Treasury Bills, Notes, and Bonds Discussion

[audreyh1]

This weeks’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912796ZM4	01/03/2023	3.830%	3.895%	$99.702111
8-Week	No	912796Y78	01/03/2023	4.250%	4.338%	$99.338889
13-Week	No	912796YM5	12/29/2022	4.350%	4.459%	$98.900417
17-Week	No	912796CW7	01/03/2023	4.550%	4.684%	$98.495972
26-Week	No	912796ZR3	12/29/2022	4.600%	4.775%	$97.674444
52-Week	No	912796ZN2	12/29/2022	4.515%	4.741%	$95.434833

Link to last week’s: https://www.early-retirement.org/fo...d-bonds-discussion-115186-56.html#post2870555

Generally up, some a lot.

 

[Montecfo]

I am just curious how the knowledgeable bond buyers think about this, I would not do this.



Would it make sense to buy 30 year Treasury bonds now with the purpose of holding them until the Fed lowers rates a bit and then sell them for a profit or is that the stuff that fund managers do?

I suggested that about 3 weeks or so ago.

Inflation is declining steadily. Long rates are tied to inflation expectations.

Fed raising more reduces inflation expectations and long rates.

 

[Vincenzo Corleone]

I suggested that about 3 weeks or so ago.

Inflation is declining steadily. Long rates are tied to inflation expectations.

Fed raising more reduces inflation expectations and long rates.

I guess I still have a lot to learn. I'd have thought - what with the yield curve being inverted, with the short end yielding more than the long end - that buying a 30 year now would provide you with a low yield and would fetch less on the secondary market when the yield curve goes back to normal. Don't bond prices and yields move inversely on the secondary market?

 

[pb4uski]

Yes, but the play is that in the near term that the 30 year yield will decline so the value of the 30 year bonds will rise and one can sell at a profit. A credible investment hypothesis I think... but not sure I'm willing to be the house on it.

 

[Vincenzo Corleone]

Yes, but the play is that in the near term that the 30 year yield will decline so the value of the 30 year bonds will rise and one can sell at a profit. A credible investment hypothesis I think... but not sure I'm willing to be the house on it.

Got it. Thanks.

 

[joesxm3]

I had been buying 13 and 26 week since October and my first maturity is 1/19/23. My plan is now to buy only 26 as I roll them.

However, I have an unbalanced situation with $100k in February, but only $15k in March.

Should I just roll them as they come, or would there be some benefit to trying to even them out.

I am leaning toward keeping as is or maybe doing some February as 13 week.

I am buying small amounts of 52 week to use for next years expenses, but I don't really need the money unless it is to rotate into equities once I feel the market has gotten near the bottom. I am currently averaging in lightly as it goes down. I still have a little in a MM fund but most cash is now in tbills.

After writing, I think probably some February into 13 weeks.

 

[jldavid47]

I am just curious how the knowledgeable bond buyers think about this, I would not do this.

Would it make sense to buy 30 year Treasury bonds now with the purpose of holding them until the Fed lowers rates a bit and then sell them for a profit or is that the stuff that fund managers do?

The Fed funds rate has nothing to do with the 30 year Treasury bond rate or price. The way the Fed manipulates long-term bonds is through their QE (or QT) programs. A long bet on bonds right now would be assuming that the Fed will stop or reverse QT. I'm not betting that way, but feel free if you'd like.

 

[Montecfo]

The Fed funds rate has nothing to do with the 30 year Treasury bond rate or price. The way the Fed manipulates long-term bonds is through their QE (or QT) programs. A long bet on bonds right now would be assuming that the Fed will stop or reverse QT. I'm not betting that way, but feel free if you'd like.

It is a bet that inflation expectations will moderate in the future. A reasonable bet.

 

[JoeWras]

OK, I admit it. I decided to throw a few thou into the 7 year note this week. Fool or not? We'll see. Rate was 3.875%. It isn't a lot of money though.

 

[copyright1997reloaded]

I had been buying 13 and 26 week since October and my first maturity is 1/19/23. My plan is now to buy only 26 as I roll them.

However, I have an unbalanced situation with $100k in February, but only $15k in March.

Should I just roll them as they come, or would there be some benefit to trying to even them out.

I am leaning toward keeping as is or maybe doing some February as 13 week.

I am buying small amounts of 52 week to use for next years expenses, but I don't really need the money unless it is to rotate into equities once I feel the market has gotten near the bottom. I am currently averaging in lightly as it goes down. I still have a little in a MM fund but most cash is now in tbills.

After writing, I think probably some February into 13 weeks.

IMHO, Not worth worrying about.
When the February bill matures, reinvest 60K at target. Keep the rest (40K) in a decent yielding MM. When March arrives, put the 55K at target.

ETA: My short term ladder is very "lumpy", with humps at 1 day (money market), June 23 (6 month T-bills), Nov/Dec 23 (1-year T-Bills). Most of the other months I managed to fill in somewhat using secondary's or CD's, but not as much as the hump months as I managed to catch some of the higher yielding T-Bill auctions with bigger orders.

 

[jim584672]

I had one at Vanguard mature yesterday. Checked through the day, funds came in overnight.

 

[jldavid47]

It is a bet that inflation expectations will moderate in the future. A reasonable bet.

It isn't even that and it wasn't OPs question or position.

 

[Graybeard]

This is the 1st weekend since late September that I am not buying any T bills.

Each week I'd buy 14 3 month T bills in my rollover IRA and the next week 14 in my taxable account, I currently have 3 month bills maturing each week out to late March.

The past 2 weeks I changed to buying 25 6 month T bills in the IRA and the same the following week in the taxable.

I read enough posts from those far more knowledgeable than I am to realize I should start getting longer maturities. I wanted to buy some 1 year bills in December but my 401k rollover was too late in coming into my IRA so in later January I will do that. I'm thinking at least 50 and the next month another 50 until I have 200 or 250 in the rollover IRA, maybe just 2 purchases of 100 each 2 or 3 months apart.

I am very hesitant to buy any 1 year bills in my taxable account as the settlement fund is where l keep all my cash and I don't want to deplete that. I will have 14 bills mature every other week in that account out to later March so I need to look closely to see if I am comfortable buying some 1 year bills but it probably wouldn't be more than 50.

The thing is I am not matching any purchases to fund anything, just taking advantage of better yields than at Ally so it is more like parking money.

 

[Montecfo]

It isn't even that and it wasn't OPs question or position.

um, what?

The question was about buying 30 year treasuries against a possibility of a rate decline in the future, which would mean a capital gain. If the Fed sticks to its guns as the say, I expect long rates to fall as they have been doing recently since peaking in October.

I think it is a reasonable bet, especially if we get a recession (which I expect).

Long-term treasury yields reflect long-term inflation expectations. Investors would not invest in a 3% long treasury if inflation was expected to run at 3-4% for example. It would be uneconomic.

Edited to add: if you see it differently, please flesh out your view.

 

[jldavid47]

Long-term treasury yields reflect long-term inflation expectations. Investors would not invest in a 3% long treasury if inflation was expected to run at 3-4% for example. It would be uneconomic.

That is your belief. That is not how the bond market works. The price of credit reflects the supply of and demand for it. During the last 10+ years the Fed has created artificially high demand for long-term bonds through QE which has depressed yields. In addition, foreign governments (especially China) had to do something with all the excess dollars they had from running trade surpluses with the US. The safest place to put those surpluses was in US treasuries thus increasing demand (and depressing yields). Inflation "expectations" have had nothing to do with it. Any reversal of those trends (and we are seeing that) will increase long-term yields regardless of what inflation "expectations" are because supply will simultaneously increase while demand decreases.

People make what you might think are irrational economic decisions all the time. Why on earth would anyone purchase government securities with negative interest rates when there was no deflation? Maybe the picture is bigger than you think.

 

[Montecfo]

That is your belief. That is not how the bond market works. The price of credit reflects the supply of and demand for it. During the last 10+ years the Fed has created artificially high demand for long-term bonds through QE which has depressed yields. In addition, foreign governments (especially China) had to do something with all the excess dollars they had from running trade surpluses with the US. The safest place to put those surpluses was in US treasuries thus increasing demand (and depressing yields). Inflation "expectations" have had nothing to do with it. Any reversal of those trends (and we are seeing that) will increase long-term yields regardless of what inflation "expectations" are because supply will simultaneously increase while demand decreases.

People make what you might think are irrational economic decisions all the time. Why on earth would anyone purchase government securities with negative interest rates when there was no deflation? Maybe the picture is bigger than you think.

Well, Hmm. There is very little to debate here. You state that price is set by supply and demand, then you state drivers of demand, ignoring inflation expectations. Certainly price is set by supply and demand. But what determines supply and demand?

That inflation expectations are the key driver of longterm treasury rates is widely accepted in the financial community and among economists. But obviously there is more to that in play as you point out. But inflation expectations play into the thinking of sovereigns also as they purchase and sell bonds, an investment for which they require a positive return. Same with pension funds, corporate and individual investors. The idea that inflation expectations play absolutely no role, as you suggest, is hogwash.

Here is one article which explains this:

"In the absence of credit risk [I.e., with respect to US Treasuries] (the risk of default), the value of that stream of future cash payments is a function of your required return based on your inflation expectations. "

'In other words, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand a higher yield to compensate for inflation risk."

https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp

I guess it is possible the the massive market for US Treasuries reflects people making uneconomic decisions, but that seems quite unlikely.

And anyone thinking that would probably not be investing in such a market.

 

[pb4uski]

I think that you are both right.

Certainly, in graduate finance courses that I took in the mid 80s the base of any rate of return was expected inflation, then add premiums for credit risk, liquidity risk, interest rate risk, equity risk premia for stocks, etc. Composition of return rates as I recall.

At the same time however, we had sustained periods where benchmark interest rates have been lower than inflation and there were no reasonably viable substitutes, so other factors were at play... I suspect that the demographics were such that demand exceeded supply by a wide margin and that is why we have seen a sustained period where benchmark interest rates were lower than inflation.

 

[Montecfo]

I think that you are both right.

Certainly, in graduate finance courses that I took in the mid 80s the base of any rate of return was expected inflation, then add premiums for credit risk, liquidity risk, interest rate risk, equity risk premia for stocks, etc. Composition of return rates as I recall.

At the same time however, we had sustained periods where benchmark interest rates have been lower than inflation and there were no reasonably viable substitutes, so other factors were at play... I suspect that the demographics were such that demand exceeded supply by a wide margin and that is why we have seen a sustained period where benchmark interest rates were lower than inflation.

Long-term treasury rates do not reflect inflation. They reflect long-term inflation expectations. Those expectations can be right or wrong.

Historically, long-term real rates have been mostly positive.

 

[pb4uski]

I think that you are both right.

Certainly, in graduate finance courses that I took in the mid 80s the base of any rate of return was expected inflation, then add premiums for credit risk, liquidity risk, interest rate risk, equity risk premia for stocks, etc. Composition of return rates as I recall.

At the same time however, we had sustained periods where benchmark interest rates have been lower than inflation and there were no reasonably viable substitutes, so other factors were at play... I suspect that the demographics were such that demand exceeded supply by a wide margin and that is why we have seen a sustained period where benchmark interest rates were lower than inflation.

Long-term treasury rates do not reflect inflation. They reflect long-term inflation expectations. Those expectations can be right or wrong.

Historically, long-term real rates have been mostly positive.

I'm perplexed what you are objecting to.

 

[Montecfo]

I'm perplexed what you are objecting to.

Simply a clarification. Long-term Interest rates may under-run current inflation for relatively periods but that does not suggest that they do not reflect long-term inflation expectations, as you appeared to suggest.

Long-term inflation expectations are not the same as the current rate of inflation.

 

[audreyh1]

T-bills creeping higher in the new year. Both 13-week and 26-week looks like close to 52 week high rates.

Yep, the 13-week jumped the most and finally got above 4.5%
The 26-week finally surpassed its high from the 12/12 auction.

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
13-Week	No	912796YN3	01/05/2023	4.410%	4.522%	$98.885250
26-Week	No	912796ZS1	01/05/2023	4.635%	4.812%	$97.656750

I was hoping the 3 month would yield at least 4.5%. I like to have my t-bills issued the first week of the month to keep at least a multiple of months spacing between them maturing.

 

[JoeWras]

I was hoping the 3 month would yield at least 4.5%. I like to have my t-bills issued the first week of the month to keep at least a multiple of months spacing between them maturing.

These numbers gave me confidence to clean up an account.

In the interest of simplicity, today I nuked all my savings bonds I bought in '93, '94 and early '95 on a payroll deduction plan back then. Starting with the March '93 bond purchases, the bonds started posting monthly (instead of 6 months), and the interest dropped from 6% to 4%. Not having to wait until the 6 month date made it an easy decision to redeem. Today, they still earn 4%, but I figured quad-secting the proceeds into tranches of 13wk, 26wk, 52wk bills and 2 year note effectively will be better than leaving the bonds. When each tranche matures, we'll use it for living money.

It simplifies things because I can now close my Treasury Direct converted bond account and consolidate the bills/note to Fidelity. I'm trying to simplify things for DW in case I can't manage anymore. I will take a tax hit this year, but no biggie, just do less Roth conversions.

 

[audreyh1]

This week’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912796ZT9	01/10/2023	4.100%	4.170%	$99.681111
8-Week	No	912796Y86	01/10/2023	4.430%	4.523%	$99.310889
13-Week	No	912796YN3	01/05/2023	4.410%	4.522%	$98.885250
17-Week	No	912797FD4	01/10/2023	4.570%	4.705%	$98.489361
26-Week	No	912796ZS1	01/05/2023	4.635%	4.812%	$97.656750

Rates keep moving up! Notably the 4-week finally crossed 4% with a pretty good jump too. And the 8-week caught up to the 13 week! Only 3 days auction difference.

Last week’s results - https://www.early-retirement.org/fo...d-bonds-discussion-115186-59.html#post2873872

 

[copyright1997reloaded]

This week’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912796ZT9	01/10/2023	4.100%	4.170%	$99.681111
8-Week	No	912796Y86	01/10/2023	4.430%	4.523%	$99.310889
13-Week	No	912796YN3	01/05/2023	4.410%	4.522%	$98.885250
17-Week	No	912797FD4	01/10/2023	4.570%	4.705%	$98.489361
26-Week	No	912796ZS1	01/05/2023	4.635%	4.812%	$97.656750

Rates keep moving up! Notably the 4-week finally crossed 4% with a pretty good jump too. And the 8-week caught up to the 13 week! Only 3 days auction difference.

Last week’s results - https://www.early-retirement.org/fo...d-bonds-discussion-115186-59.html#post2873872

The 13-week (3 months) is trading at 4.622%, so it is moving up (and should reflect that if rates stay as is when the next 13-week auction happens next week.)

 

[jim584672]

The 3 month Bill 4/9/23 is at 4.752% on Schwab now.