Treasury Bills, Notes, and Bonds Discussion

[copyright1997reloaded]

5-year TIPS auction this week:

From TIPSwatch https://tipswatch.com/2023/10/15/th...uction-offers-a-solid-investment-opportunity/

I'm looking at this one...but....I currently own the April 28 issue (CUSIP 91282CGW5) which is trading w/a 2.4212% real yield (ask quote on 10k or more). So, I could pick up more of this (I did so a couple weeks ago at 2.52% real) and eliminate auction rate risk. (Yes, there is a bit of accurmulated interest and accumulated inflation adjustment for the April 28 issue.)

Decisions, decisions. I will likely make a Thursday early morning last minute decison on this.

These would be going in my Roth. Unfortunately for me, my tIRA is way larger than my Roth (in $ size), so I need to be judicious in terms of what I buy and when. I am still pondering how much of a Roth conversion I will be doing this year.

 

[audreyh1]

This 5-yr TIPS comes up for an additional auction (reissue) announced around 12/15, so you have another chance at it 2 months later.

 

[calmloki]

Well poop. I'd been buying an equal amount of 6 month T-bills almost weekly at Vanguard for almost the last year. Idea was to track the interest rate smoothly and always have a chunk maturing and available for easy use within a week. Most every Sunday I'd put in my buy order for auction, every Thursday a maturing T-bill would pay for the new T-bill purchase.

Fidelity offers auto-roll; Vanguard doesn't. I was seduced by the lure of an even easier investing experience (and some cash) so moved all the T-bills to Fido. Tried to figure out how to set up auto-roll online for the existing T-bills. Failed. Tried online to make the auction purchase for the week. Failed, even though it showed I had sufficient in the cash account available to trade (actually had like $99 available for a $100 face value bill that trades around $97.50.)

Got up on the left coast and spent long enough on the Fidelity phone system explaining what I wanted, with CUSIPs, and getting passed around that it was 7:01 and the auction had closed. Also learned that auto-roll can only be set for new positions, not the 22 I already own, so can look forward to calling and ordering the "fund new replacement T-bill with maturing T-bill proceeds" auction purchase for the next six months. Alternatively, I can keep enough cash in the Fidelity cash account (not Spaxx, not available) to fund each weeks purchase. In the 6 months it will take to get everything re-bought and set on auto-roll we will lose about the same amount in interest in the sweep account vs. T-bill interest as they offered as an inducement to move a substantial amount over from Vanguard. No free lunch.

I suggested as a work-around buying on the secondary market and the rep told me something I wasn't aware of: T-bill purchases bought on the secondary market are NOT state tax free, even if held to maturity. If that is true then it is a valuable bit of knowledge for me - and learning something new the one positive in the morning.

 

[audreyh1]

Yeah, you can call in to turn off autoroll, but you can’t turn it on after the fact. Fidelity also usually gives you an opportunity to cancel the autoroll buy within a couple of days of the new auction, however one time I was notified of the new order so close to auction time I wasn’t sure I could have canceled it if I had wanted to.

I usually have enough in a MM fund to cover a new purchase if doing my own version of autoroll.

 

[Sunset]

....
I suggested as a work-around buying on the secondary market and the rep told me something I wasn't aware of: T-bill purchases bought on the secondary market are NOT state tax free, even if held to maturity. If that is true then it is a valuable bit of knowledge for me - and learning something new the one positive in the morning.

I wonder about this...

I can see the interest a person pre-pays when buying to compensate the seller as taxable, but the rest of the interest paid out by the Treasury, should be State tax free.

The calculation would be complex and different for each one, as the price and duration and initial "rate" would be different.

 

[Rickt]

Can anyone tell me, what the cutoff time is to enter a buy order, on the day that a 52 week Treasury goes to auction on Fido? I have a Treasury that comes due 10/31/23, the proceeds of which will be available to trade that morning, or perhaps 12:01 AM on that day. I want to roll it into a new 52 week bill that will be auctioned on 10/31/23. Will I have enough time to use those maturing funds to roll into the new bill, or should I transfer $$ into Fido to cover the purchase and hit buy prior to 10-31?

I entered a buy order to buy 90 Day Tbills on Schwab today at 8:45AM Central Time. The order was accepted , have to wait and see if it went through.

Rick

 

[JoeWras]

One lesson I learned with both Vanguard and Fidelity is to not push the auction deadline. You are playing with fire.

Vanguard has a closed maintenance window for bonds every morning from approx 4AM EST to 6:30AM EST, and sometimes it lingers.

Auto-roll is great, but everything isn't available on the web. I stopped doing auto-roll. I want to shift my own gears. I also leave a buffer in the Money Market because I don't want to play the maturity-to-purchase float time game. SPAXX is paying well enough for a week delay until my next purchase.

 

[Golden sunsets]

Thanks Audrey.

Rickt; Your attempted buy today mimics what I am planning to do. Would you post the results when you determine if the order went through? Thanks.

 

[Chuckanut]

One lesson I learned with both Vanguard and Fidelity is to not push the auction deadline. You are playing with fire.

I believe the guy who writes the TIPS newsletter many of us follow has mentioned that some brokerages will close the Treasury window early on the sale day. He recommends buying no later than very early on the sale morning and preferably the day before.

 

[jldavid47]

I suggested as a work-around buying on the secondary market and the rep told me something I wasn't aware of: T-bill purchases bought on the secondary market are NOT state tax free, even if held to maturity. If that is true then it is a valuable bit of knowledge for me - and learning something new the one positive in the morning.

This sounds totally wrong to me. It is still US government interest. There is no logic to treating it differently than a Treasury Bill purchased at auction and I can find no references that say it is taxable at the state level.

 

[Gumby]

I can see an argument that some of the gain may not be free of state tax. To explain, suppose Treasury issues a bill at $95.00. The $5.00 OID is interest on a federal obligation and not taxable by the state. Now suppose that something happens overnight and interest rates shoot up. The value of that bill will drop. If you then buy at $94 and hold to maturity, only $5.00 is interest paid by the federal government. The other $1.00 is a trading gain and should be taxable by the state.

 

[MichaelB]

I suggested as a work-around buying on the secondary market and the rep told me something I wasn't aware of: T-bill purchases bought on the secondary market are NOT state tax free, even if held to maturity. If that is true then it is a valuable bit of knowledge for me - and learning something new the one positive in the morning.

This sounds wrong to me as well. It doesn’t make sense. That would mean fund and ETF 1099 tax statements would need to distinguish between Treasuries acquired new vs secondary, and they don’t.

Edit to add - Gumby’s explanation makes sense and sounds reasonable.

 

[Dash man]

This sounds wrong to me as well. It doesn’t make sense. That would mean fund and ETF 1099 tax statements would need to distinguish between Treasuries acquired new vs secondary, and they don’t.

I agree with Gumby that he was probably referring to any potential capital gains from the purchase. Since rates have gone up, the price of some older treasuries are down. When they mature the gain will be taxable at the state and federal levels.

 

[calmloki]

Hmm. We hold till maturity, so any gain attributable to a T-bill price being different than the original listing price would only be from time of purchase. I did put in an order for the 6 week auction T-bill maturing 11/30/23 with the second bond desk rep I spoke with, to be paid for with the 6 month bill being settled this Thursday. Maybe the next few days I'll see if the secondary market has any of the 6-month auctioned today, 912796CX5. Any gain might be de minimus and we could avoid carrying too darn much cash in the sweep account for the next six months.

I may have misunderstood what the first rep told me about taxes - or he may have been wrong. I respect the views of those I've interacted with for some years - they may be wrong, but I'll be in good company.

 

[jim584672]

I had a T-Bill sold prior to maturity, it got reported as a 1099 sale, so cap gain. The one held to maturity got reported as 1099-INT. Since only INT is state tax free the cap gain cost me some state tax. I read you could if you wanted to determine the amount of the gain that was interest vs the amount that was a cap gain/loss. But that is overly complex so I didn't bother. Both where bought secondary market.

 

[CRLLS]

From Fidelity:

Treasurys and taxes

Interest income from Treasury bonds is exempt from state and local income taxes, but subject to federal income taxes. There may also be tax consequences when you sell Treasurys that you bought on the secondary market. If you buy a bond for less than face value on the secondary market and either hold it until maturity or sell it at a profit, the gain will be subject to federal and state taxes. This is different than buying a Treasury bill at Original Issue Discount (OID). When a bond is sold or matures, gains resulting from purchasing a bond at a discount in the secondary market are treated as capital gains while OID gains are taxed as income.

 

[Fermion]

Hmm, I have about $50,000 in carry over capital losses that will take me awhile to use up at $3k a year. Buying bonds and selling them for a cap gain and then offsetting this against those losses would be better than having the interest income.

 

[calmloki]

From Fidelity:

Well, that sounds like what the first rep told me. drat.

 

[Rickt]

Thanks Audrey.

Rickt; Your attempted buy today mimics what I am planning to do. Would you post the results when you determine if the order went through? Thanks.

Golden Sunset:

Trade was executed. I received a trade confirmation at 11AM Central Time

Rick

 

[copyright1997reloaded]

For those planning on buying the 5-year TIPS issue tomrrow, the preivous 5-year TIPS (April 2008) closed today at 2.587% real (ask) at Fidelity.

 

[audreyh1]

For those planning on buying the 5-year TIPS issue tomrrow, the preivous 5-year TIPS (April 2008) closed today at 2.587% real (ask) at Fidelity.

Wow!

 

[jldavid47]

The reissue of the 20 year bond yielded 5.245% yesterday. (4.375% coupon at a price of 89.352074). It was the last auction of the August series. The next auction for the 20 year bond is the first auction for the November series on November 20th. This is getting really tempting if long-term rates stay higher which would probably mean a 5.125% coupon plus some discount.

 

[Chuckanut]

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.

Today’s Treasury auction of $22 billion in a new 5-year Treasury Inflation-Protected Security generated a real yield to maturity of 2.440%, continuing a recent trend of mildly disappointing results for TIPS at auction.

This is CUSIP 91282CJH5, which will mature Oct. 15, 2028. At yesterday’s market close, the U.S. Treasury estimated the real yield of a full-term 5-year TIPS at 2.57%, and a TIPS with a similar term was trading all morning with a real yield in the range of 2.54% to 2.61%. So the result of 2.440% was a downside surprise, indicating fairly strong demand for this new issue.

Here is the history of 4- to 5-year TIPS auctions going back to 2017. Note there is nothing on the list that even comes close to a real yield of 2.440%.

 

[audreyh1]

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

More from the article:

I was expecting a real yield and coupon rate topping 2.5%. Nevertheless, this TIPS broke through some historic milestones:

• The real yield of 2.440% was the highest for any TIPS auction of this term going back to October 2008, during the heart of the U.S. financial crisis.
• The coupon rate was set at 2.375%, the highest for any 5-year TIPS since the very first TIPS auction of this term in history, which generated a coupon rate of 3.625% on July 9, 1997.
• The auction size was $22 billion, the largest for this term in history.

 

[tulak]

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