What happens to T bills when the Fed has their next rate increase?

[COcheesehead]

I am concerned that if rates drop today's rates may be better so I bought some 26 week T bills. Not sure of the coupon yet but guessing around 2.55%.

You never know if that is best at the buy, but laddering them eliminates the guess.
I bought a bunch of munis about a month ago and I am really glad I have them. All over 4%, a bunch in the 4.4%-4.5% range. Double tax free. I can make my plan work for a long time with those rates because I have more cashflow than expenses.

 

[Dash man]

I am concerned that if rates drop today's rates may be better so I bought some 26 week T bills. Not sure of the coupon yet but guessing around 2.55%.

Term: 26-Week
High Rate: 2.500%
Investment Rate*: 2.567%
Price: $98.736111
Allotted at High: 94.74%
Total Tendered: $114,598,035,000
Total Accepted: $48,842,949,000
Issue Date: 07/07/2022
Maturity Date: 01/05/2023
CUSIP: 912796X95

 

[Graybeard]

So maybe my concern about T bill coupons dropping has some truth to it? While I wanted to just buy 13 week bills to capture rising rates, maybe the 26 week bill is going to capture a higher coupon as/if rates are declining.

https://www.schwab.com/learn/story/fed-rate-hikes-why-are-bond-yields-falling

The Federal Reserve's pledge to curb inflation appears to have resonated with the market. If the central bank raises rates as much as recent projections indicate, the risk of recession rises. Consequently, bond yields have been pulling back from recent highs and the yield curve has flattened.

It looks like the Fed's actions and pledge to bring inflation down have resonated with the market. If the Fed follows through in hiking rates as much as the recent projections indicate, the risk of recession rises. Consequently, bond yields have been pulling back from recent highs and the yield curve has flattened.

 

[mb24]

Tbills = no coupon

Maybe it is semantics but T-Bills are Treasury Issuance 1 year or less in maturity and have no coupon attached to it. They are issues at a discount and that discount (discount price) is used to calculate the yield you would get on the T-Bill. For the sake of being very simplistic, let’s say a 1-year Bill is issues at a 99.01. That means in one year, you get back par (100) and you earn 1%. So the yield is 1%. If the market expected a 50bps hike on July 27th and this t bill is issued July 26th, then the market was anticipating the hike in calculating that discount price and 1% yield. If the fed hikes 75bps as a complete surprise to the market then the market would have to lower the price on this newly issued bill to a price that would be more equivalent to 1.25% (maybe 98.76). If they then issue a brand new 1-year bill, the yield will be 1.25% and the price around 98.76. If you bought before the fed hikes, you will still earn 1% if you hold to maturity. But you miss out on that extra 25bps yield because the market has adjusted.

Does this answer your question?

 

[Lsbcal]

I don't know if this is as cut and dried as "when interest rates rise bond prices decline". That is bond math and it is how it works so that is cut and dried but what about this?

The Fed will meet July 27 and they may rise the overnight rate 50 bp but 75 is perhaps more likely. Let's say they go 75 bp just for the sake of this discussion. How should or could or would that effect the coupon on a 3 month, 6 month and 1 year T bill? I doubt all 3 would raise their coupon by 75 bp. Is it possible that is already baked into rates and the coupons only increase a small amount like say 4 bp on the 3 month, 7 on the 6 month and 12 bp on the 1 year? Those are just numbers for discussion sake, I am not thinking those would be the increase of the coupons. Do these coupons have to increase close to what the Fed's increase is or can they just remain pretty much where they are?

You can see market expectations for the Fed Funds rate here:
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

The market assigns a probability of 93% that the target will be 2.25 to 2.50% at the July 27 meeting.

The market assigns a probability of 69% that it will be 2.75 to 3.00 at the September 21 meeting.

Rates will move up as they already have to meet these numbers by the applicable date. Then we will here the actual FOMC result. So a decent guess at the 3 month Treasury on July 27 might be 2.8% or thereabouts.

The Fed has said it is data driven. So is the bond market in secondary Treasuries.

FWIW, I decided to just hold my cash in Vanguard's VMFXX which will move with a lag towards the current short term Treasury rate. I was doing the 3mo Treasury purchases to maturity.

 

[Graybeard]

Maybe it is semantics but T-Bills are Treasury Issuance 1 year or less in maturity and have no coupon attached to it. They are issues at a discount and that discount (discount price) is used to calculate the yield you would get on the T-Bill. For the sake of being very simplistic, let’s say a 1-year Bill is issues at a 99.01. That means in one year, you get back par (100) and you earn 1%. So the yield is 1%. If the market expected a 50bps hike on July 27th and this t bill is issued July 26th, then the market was anticipating the hike in calculating that discount price and 1% yield. If the fed hikes 75bps as a complete surprise to the market then the market would have to lower the price on this newly issued bill to a price that would be more equivalent to 1.25% (maybe 98.76). If they then issue a brand new 1-year bill, the yield will be 1.25% and the price around 98.76. If you bought before the fed hikes, you will still earn 1% if you hold to maturity. But you miss out on that extra 25bps yield because the market has adjusted.

Does this answer your question?

Yes, thank you, you stated that correctly. Sometimes I'll use "generic" language as in "the T bill's coupon", I know it is an estimate on Vanguard's site when buying. I do know the 1 year and under bills are sold at a discount and the difference is what you earned.

 

[Graybeard]

You can see market expectations for the Fed Funds rate here:
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

The market assigns a probability of 93% that the target will be 2.25 to 2.50% at the July 27 meeting.

The market assigns a probability of 69% that it will be 2.75 to 3.00 at the September 21 meeting.

Rates will move up as they already have to meet these numbers by the applicable date. Then we will here the actual FOMC result. So a decent guess at the 3 month Treasury on July 27 might be 2.8% or thereabouts.

The Fed has said it is data driven. So is the bond market in secondary Treasuries.

FWIW, I decided to just hold my cash in Vanguard's VMFXX which will move with a lag towards the current short term Treasury rate. I was doing the 3mo Treasury purchases to maturity.

I didn't know that site existed. I do watch enough CNBC that I'm aware of the likelihood of what the Fed is expected to do in upcoming meetings, I'm sure the guests and hosts see that site or something like it. It's something that seems to get air time every day, multiple times a day.

2.8% on a 3 month T bill sounds nice! This is why I have preferred to buy mostly 3 month bills to keep them short to take advantage of the next Fed rate increase (especially in September) though I have bought some 26 week bills too. If it looks like the Fed has reached a point where they won't raise again or especially if they are contemplating a cut, I'd buy 26 and 1 year bills.

 

[LV_Travel]

My bet is long rates go lower. Recession inevitable after over $6 trillion in stimulus. Followed by negative stimulus. M2 will be very negative between banks cutting back amd Fed cutting back. The US economy will experience what our teenage (and 20 something ) kids do when we cut off the credit card. Lifestyle goes down when austerity sets in. Market will anticipate recession and then a quick return to the fed fighting to prevent deflation. OTOH -

The above assumes the Chinese supply chain gets straightened out, union led strikes driving labor rates up double digits don’t continue, government policy doesn’t further restrict fossil fuel production, etc etc. in other words the fed can only do so much to reduce inflation without inducing a major downturn. If the above factors don’t marginally improve, it will get much worse and ugly with no where to hide, kind of like YTD 2022 continuing to be bad for all assets. No one has crystal ball. So who knows.

 

[Gearhead Jim]

The rate hikes have been pretty much discounted by the bond market.
...

It seems to me over the decades that whenever the stock market is going down or bond rates are going up, there's talk about how that market has already discounted the potential future bad news that's being discussed. Then the bad news actually arrives, and the market(s) drops some more.
Rinse and repeat.

Of course at some point things do start to improve, but by then few people want to talk about a possible bottom being achieved.

 

[Lsbcal]

It seems to me over the decades that whenever the stock market is going down or bond rates are going up, there's talk about how that market has already discounted the potential future bad news that's being discussed. Then the bad news actually arrives, and the market(s) drops some more.
Rinse and repeat.

Of course at some point things do start to improve, but by then few people want to talk about a possible bottom being achieved.

The current market prices are based on many, many ideas of what the future holds. But the future is only vaguely perceived. So it is no wonder that as new unanticipated event occur the markets have to reassess.

So the market cannot fully discount the future because it is unknown.