Treasury Bills, Notes, and Bonds Discussion

[tulak]

Thanks much. Still better than expected a week or so ago. I assume the coupon was 2.375%?

Yep.

 

[olyveoil]

Already have a large position in 26 week tbills into April 24.
Thinking about extending duration.

Looking at 06055JCM9. 5 yr. 6.50% coupon. callable.

Thoughts?

 

[Trailwalker]

Already have a large position in 26 week tbills into April 24.
Thinking about extending duration.

Looking at 06055JCM9. 5 yr. 6.50% coupon. callable.

Thoughts?

Not a Treasury and callable in about a year.

 

[jldavid47]

Already have a large position in 26 week tbills into April 24.
Thinking about extending duration.

Looking at 06055JCM9. 5 yr. 6.50% coupon. callable.

Thoughts?

Try posting your question in the "Corporate and Agency GSE Bond DEALS and NEW ISSUES" forum.

 

[Fermion]

So I have a zero coupon short term bill maturing 11/30/2023 in one of our taxable accounts at Fidelity.

UNITED STATES TREAS BILLS ZERO CPN 0.00000% 11/30/2023
current gain +$1,080.43

If I were to sell this bond early, it will be counted as a short term capital gain and not interest income?

I am trying to manage our MAGI and capital gains would be better than interest income since I have a massive $50k of long term capital losses to work though.

I guess I could just sell it and see what they report it as. If I can get it as cap gains instead of interest, I can then sell some 0% I-bonds because I know THAT will be interest income.

 

[JoeWras]

So I have a zero coupon short term bill maturing 11/30/2023 in one of our taxable accounts at Fidelity.

UNITED STATES TREAS BILLS ZERO CPN 0.00000% 11/30/2023
current gain +$1,080.43

If I were to sell this bond early, it will be counted as a short term capital gain and not interest income?

I am trying to manage our MAGI and capital gains would be better than interest income since I have a massive $50k of long term capital losses to work though.

I guess I could just sell it and see what they report it as. If I can get it as cap gains instead of interest, I can then sell some 0% I-bonds because I know THAT will be interest income.

Ask yourself this question. "Given that cap gain rate is best for most taxpayers, why doesn't everyone sell their T-bills last day before maturity so as to capture it all as capital gain?"

Well the answer is that "It isn't a capital gain."

This gets into the weeds a bit, but what will happen if you sell your T-Bill early is that you need to calculate the ratable interest, and then the capital gain. Or at least, that's ONE method you can choose. It gets complicated.

For example: you buy a 1 year, $1000 Tbill for $900. You then sell at exactly 1/2 year for $970. Your ratable interest is $50, your cap gain is $20.

I believe this all ends up on your 1099-INT under different columns, and then you have to sort it out. It is one reason I don't like messing with the secondary market. Taxes get more complex.

For more on this, read Publication 550: https://www.irs.gov/publications/p550

Discount on Short-Term Obligations

When you buy a short-term obligation (one with a fixed maturity date of 1 year or less from the date of issue), other than a tax-exempt obligation, you generally can choose to include any discount and interest payable on the obligation in income currently. If you do not make this choice, the following rules generally apply.

You must treat any gain when you sell, exchange, or redeem the obligation as ordinary income, up to the amount of the ratable share of the discount. See Discounted Debt Instruments, later.

 

[Fermion]

Ah I get it and that makes sense. So if you bought a bond and the next day the Fed raised rates 0.5% and your bond went up $1000 and you sold it, almost all would be capital gains since your holding period was so short compared to the length of the bond.

I guess now that most of our money is in Roth and 401K it will just be $3,000 a year for a long time until I exhaust the capital losses.

 

[Montecfo]

Ask yourself this question. "Given that cap gain rate is best for most taxpayers, why doesn't everyone sell their T-bills last day before maturity so as to capture it all as capital gain?"



Well the answer is that "It isn't a capital gain."



This gets into the weeds a bit, but what will happen if you sell your T-Bill early is that you need to calculate the ratable interest, and then the capital gain. Or at least, that's ONE method you can choose. It gets complicated.



For example: you buy a 1 year, $1000 Tbill for $900. You then sell at exactly 1/2 year for $970. Your ratable interest is $50, your cap gain is $20.



I believe this all ends up on your 1099-INT under different columns, and then you have to sort it out. It is one reason I don't like messing with the secondary market. Taxes get more complex.



For more on this, read Publication 550: https://www.irs.gov/publications/p550

It is academic, since neither interest nor STCG qualify for a favorable tax rate.

 

[JoeWras]

It is academic, since neither interest nor STCG qualify for a favorable tax rate.

Less academic for longer term bonds, like Notes.

 

[Fermion]

It is academic, since neither interest nor STCG qualify for a favorable tax rate.

Except STCG are very favorable tax rate of zero if you have a lot of carry over losses.

 

[olyveoil]

Try posting your question in the "Corporate and Agency GSE Bond DEALS and NEW ISSUES" forum.

Thank you

 

[JoeWras]

Ah I get it and that makes sense. So if you bought a bond and the next day the Fed raised rates 0.5% and your bond went up $1000 and you sold it, almost all would be capital gains since your holding period was so short compared to the length of the bond.

Yes, but let me correct one thing.

In general, when the Fed raises rates, which causes the market to bump up yields, the value of your existing bond generally goes down.

So instead say: "... the next day the Fed dropped rates 0.5% and your bond went up $1000..."

Not trying to be picky. It is just that we are all learning about treasuries and bonds these days. It was almost a completely lost art. Many of us got caught without our raincoat when bonds yields went through the roof. The value of bond funds plummeted.

There was a user here who kind of loudly preached about this. I won't repeat that. I just want to say remember this:

- In general, the market value of a bond moves in an INVERSE relationship to the trending market yield.

 

[audreyh1]

It is academic, since neither interest nor STCG qualify for a favorable tax rate.

STCG can be completely offset against long term capital losses, are not limited to the $3000 against ordinary income. So there is one favorable tax treatment compared to ordinary income.

 

[Earl E Retyre]

10 year treasury questions

So, I saw today in the news that 10 year treasuries have hit 5%. It really intrigues me to be able to lock in 5% for 10 years. I have a couple questions ...

(1) When I log in to Vanguard it shows me 10 year treasuries as 4.933% - I think however that is a secondary market bond? When I select "Auction" it does not show any 10 year bonds? Do I need to buy from Treasury Direct. I have ibonds in Treasury Direct and hate the interface so I much prefer buying in Vanguard.

(2) I have been buying 5% CDs going out as much as 5 years - thinking I would not go above 5 years in case interest rates went sky high. But now I am thinking it would make sense to at least invest some at 10 years since interest rates could just as easily go back down. If you asked me a couple years ago if I would lock in 5% for 10 years I would have jumped at the opportunity. A guaranteed 5% is a dream but I guess the hesitation would be FOMO. Am I crazy to lock in 5% for 10 years?

 

[Fermion]

I was thinking the same thing, however I will caution that I did lock in a 2 year treasury about a year ago at 4.6% which at the time I thought was great...not so great now even though it is throwing off $18,000 a year.

I don't want a 5% 10 year if I can get a 6% 10 year next year.

 

[aja8888]

I was thinking the same thing, however I will caution that I did lock in a 2 year treasury about a year ago at 4.6% which at the time I thought was great...not so great now even though it is throwing off $18,000 a year.

I don't want a 5% 10 year if I can get a 6% 10 year next year.

This is why building a treasury or CD ladder with reinvestment works.

 

[JoeWras]

(1) When I log in to Vanguard it shows me 10 year treasuries as 4.933% - I think however that is a secondary market bond? When I select "Auction" it does not show any 10 year bonds? Do I need to buy from Treasury Direct. I have ibonds in Treasury Direct and hate the interface so I much prefer buying in Vanguard.

When you hear on the news that "10 year Treasuries are over 5%", that means the rate at that point of time on the secondary market. The finance media rarely talks about auction results.

In the time between you heard this, and your log in, the rate dropped. It is currently dropping like a rock and is now at 4.880%.

You can buy Treasuries on Vanguard at auction, but only in specific windows as determined by the Treasury Department. I'd tell you when that is, but their web site is slammed right now, probably due to this news, and is not responding.

EDIT: got in. The next 10 year auction is Nov 8. It should appear for sale on Vanguard afternoon of Nov 1. I don't buy on Treasury Direct anymore either because selling requires a transfer out to a brokerage.

 

[Phroig]

If 5% is good enough, why not lock it in for 30 years?

 

[Earl E Retyre]

If 5% is good enough, why not lock it in for 30 years?

Mainly FOMO (fear of missing out). I also need to be sure to have liquidity for RMDs - at 10 years I do not need to worry about that.

 

[Montecfo]

Except STCG are very favorable tax rate of zero if you have a lot of carry over losses.

Treated just like ordinary income though.

But I see Fermion, your different facts than what JoeWras posted had to do with carryover losses.

Fair enough.

 

[Montecfo]

STCG can be completely offset against long term capital losses, are not limited to the $3000 against ordinary income. So there is one favorable tax treatment compared to ordinary income.

Sure but they are not being taxed at a favorable tax rate. There is no beneficial STCG tax rate.

 

[Montecfo]

If 5% is good enough, why not lock it in for 30 years?

Yeah, rates ultimately will drop. Then you are holding the bag waiting.

ETA: would stop at 10y

 

[Chuckanut]

If 5% is good enough, why not lock it in for 30 years?

That's a very big IF and 30 years is long time.

If you lived through the Great Inflation of the mid 70s to the mid 80s you remember double digit interest rates on everything from mortgages to treasury bills. Items that cost $1 in 1974 cost $1.93 in 1984. In ten years the value of your dollar was nearly cut in half.

If that happens again, 5% will not look so good to many people.

5% being 'good enough' would vary for individual as it depends on one's personal situation regarding loans, life expectancy, alternative investments, etc.

This is my 2¢. YMMV.

 

[Earl E Retyre]

That's a very big IF and 30 years is long time.

If you lived through the Great Inflation of the mid 70s to the mid 80s you remember double digit interest rates on everything from mortgages to treasury bills. Items that cost $1 in 1974 cost $1.93 in 1984. In ten years the value of your dollar was nearly cut in half.

If that happens again, 5% will not look so good to many people.

5% being 'good enough' would vary for individual as it depends on one's personal situation regarding loans, life expectancy, alternative investments, etc.

This is my 2¢. YMMV.

I agree 30 years is a long time. I cannot see considering that (for myself).

And, yes, I do remember when interest rates were double digits. That is what feeds my FOMO. If I lock in 5% for 10 years and then interest rates went to 10+% like the 80's I would be extremely annoyed. If I did not lock it in, and interest rates went back down to 3%, I would also be extremely annoyed.

Having said that, I think I would be more annoyed if interest rates dropped (and I missed the opportunity to lock in) versus missing the opportunity for higher rates.

I have a boatload of CDs maturing this coming January/February. My best crystal ball tells me that interest rates will not drop [much if at all] by then. In which case, I am currently thinking I will lock all the maturing CDs in for another 5 years at whatever the going rate is.

I do have some dry powder available now and am considering dipping my toe into 10 year CDs/Treasuries if I can get them at 5+%. I never thought I would consider anything greater than 5 years since even 10 years seems like a long time to me. So just pondering right now.

 

[tulak]

If 5% is good enough, why not lock it in for 30 years?

Inflation is a big risk.

I’d never lock in for longer than 5 years without some kind of inflation hedge. That leaves stocks, TIPS, and iBonds.