are not purchasing on the secondary market. What type of broker is needed to submit a bid on the secondary market?

I think you have misunderstood some terminology, and thus have misunderstood Vanguard's policy. When the treasury has an auction for a new or reopened bond (see Announcements, Data & Results) the treasury accepts two kinds of bids non-competitive bids and competitive bids. At this year's 5 year TIPS auction the largest permitted non-competitive bid was $5,000,000.00 while the largest permitted competitive bid at a single yield was $6,300,000,000.00. Until you want to place a bid larger than the maximum non-competitive bid, I believe you will always want to use a non-competitive bid. So Vanguard's restriction should not bother you. If you need to bid more than five million at a single Treasury auction, you need professional advice, not my amateur understanding of the situation.

Using 5 year TIPS as an example, in recent years the Treasury has auctioned a new 5 year TIPS every April, and has reopened the 5 year TIPS auction selling additional bonds two or more times (I don't pay much attention) during the year. However, the secondary market is not run by the Treasury. It lets people who already own bonds sell those bonds to other people who don't want to wait for the next Treasury auction. The catch is there is normally a bid-ask spread, and/or an explicit or hidden commission involved in buying on the secondary market. Those fees are usually not huge for Treasuries, and I have sold Treasuries on the secondary market. However, I prefer to buy my Treasuries at wholesale during Treasury auctions where possible, and to hold them to maturity.

So what Vanguard is saying is they only accept non-competitive bids for official Treasury auctions. However, during business hours the Vanguard "bond desk" stands ready to buy and sell Treasuries, Agencies, Municipal, and Corporate bonds, as well as brokered CDs on the secondary market. Under the "Buy & Sell" tab click the "View and trade bonds or CDs" link.

Personally, when my portfolio was smaller, I used Treasury Direct to purchase my Treasury securities. Now I find it more convenient to use Vanguard where most of my other investments are located. I don't recall ever purchasing a bond on the secondary market. Though I have sold Treasuries on the secondary market, my equivalent of cashing out a CD early.

 

[CaptainO]

Thanks very much, bamsphd, and everyone else that has replied!