Treasury Bills, Notes, and Bonds Discussion

[Sunset]

....

Finally, some instruments will throw off OID income. T-Bills won't do this since the max term is 52 weeks. However, other treasuries do, like Notes. Notes have both coupon and discount. The government wants the imputed interest from the discount each year in a 3 year note, so you get a 1099-OID. When the Note matures, you are done and at par so there is no capital gain. The "gain" through the years was caught as imputed interest in the 1099-OID.

I am wondering, when the example 3 year note matures and is repaid to a person's brokerage account, will it not show interest for the amount of OID that was previously stated in the prior years ?
I'd hate to pay taxes twice

 

[JoeWras]

I am wondering, when the example 3 year note matures and is repaid to a person's brokerage account, will it not show interest for the amount of OID that was previously stated in the prior years ?
I'd hate to pay taxes twice

If I understand your question, the answer is no.

Take this very fictional example:

3 year note, bought at 97 (on 100), with a coupon of 5%, $1000.

Purchase at $970.

Year 1 - 1099-OID: $10, 1099-INT: $50.
Year 2 - 1099-OID: $10, 1099-INT: $50.
Year 3 - 1099-OID: $10, 1099-INT: $50.

Maybe I'm on magic mushrooms, though. I did have a Pina Colada, so my example may be suspect. I'm on island time right now.

 

[Montecfo]

Speaking of not paying interest twice, if you buy bonds on the secondary market, accrued interest paid at purchase will not be subtracted out from interest income on your 1099-INT.

You need to collect the accrued interest paid at purchase from your brokerage transaction history and adjust the net interest on each bond purchased that year for which you collected interest.

TurboTax makes it easy to do this. And for every security for which you had prepaid accrued interest, but collected none in the current year, you must carry those figures forward to the subsequent year for future deduction.

 

[imbatman]

Too bad our brokers don't take care of this for us - they clearly know we paid prepaid interest, it is on my trade confirmation. Doesn't this manual adjusting down of the 1099-INT just beg an IRS audit? Not saying you wouldn't pass but uh, not looking for that experience regardless.

 

[Montecfo]

It is a very common one. And interesting that it both reduces tax liability AND is not part of regular reporting.

 

[Sunset]

Speaking of not paying interest twice, if you buy bonds on the secondary market, accrued interest paid at purchase will not be subtracted out from interest income on your 1099-INT.

You need to collect the accrued interest paid at purchase from your brokerage transaction history and adjust the net interest on each bond purchased that year for which you collected interest.

TurboTax makes it easy to do this. And for every security for which you had prepaid accrued interest, but collected none in the current year, you must carry those figures forward to the subsequent year for future deduction.

Wow, I bet that slips by some folks.

I try to avoid the secondary market, but might have accidentally stepped into it this year

 

[audreyh1]

This week’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912797GH4	07/25/2023	5.255%	5.365%	$99.591278
8-Week	No	912797GT8	07/25/2023	5.255%	5.387%	$99.182556
13-Week	No	912797FB8	07/20/2023	5.250%	5.409%	$98.672917
17-Week	No	912797HL4	07/25/2023	5.270%	5.453%	$98.257972
26-Week	No	912797GD3	07/20/2023	5.250%	5.483%	$97.345833

 

[JoeWras]

Selling T-Bills: liquidity issues.

I buy T-Bills to hold to maturity. But it is nice to know I can sell them in a pinch. But can I?

Bogleheads are complaining of T-Bill transaction liquidity issues on Vanguard. It seems lately people are not getting options to buy or sell for lower amounts, i.e. less than $50k or even $100k. (https://bogleheads.org/forum/viewtopic.php?t=408773)

On Fidelity, I see options to sell my T-Bills with a minimum of $1k or $10k. Of course the higher minimum options have more favorable spreads. But at least the option is there.

However, apparently Fidelity also had this problem a few days ago too.

Just FYI. Some Bogleheads are panicking (not unusual over there). I don't think it is time to panic. I just find it interesting as to how markets work. I would have thought market makers wouldn't be so stingy on their minimums.

 

[audreyh1]

From what I read the initial panickers seemed pretty clueless as well as communicating very poorly. Basic call the bond desk situation. Only attempt when the bond market is open. Didn’t know about show more, etc.

But then again I don’t depend on my treasuries being liquid, meaning I have a large amount of other funds I can tap first.

 

[calmloki]

Looking at buying Agency bonds vs 6 month Treasuries. All I've ever bought was new issue 6 month Treasuries, no secondary, and hold them till maturity. I'm looking at the Agency bonds as away of stretching out maturities and locking in return rates.

Both the FFCB Agency bonds and the Treasuries are state tax free, important to me. The Treasury pays 5.483% this week. An Agency, 3133EPQX6, pays 6.25%, or 5.844% yield to call or worst. Call is in 3 months? Thought I'd seen 6 months? Vanguard charges $10 for a $10,000 Agency purchase (do they also for a sale? what if the Agency is called? No charge?)

Trying to see the advantage to the Agency - if interest goes up we're trapped or have to sell for less that the amount we paid + a commission. If interest rate goes down the Agency calls. I like making money, but don't want to do an exercise for little value.
Are my figures right? - a $10,000 Agency purchase costs $10 commission but would earn $36.10 more annualized than the 6-mo Treasury, or $18.05 more in 6 months minus the $10 Agency purchase commission. So $8.05 earnings more on $10,000 for the Agency in 6 months and risk of call or being trapped if rates go up more??

Please enlighten this Agency newbie - VERY unclear on my understanding.

 

[imbatman]

@calmloki, I think you have it mostly covered. I believe all the main brokers charge the same approximate amount ($1 per) for secondary market bonds, but they all do it in different ways and different transparency. ML does it by artificially inflating the sell price and then showing you the % fee (also ML charges $10 minimum, regardless if you buy less than 10 bonds). Fido tells you the fee separately and does only charge per bond, even if less than 10. I know there is no fee at Fido for when they mature/ called.

Does Vanguard really charge for a NEW bond? Fido does not and is an advantage of buying new. ALSO, if you buy secondary or after the bond is issued, you will prepay accrued interest, which you will likely need to manually adjust on your 1099 as it wasn't true interest for you (again, an advantage of sticking to new issues).

Other than having to shop for a new investment if this is called in October, the main risk in your scenario is if rates go up a whole lot, your treasury would have matured and you could have invested at higher rates....VERSUS with this, you will be locked for 15-years as they wouldn't likely call if rates are higher. This scenario seems unlikely to me.

 

[aja8888]

17 week T Bill auction came in at 5.47% today.

 

[Bruno]

17 week T Bill auction came in at 5.47% today.

Thanks for the info .. sounds great. I asked in another thread with the .25 % raise will that affect next week 26 week Bills?

 

[Montecfo]

Thanks for the info .. sounds great. I asked in another thread with the .25 % raise will that affect next week 26 week Bills?

Mostly baked in already. 1 month and 6 month yields down slightly today.

 

[Spock]

I read a confusing article that suggested "50% of the US debt matures in the next 2 years and will need to be rolled over into new USTs". This would create a tsunami of new Treasuries on the market.
Since actual numbers are not stated in the article, I can't tell if the article is referring to the debt held by the Fed, which is intentionally loaded with short term debt to reduce short term rates, or if it is suggesting the 32T national debt is mostly funded by short term debt which is about to mature and needs to be refinanced. The latter would be gross mismanagement having missed out on the ability to finance at historically low long term rates... (which means it's highly probable that is exactly what happened).

Google searches to verify the claim are overwhelmed with results just showing the debt level or the treasury rates. I can't find anything that shows a schedule of the debt by maturity date range.

Anybody have a source of data that shows how much the market for treasuries is going to have to absorb (all new issues, not just the 1T per year in new deficits) over the next X months/years?

 

[audreyh1]

This week’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912797GJ0	08/01/2023	5.275%	5.385%	$99.589722
8-Week	No	912797GU5	08/01/2023	5.285%	5.418%	$99.177889
13-Week	No	912797FC6	07/27/2023	5.270%	5.430%	$98.667861
17-Week	No	912797HM2	08/01/2023	5.300%	5.484%	$98.248056
26-Week	No	912796ZY8	07/27/2023	5.270%	5.504%	$97.335722

 

[copyright1997reloaded]

I read a confusing article that suggested "50% of the US debt matures in the next 2 years and will need to be rolled over into new USTs". This would create a tsunami of new Treasuries on the market.
Since actual numbers are not stated in the article, I can't tell if the article is referring to the debt held by the Fed, which is intentionally loaded with short term debt to reduce short term rates, or if it is suggesting the 32T national debt is mostly funded by short term debt which is about to mature and needs to be refinanced. The latter would be gross mismanagement having missed out on the ability to finance at historically low long term rates... (which means it's highly probable that is exactly what happened).

Google searches to verify the claim are overwhelmed with results just showing the debt level or the treasury rates. I can't find anything that shows a schedule of the debt by maturity date range.

Anybody have a source of data that shows how much the market for treasuries is going to have to absorb (all new issues, not just the 1T per year in new deficits) over the next X months/years?

I'm travelling with limited internet, but I believe the detailed report here shows all debt instruments and amounts: https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding

 

[Midpack]

Thought about starting a separate thread, but I’ll ask here first/instead. Unfortunately we lost the best (but not only) member resource we had IMO.

I have all my “fixed income” allocation in T Bills (almost all 26 wks) at over 5% weighted average yield - I haven’t seen any reason to go longer in the last year or so. But at some point (next 12 months?) Treasury yields will come down. I would like to lock in these higher rates for longer duration like 2-5 years for some of my fixed income allocation. For anyone else so inclined, how do you plan to pick the down inflection period?

I am not looking for perfect, just good. I wouldn’t be unhappy with the current yields for 2-5 year treasuries but I don’t think the window is closing real soon either.

I do watch this periodically. https://www.ustreasuryyieldcurve.com/

 

[Montecfo]

When the conductor signals the music is stopping it will be too late to exit the dance floor. All chairs will be taken.

The best time to extend durations was last fall. But now is just about as good as the GDP report gave yields a small upswing (though the mild PCE report yesterday went the other way).

Build a ladder and then there is no pressure to pick the market bottom.

 

[Marc]

Thought about starting a separate thread, but I’ll ask here first/instead. Unfortunately we lost the best (but not only) member resource we had IMO.

I have all my “fixed income” allocation in T Bills (almost all 26 wks) at over 5% weighted average yield - I haven’t seen any reason to go longer in the last year or so. But at some point (next 12 months?) Treasury yields will come down. I would like to lock in these higher rates for longer duration like 2-5 years for some of my fixed income allocation. For anyone else so inclined, how do you plan to pick the down inflection period? I am not looking for perfect, just good.

I do watch this periodically. https://www.ustreasuryyieldcurve.com/

What montecfo said . . .

I am actually of same mindset as you. I try to keep 10% in cash to fund the next two years expenses; however, I do not like to sell equities in a down market so didn't replenish my cash between December 2021 and somewhat recently when stocks started moving up again. So, I am finally looking at being able to maintain my 10%. I started looking at two year CDs but haven't found anything worthwhile that wasn't callable. I might just stick with FZDXX and 6-month bills for a while and hope for a hiccup in the markets that might let me get CDs from ore than I am making with shorter term.

Who knows what tomorrow will bring,

Marc

 

[Healthy Lifestyle]

Thought about starting a separate thread, but I’ll ask here first/instead. Unfortunately we lost the best (but not only) member resource we had IMO.

I have all my “fixed income” allocation in T Bills (almost all 26 wks) at over 5% weighted average yield - I haven’t seen any reason to go longer in the last year or so. But at some point (next 12 months?) Treasury yields will come down. I would like to lock in these higher rates for longer duration like 2-5 years for some of my fixed income allocation. For anyone else so inclined, how do you plan to pick the down inflection period? I am not looking for perfect, just good.

I do watch this periodically. https://www.ustreasuryyieldcurve.com/

Not sure if my thinking is correct, but should an intermediate bond fund be of interest probably sooner than later when yields are lower?

I am thinking that when treasury yields drop, bond fund prices will increase more than the locked in rates of longer duration bond?

 

[pb4uski]

...An Agency, 3133EPQX6, pays 6.25%, or 5.844% yield to call or worst. Call is in 3 months? Thought I'd seen 6 months? Vanguard charges $10 for a $10,000 Agency purchase (do they also for a sale? what if the Agency is called? No charge?)

Trying to see the advantage to the Agency - if interest goes up we're trapped or have to sell for less that the amount we paid + a commission. If interest rate goes down the Agency calls. I like making money, but don't want to do an exercise for little value.
Are my figures right? - a $10,000 Agency purchase costs $10 commission but would earn $36.10 more annualized than the 6-mo Treasury, or $18.05 more in 6 months minus the $10 Agency purchase commission. So $8.05 earnings more on $10,000 for the Agency in 6 months and risk of call or being trapped if rates go up more??...

The YTC doesn't make sense to me. Schwab shows the YTC at 6.459% based on a value of $99.95. The 5.844% YTC suggests that you are paying over $100 for that CUSIP, but there were a number of sales yesterday at $99.75 to $99.95.

First call is 10/26/23, but the bond was issued 7/26/23, so it is unlikely that it will be called at first call, but I did have it happen to one of mine earlier this year... it was called after a month or two as I recall.

On the second part I look at the yield on the callable compared to the yield on a similar term and credit non-callable. A quick search of agency issues maturing in 2036-2040 the top 4 results show YTC of 6.255% to 5.830%... if I toggle the search to non-callable issues for the same time frame the best 4 results are 4.796% to 4.305%... so the way I look at it is the buyer is being paid an additional 1.5% for the call risk. Is 1.5% enough? I dunno, that is a judgement call.

https://www.finra.org/finra-data/fixed-income/trade-history?cusip=3133EPQX6&bondType=CA

https://client.schwab.com/Areas/Tra...e&SourceView=MarketDepth&HideTradeLinks=False

 

[Chuckanut]

Who knows what tomorrow will bring,

Marc

Nobody knows nuthin’ or something like that.

I know as little as anybody. So, I am beefed up the 4-5 year rungs of my ladder this past month. I also have a few short term CDs maturing in the next few months. If rates in the 4-5 year area pop up above 5% for call protected CDs, Treasuries, Agency bonds, etc. I will pick up a few more here and there but at higher rates than those I buy today. Diversification is the only tool in my bag that gives me a fighting chance to maintain income levels near where they are today.

It’s the best a guy like me can do. After all, my crystal ball is cracked, I can’t read minds, and my Time Machine is still broken.

My 2¢. YMMV.

 

[Montecfo]

Not sure if my thinking is correct, but should an intermediate bond fund be of interest probably sooner than later when yields are lower?



I am thinking that when treasury yields drop, bond fund prices will increase more than the locked in rates of longer duration bond?

Possibly but depends on the fund and the security you are comparing.

But are you planning to sell at a gain? Or just have the psychic benefit of having a paper gain?

In a declining rate environment you have to sell if you want to capture gains.

Most bondholders plan to hold to maturity. If not then you book a gain but reinvest in a lower rate environment.

No free lunch.

But longer duration securities should do well in a declining rate environment.

If I were speculating on lower rates I might look at something like the TLT.

I will say this: if you expect rates to fall then buying an investment that is easily liquidated might

 

[audreyh1]

I am not looking for perfect, just good. I wouldn’t be unhappy with the current yields for 2-5 year treasuries but I don’t think the window is closing real soon either.

I do watch this periodically. https://www.ustreasuryyieldcurve.com/

I noticed brokered CDs for 5 yrs on Fidelity were offering 4.5% for non-callable recently (5.5% for callable).

Also pay attention to 5 year TIPS (for tax deferred accounts), real yields have been pretty good lately. Next issue is in October. This blogger will talk about it. https://tipswatch.com/2023/06/22/5-year-tips-reopening-gets-real-yield-of-1-832-highest-in-14-years/