Treasury Bills, Notes, and Bonds Discussion

[calmloki]

So ladders - if you had plenty of monthly income coming in and a million dollars to invest and wanted to put it in treasuries how would you do it? Right now a one year Treasury is at 4% and the return drops off as the duration goes up or down. Would you put the whole amount in on Tuesday or build a ladder? And what distance between the rungs? $50k every week for 20 weeks? That means rebuying weekly. 100k/month and hope for rates to favor getting 2 and 3 year and longer issues as the months pass?

[Dash man]

Quote:

Originally Posted by calmloki So ladders - if you had plenty of monthly income coming in and a million dollars to invest and wanted to put it in treasuries how would you do it? Right now a one year Treasury is at 4% and the return drops off as the duration goes up or down. Would you put the whole amount in on Tuesday or build a ladder? And what distance between the rungs? $50k every week for 20 weeks? That means rebuying weekly. 100k/month and hope for rates to favor getting 2 and 3 year and longer issues as the months pass?

With $1M I’d build a three year ladder with T-bills, T-notes and CDs spread out every three months.

[ShokWaveRider]

Quote:

Originally Posted by copyright1997reloaded I updated my post with some screen shots. Let me know if anything is confusing or you need more. Ha ha, this is what my life is like with students. ETA: Hope the above (life with students) didn't sound disrespectful, it wasn't meant to be. Also, I've been personally concentrating on auctions vs. buying in secondary. If you buy or sell in secondary, you will need to be cognizant of minimum amounts for certain asks/bids.

If one buys a bond on the secondary market, say a 2 year Treasury that has 18 months left to maturity, If the original return was 2% but now it is say 4%. How is the price calculated and do I get 2% or 4%?

Sorry, I really need to call Schwab to get these questions answered.

[copyright1997reloaded]

Quote:

Originally Posted by ShokWaveRider If one buys a bond on the secondary market, say a 2 year Treasury that has 18 months left to maturity, If the original return was 2% but now it is say 4%. How is the price calculated and do I get 2% or 4%? Sorry, I really need to call Schwab to get these questions answered.

You can look at the YTM (yield to maturity) to see, but in general if a 2-year 2% coupon treasury bond with 18 months remaining were to be sold with 18-month treasuries around 4%, the 2% coupon bond would have to sell at a discount.

Since: Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]

we can solve for Price given we know YTM (4%) and the maturity in years.

However, I am too lazy. So I just did a search on Schwab using 18 months as the maturity. For example, look at the first line, i.e. CUSIP 91282CDV0 with a annual interest of 0.875%. It has a YTM of 3.954% which combines the interest payments AND the gain based on the discount (95.95700) as it will mature on 01/31/2024 at 100.00. Oh yes, that calculation also factors the fact that you will need to pay the accrued but not yet paid interest of 30.320.

Also note that T-bills don't pay interest via coupon, so no accrued but not paid interest to worry about (the YTM is based on the discount from maturity price).

There are also tax ramifications in terms of treatment of bonds sold at a discount to their original price:

Quote:

. Generally, if the discount falls within a specified de minimis threshold, it is deemed to be too small to be treated as a market discount. As a result, the appreciation upon the sale or exchange of the bond will be treated as a capital gain rather than as ordinary income. If the market discount is less than one quarter of 1% of the stated redemption price of the bond at maturity, multiplied by the number of complete years to maturity from when the taxpayer acquires the bond, the market discount will be deemed de minimis and treated as a capital gain for tax purposes if the bond is held to maturity, redeemed or sold for a price above the purchase price. If the discount is greater than this de minimis threshold, the accrued market discount realized at maturity must be treated as ordinary 3 See footnote 1 regarding municipal bond pricing. income. However, if the bond is sold above the purchase price before maturity, such premium may be taken into account in determining the total amount of market discount upon sale.

Ugh. To me, why not just stay simple and buy new issues vs. mess in the secondary market? There is a 2-year note auction scheduled for 9/26. a 52-week T-Bill scheduled for 10/4/22.

[calmloki]

Quote:

Originally Posted by Dash man With $1M I’d build a three year ladder with T-bills, T-notes and CDs spread out every three months.

Why T-bills, T-notes and CDs? Why not just T-bills or CDs or T-notes?

So buy $83,333 worth every three months?

[ShokWaveRider]

Quote:

Originally Posted by copyright1997reloaded Ugh. To me, why not just stay simple and buy new issues vs. mess in the secondary market? There is a 2-year note auction scheduled for 9/26. a 52-week T-Bill scheduled for 10/4/22.

I agree 100% I was just trying to learn about them. Thanks for the Tax lesson too.

I assume tax is not due till maturity. Say if one purchased a 2 year bond at the discounted rated (Bond price - 2 years interest). Or am I wrong there? Is tax due annually?

[copyright1997reloaded]

Quote:

Originally Posted by ShokWaveRider I agree 100% I was just trying to learn about them. Thanks for the Tax lesson too. I assume tax is not due till maturity. Say if one purchased a 2 year bond at the discounted rated (Bond price - 2 years interest). Or am I wrong there? Is tax due annually?

Interest on T-Bills is due in the year it matures. If you buy a T-Bill and sell it before maturity, I believe the gain is treated as a capital gain (short term). (This is a guess, so your mileage may vary.) I also think that you can opt to have some of the interest paid at maturity held to pay taxes. (I have never done this.)

T-Notes & T-Bonds pay interest every six months, interest is due in the tax year it is paid.

Zero coupon T-Notes/T-Bonds have a different tax treatment: Since they pay 0%, the interest is imputed annually. A long time ago when zero's were paying out 8/10/12/14% this was a big factor (the phantom income) as one would have to have enough $ to pay taxes on the phantom income (with no income coming from the bond, just theoretical price appreciation).

[MBSC]

Quote:

Originally Posted by ShokWaveRider I assume tax is not due till maturity. Say if one purchased a 2 year bond at the discounted rate...

When a secondary market coupon note/bond is bought at a discount, the low coupon payments are taxed along the way. Tax on the remainder is deferred until maturity. Some people buy MYGAs to defer ACA income for a few years until Medicare age. Secondary discounted notes can be used for similar purposes.

Market discount taxation: https://www.hilltopsecurities.com/wp...ount-rules.pdf

The de Minimis Rule mentioned above impacts municipal bond holders. They think it's tax-free but end up paying tax on the de Minimis gain. Treasury gains are taxed as interest when the rule does not apply so there is no surprise tax due. The tax software figures out the correct method so I don't have to think about it since I hold secondaries until maturity.

[Dash man]

Quote:

Originally Posted by calmloki Why T-bills, T-notes and CDs? Why not just T-bills or CDs or T-notes? So buy $83,333 worth every three months?

Pick the best returns out of T-bills, T-notes and CDs. Sometimes you’ll find a better CD rate than a T-note for a particular length.

No, I didn’t mean spreading out your purchases every three months. I meant spreading out your maturities every three months. Put all your money to work.
Start with $80,000 in 3 month bill, not or CD, then $80,000 in 6 month maturity, $80,000 in 9 month maturity and so on out to 3 years maturity.
As each matures, buy another 3 year maturity.
That is how a ladder works.

[COcheesehead]

Quote:

Originally Posted by calmloki So ladders - if you had plenty of monthly income coming in and a million dollars to invest and wanted to put it in treasuries how would you do it? Right now a one year Treasury is at 4% and the return drops off as the duration goes up or down. Would you put the whole amount in on Tuesday or build a ladder? And what distance between the rungs? $50k every week for 20 weeks? That means rebuying weekly. 100k/month and hope for rates to favor getting 2 and 3 year and longer issues as the months pass?

I built my ladder to match liabilities. I don’t want to touch equities and want enough to fund a pretty comfy retirement until I access SS at 70. So I built each rung to throw off in interest the amount I need. Maturing bonds are reinvested. I started with mostly muni’s, but as my tax situation changed in retirement I added corporates. My ladder yields over 5%, having doubled in a pretty short time and has an average duration of 9 years. Some say don’t go long, over 5 years, but that end of the curve has been far less reactive and provides good yield. I buy bonds almost every couple of weeks now as bonds mature. Someone far smarter than me told me years ago, the time to buy bonds is when inflation is raging. It has served me well, if you are pragmatic about investing maturing funds into intermediate/long bonds.

[Chuckanut]

My only ladder problem is that I have a few small CD's that are maturing many months apart. As each matures, I put the proceeds into a ladder. So now I have three ladders going and another CD maturing later this month. Too many ladders, makes for confusion and more work. Later this week I will print out a SS of the ladders and figure out how to consolidate them into one ladder. I may extend the ladder out another six months, or just be content with some steps being wider/thinner than the other steps.

[copyright1997reloaded]

Quote:

Originally Posted by MBSC When a secondary market coupon note/bond is bought at a discount, the low coupon payments are taxed along the way. Tax on the remainder is deferred until maturity. Some people buy MYGAs to defer ACA income for a few years until Medicare age. Secondary discounted notes can be used for similar purposes. Market discount taxation: https://www.hilltopsecurities.com/wp...ount-rules.pdf The de Minimis Rule mentioned above impacts municipal bond holders. They think it's tax-free but end up paying tax on the de Minimis gain. Treasury gains are taxed as interest when the rule does not apply so there is no surprise tax due. The tax software figures out the correct method so I don't have to think about it since I hold secondaries until maturity.

Thank you for clarifying this, I had mixed that into a discussion on Treasuries (which I should not have done). Nor can I edit my post to fix/remove.

[jazz4cash]

Quote:

Originally Posted by COcheesehead I built my ladder to match liabilities..

Same here but I do have 70% equities. My ladder includes treasuries, CDs, corporate bonds/notes, munis and MYGAs. At maturity I try to split the principal in half or thirds. One chunk gets reinvested at the far end of the ladder. The other chunk(s) go(es) to near term expenses and/or equity allocation adjustments. The ladder is very lumpy because I buy whatever maturity I perceive to have value.

[Graybeard]

I am confused by this "When a secondary market coupon note/bond is bought at a discount, the low coupon payments are taxed along the way.". I read the link but not sure I understand it. It used an example of buying a bond that has increased rate.

If I buy a bill today that was issued several months ago, interest rates were lower back then. To be attractive, the interest rate today would need to be higher and therefore the cost would be lower. In that scenario, is that an example of the market discounting rule because I paid less for the bill? And if the answer is yes, then does that mean there is more tax because of that?

If there is more tax then why buy in the secondary market? Any treasuries issued months or years ago will have low interest rates and high prices when they were bought. Wouldn't buying new at auction eliminate that extra taxation?

ETA - maybe this does not apply to bills as they are in effect a zero coupon instrument?

[audreyh1]

It only applies to certain notes and bonds. Not to bills.

[copyright1997reloaded]

Quote:

Originally Posted by Graybeard I am confused by this "When a secondary market coupon note/bond is bought at a discount, the low coupon payments are taxed along the way.". I read the link but not sure I understand it. It used an example of buying a bond that has increased rate. If I buy a bill today that was issued several months ago, interest rates were lower back then. To be attractive, the interest rate today would need to be higher and therefore the cost would be lower. In that scenario, is that an example of the market discounting rule because I paid less for the bill? And if the answer is yes, then does that mean there is more tax because of that? If there is more tax then why buy in the secondary market? Any treasuries issued months or years ago will have low interest rates and high prices when they were bought. Wouldn't buying new at auction eliminate that extra taxation? ETA - maybe this does not apply to bills as they are in effect a zero coupon instrument?

Please review what I posted here: https://www.early-retirement.org/for...ml#post2830202

[copyright1997reloaded]

13-week, CUSIP 912796X87, YTM 3.343%
26-week, CUSIP 912796U31, YTM 3.907%

The 26-weeks are getting pretty darn close to that 4% marker.

[Chuckanut]

Quote:

Originally Posted by copyright1997reloaded 13-week, CUSIP 912796X87, YTM 3.343% 26-week, CUSIP 912796U31, YTM 3.907% The 26-weeks are getting pretty darn close to that 4% marker.

I noticed that food prices are up about 13% over last year, electricity is up about 15% and gasoline in my area is still 20+% higher than last year even with the latest price drops. Sure Walmart is selling clothing cheaper these days. But, it's the daily consumables that I am buying that are up, Up and UP. Add in travel expenses now that the kids have moved out of state, and 4% is what I would name a dog that doesn't hunt.

I'll take the best I can get at this time, no doubt about that. But, I am keeping my ladder under two years, and the option to see what happens with inflation and interest rates over the next year. I am not optimistic. And, I hope I am wrong.

[jim584672]

Quote:

Originally Posted by Graybeard I am confused by this "When a secondary market coupon note/bond is bought at a discount, the low coupon payments are taxed along the way.". I read the link but not sure I understand it. It used an example of buying a bond that has increased rate. If I buy a bill today that was issued several months ago, interest rates were lower back then. To be attractive, the interest rate today would need to be higher and therefore the cost would be lower. In that scenario, is that an example of the market discounting rule because I paid less for the bill? And if the answer is yes, then does that mean there is more tax because of that? If there is more tax then why buy in the secondary market? Any treasuries issued months or years ago will have low interest rates and high prices when they were bought. Wouldn't buying new at auction eliminate that extra taxation? ETA - maybe this does not apply to bills as they are in effect a zero coupon instrument?

The premium or discount needs to be amortized over the life of the bond and held to maturity.

[copyright1997reloaded]

Quote:

Originally Posted by Chuckanut I'll take the best I can get at this time, no doubt about that. But, I am keeping my ladder under two years, and the option to see what happens with inflation and interest rates over the next year. I am not optimistic. And, I hope I am wrong.

Same. My weighted duration on my non-I-Bond treasuries as of this mornings purchase is 140 days (weighted YTM is 3.26% annualized).