Treasury Bills, Notes, and Bonds Discussion

[copyright1997reloaded]

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?

Yes, this is the latest 10-year issue trading in the secondary market. It hit 5%, but then backed off. Here is a 5-day chart as of this evening courtesy of CNBC (see screenshot and a link to CNBC's quote: https://www.cnbc.com/quotes/US10Y

 

[Healthy Lifestyle]

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.

I have same thoughts of FOMO.
How long a duration do you consider, if you are mid to late 60's.
30 year bond is a long time even with good health.
I am still in the camp for 5 year duration maybe 8-10 years depending on market conditions.

 

[disneysteve]

I have an account with Schwab and our TD accounts recently merged there as well. I've never done a lot with either but I was just looking to pick up an agency bond in my account. I pulled up the rate grid on Vanguard's site. I then looked on Schwab for the same bonds that were listed at Vanguard, searching by CUSIP, and none were available. The best rate on a 1-year non-callable agency bond at VG is 5.912%. At Schwab, the best rate they're showing is 5.369%.

Am I doing something wrong or is it common for one brokerage to have bonds that aren't available from another brokerage?

 

[JoeWras]

This week's Treasury NOTE Auction results

Reminder: "High Yield" is effective yield to maturity. This is NOT the same as T-Bills' "High Rate." "Interest Rate" is the coupon rate and paid as interest to the holder semi-annually. It is not compounded.

Security Term CUSIP Reopening Issue Date Maturity Date High Yield Interest Rate
7-Year 91282CJG7 No 10/31/2023 10/31/2030 4.908% 4.875%
5-Year 91282CJF9 No 10/31/2023 10/31/2028 4.899% 4.875%
2-Year 91282CJE2 No 10/31/2023 10/31/2025 5.055% 5.000%

 

[audreyh1]

This (past) weeks’s T-bill auction results:

Bills	CMB	CUSIP	Issue Date	High Rate	Investment Rate	Price per $100
4-Week	No	912797HM2	10/31/2023	5.295%	5.406%	$99.588167
8-Week	No	912797HW0	10/31/2023	5.330%	5.464%	$99.170889
13-Week	No	912796ZY8	10/26/2023	5.310%	5.472%	$98.657750
17-Week	No	912797JF5	10/31/2023	5.335%	5.521%	$98.236486
26-Week	No	912797HG5	10/26/2023	5.325%	5.564%	$97.307917

 

[Brat]

I am weighing investing in a 5 year TIPS or a I Bond (which is redeamable in 5 years). Which is more likely to give me the best return at 5 years.

I won't buy something with a longer than 5 year redemption as I am 82, husband 85.

 

[Mulligan]

I am weighing investing in a 5 year TIPS or a I Bond (which is redeamable in 5 years). Which is more likely to give me the best return at 5 years.

I won't buy something with a longer than 5 year redemption as I am 82, husband 85.

If you are certain to hold til 5 years is up, TIPS are likely to start with a 100 bps head start being they are in 2.4% range while the IBond is likely to be under 1.5%. You will know with certainty Wed morning when fixed rate for IBond is announced. When holding until maturity and 5 years, deflation is the major disadvantage to TIPS over IBonds.

 

[Brat]

Deflation over the next 5 years is VERY unlakely.

 

[Mulligan]

Deflation over the next 5 years is VERY unlakely.

I dont disagree. But its part of the difference between an IBond and a TIP and should be known. One should always understand what they invest in. More than one person has been surprised with poor TIPs returns in past because they didnt understand fully the product.

 

[Midpack]

Most of my Treasury holdings are 26 weeks, with one 52 week. But I find myself thinking about going (much) longer soon - like 3, 5 and/or 7 years.

Thought this was a good primer article if others are thinking the same. The window closed quickly last time (chart below).

https://www.schwab.com/learn/story/why-go-long-when-short-term-bonds-yield-more

 

[DuluthGA]

Most of my Treasury holdings are 26 weeks, with one 52 week. But I find myself thinking about going (much) longer soon - like 3, 5 and/or 7 years.



Thought this was a good primer article if others are thinking the same. The window closed quickly last time (chart below).



https://www.schwab.com/learn/story/why-go-long-when-short-term-bonds-yield-more

I was rolling 26 week bills but am splitting them up adding a 52 week and two year now. After reading this article may start adding longer sooner than I expected.

 

[jldavid47]

Most of my Treasury holdings are 26 weeks, with one 52 week. But I find myself thinking about going (much) longer soon - like 3, 5 and/or 7 years.

Thought this was a good primer article if others are thinking the same. The window closed quickly last time (chart below).

https://www.schwab.com/learn/story/why-go-long-when-short-term-bonds-yield-more

The problem I have with this article is that they only do comparisons for the 2-year and 10-year back to 1989. Every "rate hike stop" they are making a comparison to happened during a long-term bull market in bonds. We are now in a bear market in bonds. The average life span of a long-term bull or bear market in bonds over the past 230 years is about 27 years. The last bond bull market lasted 40 years.

Even in the charts they show, the 2-year and 10-year yields are not reacting to a potential stoppage in Fed rate hikes as in the past 35 years. That makes me question the wisdom of using data only from the recent bull market in bonds.

I am not against lengthening duration. In fact, I am slowly doing that in all our accounts. I'm even planning on entering the 20-year auction in November with a small portion of our assets. However, I think reinvestment risk on the shorter maturities (like the 26 week bill) is rather low at this point and will continue to be for at least the next 6-9 months.

 

[copyright1997reloaded]

Most of my Treasury holdings are 26 weeks, with one 52 week. But I find myself thinking about going (much) longer soon - like 3, 5 and/or 7 years.

Thought this was a good primer article if others are thinking the same. The window closed quickly last time (chart below).

https://www.schwab.com/learn/story/why-go-long-when-short-term-bonds-yield-more

A good strategy *IF* we are at or near the top (of the yields). But if rates are going from the 4 1/2-5 1/2 to 6 1/2 - 7 1/2 range then that longer term (3,5,7) year won't look so good when it is under water by 2%.

Same issue for real yields on TIPS. My 10-year new-issue (Jan 23) 1.125% (Real) TIPS (CUSIP 91282CGK1) is trading at 89.035 bid. Not so great for me given I paid near par 9 months ago. Yes, I intend to HTM (hold till maturity), but I would have much rathered buy it at 89 vs 99, even with the accured inflation factor.

This is the game we all face, and the issue with looking at a chart and saying "Look, I will just buy at the peak"...simply because we are therefore guessing the future.

[FWIW, I bought MORE of that CUSIP on 10/6 (seceondary), and I have a very slight profit on that position. And yes, I too have been slightly extending my weighted days till maturity...up 11 days last month (September) and up 18 days this month (October), currently at 372 days accounding for ALL fixed (even demand accounts).]

 

[Fermion]

I also bought the same TIPS with the same drop in price (I think I have about a 10% loss in it). It was a pretty small purchase as I had never bought TIPS before, but now I am leaning toward shorter length stuff.

 

[finvest2]

If you are certain to hold til 5 years is up, TIPS are likely to start with a 100 bps head start being they are in 2.4% range while the IBond is likely to be under 1.5%. You will know with certainty Wed morning when fixed rate for IBond is announced. When holding until maturity and 5 years, deflation is the major disadvantage to TIPS over IBonds.

Looks like the new I Bond fixed rate is out, 1.3%. So the new composite rate will be 5.27%.

https://tipswatch.com/2023/10/31/i-bonds-fixed-rate-rises-to-1-3-highest-in-more-than-16-years/

 

[jldavid47]

A good strategy *IF* we are at or near the top (of the yields). But if rates are going from the 4 1/2-5 1/2 to 6 1/2 - 7 1/2 range then that longer term (3,5,7) year won't look so good when it is under water by 2%.

Agreed. The "hedge" against this is to not put too much of your fixed income allocation into a single duration.

This is the game we all face, and the issue with looking at a chart and saying "Look, I will just buy at the peak"...simply because we are therefore guessing the future.

We all trade/invest based on our beliefs. Mr. Market doesn't care what we think. The way I try to mitigate being wrong is by diversifying over duration and not being too greedy. To keep this on-topic to Treasuries, for our taxable account I tend to participate in 8-week, 26-week, 52-week and 2-year auctions (not every one) with about 2% of our fixed income allocation in any one auction. Recently I have been skipping all the 8-week auctions. As the far end of the curve rises I will lock in rates for longer durations. I tend to stick with treasuries in our taxable accounts as they have a higher after-state-tax yield than CDs almost all the time. My strategy in our retirement accounts is slightly different as all income is taxable at ordinary rates for both federal and state. There is a heavier lean toward CDs there. YMMV.

 

[audreyh1]

The result of the TIPS auction is disappointing. I haven’t bought at auction yet, but plan to buy in January to fill out my 10 year ladder.

I might rethink this and stick with buying TIPS on the secondary market. I find that the rates are better.

You can get 2.5%+ for TIPS maturing in 2028.

https://www.wsj.com/market-data/bonds/tips

Today's TIPS auction was a bit below the expectations of some.

https://tipswatch.com/2023/10/19/ne...eal-yield-of-2-440-a-bit-lower-than-expected/


Emphasis added.

Even the TIPSwatch guru didn’t have it all figured out.

That last TIPS auction - wasn’t off base after all. There are strong seasonal inflation adjustment differences between the April and October issues meaning that you can’t do a simple comparison. The secondary market predictions of 2.57% real yield based off the April 3028 TIPS were too high. The October TIPS gets a higher inflation adjustment compared to April. The bond market was estimating 2.42% which the auction exceeded. All the gory details here - https://tipswatch.com/2023/10/20/a-quick-update-on-thursdays-5-year-tips-auction/

See if your brain hurts now!

 

[aja8888]

That last TIPS auction - wasn’t off base after all. There are strong seasonal inflation adjustment differences between the April and October issues meaning that you can’t do a simple comparison. The secondary market predictions of 2.57% real yield based off the April 3028 TIPS were too high. The October TIPS gets a higher inflation adjustment compared to April. The bond market was estimating 2.42% which the auction exceeded. All the gory details here - https://tipswatch.com/2023/10/20/a-quick-update-on-thursdays-5-year-tips-auction/

See if your brain hurts now!

My brain is getting too old and is full of so much minutia over the years that trying to understand TIPS is not going to happen. So I am going to stick with treasury bills, CDs,bonds and straight interest bearing vehicles. But thanks for posting for the others!

 

[audreyh1]

Yeah, pretty much. I participated in these because of their historical levels way better than even over a decade ago. But that’s really enough for me.

Some bond guru poster over on the old Morningstar Fidelity forum always said you can wait until inflation is high to buy your TIPS and I can finally see now, almost two decades later, that he was right!

 

[tulak]

Agree, I’m not going to worry about a few basis points.

Interesting analysis on the TIPS auction. Thanks for sharing.

 

[audreyh1]

Agree, I’m not going to worry about a few basis points.

Interesting analysis on the TIPS auction. Thanks for sharing.

Yeah, shows that even the very well informed TIPS investors are still learning about inflation adjustment details that can make a big difference to expected real yields.

 

[Midpack]

We all trade/invest based on our beliefs. Mr. Market doesn't care what we think. The way I try to mitigate being wrong is by diversifying over duration and not being too greedy. To keep this on-topic to Treasuries, for our taxable account I tend to participate in 8-week, 26-week, 52-week and 2-year auctions (not every one) with about 2% of our fixed income allocation in any one auction.

Agreed. I jumped on the Treasury bandwagon Spring 2022 with all our fixed income allocation in 13 and 26 weeks. I was perfectly happy with the yields then, and have rolled into better yields at maturity ever since. I've since gone to mostly 26 weeks, 52 weeks in taxable. I expect to continue at those durations until it's clear to me we've peaked - but I am not going to chase or get upset about missing a few basis points of yield.

 

[jldavid47]

Agreed. I jumped on the Treasury bandwagon Spring 2022 with all our fixed income allocation in 13 and 26 weeks. I was perfectly happy with the yields then, and have rolled into better yields at maturity ever since. I've since gone to mostly 26 weeks, 52 weeks in taxable. I expect to continue at those durations until it's clear to me we've peaked - but I am not going to chase or get upset about missing a few basis points of yield.

Just be careful about one thing. The peaks in short-term rates and longer term rates are likely to not be coincident. My guess is that short-term rates will peak first but I really don't know.

As part of my rate hedging strategy I just pulled some funds out of SWVXX today and purchased a 2-year CD paying 5.4% in my IRA. Do I think rates are going higher? Yes. Do I know anything? Oh, heck no. Is it possible that rates have peaked? Sure. Is it likely? Not really, but then again I ain't Nostradamus.

 

[Montecfo]

TIPS are more volatile than regular treasuries of same maturity. This is because the low coupon of TIPS increases the duration.

 

[Montecfo]

The market appears to be seeing a top in rates. Hopefully people have been extending duration for quite some time now.

If this is or was the top bonds may continue this rally which at least will help those bonds already in your portfolio.