short bonds - how to buy them

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Arturo
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short bonds - how to buy them

Post by Arturo » Sun Feb 24, 2013 4:39 am

Hi all,

i am in the process of buying short bonds. I want low volatility, so i would like to purchase 6 month bonds or similar ones. but i have several issues here that are not explained anywhere, so i would appreciate so much if somebody could advice me.

when you enter the treasury, you can access to the list of actual bonds. From 1 month to 30 years. If you look at the list of short bonds, generally you will not find a short bond that started just at the moment you want to buy. Generally, you will find ones that already started some months ago, but still some months left for the maturity date.

i mean, when you buy a bond that is only 3 or 4 months to the maturity date, normally the yield will be negative, and if you are trading this operation two or three times per year, the commissions can cut all the returns.

others advice to acquire longer short bonds (like 2 years), so the yields will still be positive, and would get better returns that using 6 month bonds. But in the other way, you will get higher volatility, and i want the minimum possible.

The situation with an ETF is much simpler, but i would like to buy bonds directly for the sake of simplicity and lack of intermediates. But i don't understand this situation at all. with 30 long bonds the situation i think is much simpler. i don't know how you guys are doing this procedure.

thanks in advance!
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Re: short bonds - how to buy them

Post by dualstow » Sun Feb 24, 2013 7:17 am

I buy them at auction.

Yes, you probably can't expect to have a full six months on these bills AND have them available on the secondary market at the moment you want to buy. That would require that someone buys these bills and then sells them almost immediately, and does so at just the same time that you are buying. (Or maybe that is happening but you and I are looking in the wrong place).

But, once you start, can't you just keep buying at auction?
others advice to acquire longer short bonds (like 2 years), so the yields will still be positive, and would get better returns that using 6 month bonds. But in the other way, you will get higher volatility, and i want the minimum possible.
How about a 2-year note that only has a few months left on it?
Last edited by dualstow on Sun Feb 24, 2013 7:19 am, edited 1 time in total.
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Re: short bonds - how to buy them

Post by Arturo » Sun Feb 24, 2013 9:14 am

Hi dualstow,

thanks for your help.
dualstow wrote:
But, once you start, can't you just keep buying at auction?
what do you mean with auction? secondary market? i do not get the point sorry.
others advice to acquire longer short bonds (like 2 years), so the yields will still be positive, and would get better returns that using 6 month bonds. But in the other way, you will get higher volatility, and i want the minimum possible.

How about a 2-year note that only has a few months left on it?
yes, you are right.

i have concluded two possible solutions:

1. purchase an ETF, so all this headaches are over. They get in charge of this situation, providing you the maturity you are looking for. The negative side is that you incur in the manager risk, while with bills, you buy them directly to the treasury. And i would prefer this option, Harry Browne old school.

2. purchase different maturities according to the situation. If you find a 6 month bond that started just 1 month ago, fo for it. If you can only find a bill with a maturity of 2 years that started some months ago, go for it.

i thought it was going to be easier.

regards
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Re: short bonds - how to buy them

Post by dualstow » Sun Feb 24, 2013 10:49 am

Auction is the primary market. You can buy treasuries -- t-bills, notes, bonds -- at auction. If I buy a t-bill at auction and then sell it, that's how it appears in the secondary market. Superficially, it's like buying a book new, and the secondary market is like the "used books" page. Of course, with books the price is expected to go down. :-)

It does appear, though, that most pp investors here prefer the secondary market. Secondary:
- You can buy immediately instead of waiting for your bid to settle a week later.
- You can select the most desirable coupon.

If there's an advantage to using the auction, I'm unaware of it, other than the fact that you can get nearly your full six months on t-bills or nearly a full 30 years from a bond.
I'd supply you with a screenshot, but right now my wife is uploading a massive video to the web thus things are moving slowly here.
You should be able to see an 'Auction' link on the Vanguard bond-buying page for treasuries if you're curious.
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Re: short bonds - how to buy them

Post by rickb » Sun Feb 24, 2013 11:45 am

Gumby posted Fidelity screenshots a while ago, see http://gyroscopicinvesting.com/forum/ht ... ic.php?t=0

On the second one (Step 2), there are 4 types of US treasuries listed - auction, secondary, TIPS (auction) and TIPS (secondary).  Most brokers will have a similar choice in their interface.  Like Dualstow says, "auction" is where you'll find newly issued bonds (you'll only find them after the auction is announced and before the auction occurs, which lasts only a few days), and "secondary" is where you'll find bonds someone else purchased that they're willing to sell.

There's a tentative schedule of upcoming auctions at http://www.treasury.gov/resource-center ... ctions.pdf

Looking at this schedule, it looks like there's a 26-week (6-month) bill auction essentially every Thursday.  So, you can buy a "new" 6-month bill every week.  Fidelity and Vanguard (and I think at least a few other brokers) don't charge anything at all for buying treasuries at auction.

In another thread here, Sophie has talked about a clever way to boost your returns on short term treasuries if you pay fairly high state and local income taxes (and have some capital gains you can offset with capital losses).  See http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3
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Re: short bonds - how to buy them

Post by dualstow » Sun Feb 24, 2013 12:06 pm

That's a good summary from RickB. I would just add that if you're going to use a brokerage house like Vanguard or Fidelity, check their own auction schedules in addition to the dot gov link.

The reason I suggest this is that I noticed, with long bonds at least, that an offering might be available at Fidelity but not at Vanguard, or vice versa. I wrote to them and they confirmed it. I don't know why that's the case, since it's all ultimately coming from Uncle Sam. Maybe they use different intermediaries to break down these massive amounts of instruments into small chunks that allow an individual investor like you and me to just buy a few thousand dollars' worth at a time. Just a guess.
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Re: short bonds - how to buy them

Post by BearBones » Sun Feb 24, 2013 12:44 pm

If there is little or no advantage to the primary auction, why not just buy on the secondary? I'd say, unless you are going for institutional diversification by going to Treasury Direct, forget about the primary auctions.
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Re: short bonds - how to buy them

Post by Tortoise » Sun Feb 24, 2013 2:50 pm

BearBones wrote: If there is little or no advantage to the primary auction, why not just buy on the secondary? I'd say, unless you are going for institutional diversification by going to Treasury Direct, forget about the primary auctions.
Some people just like that "new bond smell" from brand new bonds bought at auction ;)
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Re: short bonds - how to buy them

Post by dualstow » Sun Feb 24, 2013 3:14 pm

Tortoise wrote:
BearBones wrote: If there is little or no advantage to the primary auction, why not just buy on the secondary? I'd say, unless you are going for institutional diversification by going to Treasury Direct, forget about the primary auctions.
Some people just like that "new bond smell" from brand new bonds bought at auction ;)
Exactly.  :) I don't know how to explain it. I have bought bonds on the 2ndary market, but I'm not in any hurry -- I'm saying that to someone whose handle is "Tortoise -- and I like the routine of participating in the auctions if I have the cash and the (asset allocation) need.
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Re: short bonds - how to buy them

Post by Ad Orientem » Sun Feb 24, 2013 5:15 pm

SHV... It's just so much easier and less hassle with a very low risk level.
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Re: short bonds - how to buy them

Post by frugal » Sun Feb 24, 2013 6:19 pm

Arturo

Is for a EUPP ?

Which stt country you want to use?
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Re: short bonds - how to buy them

Post by rickb » Mon Feb 25, 2013 12:40 am

Ad Orientem wrote: SHV... It's just so much easier and less hassle with a very low risk level.
(bold added)

Are you sure?  SHV can loan out up to 1/3 of the treasuries they own in return for "cash" collateral that they can invest in Black Rock MM funds (that aren't backed by treasuries - in the pursuit of higher returns). 

The notion that SHV is a collection of T-bills that you buy a piece of is simply incorrect, perhaps even quaint.  They'll take your money.  They'll promise they'll invest it in treasuries.  They'll buy treasuries.  But then they'll loan out the treasuries and take the cash collateral and put it in something that returns more than the 0% treasuries are returning.  What kind of fool keeps billions of dollars tied up in treasuries returning 0%?  Certainly not the smart guys that run Black Rock!  Surely you'd rather loan out as many of these dead-weight bills as you possibly can and put the cash collateral into higher paying loans to folks like Morgan Stanley, Credit Suisse, Bnp Paribas Securities, Jp Morgan, and Deutsche Bank (see http://financials.morningstar.com/money ... te?t=XTSLA - this is the MM fund in which SHV, and SHY, and IEF, and TLT invest the collateral they hold for loaned out shares).

It's kind of complicated, but the bottom line here is up to 1/3 of your investments in any of SHV/SHY/IEF/TLT, which look like investments in nice safe treasuries, actually consist of short term loans to other banks.  I'm sure there's no circumstance in which anything could possibly go wrong here.  Oh wait, in 2008 didn't the entire interlinked financial system nearly collapse?  Maybe something can go wrong.
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Re: short bonds - how to buy them

Post by Arturo » Mon Feb 25, 2013 3:03 am

dualstow wrote: Auction is the primary market. You can buy treasuries -- t-bills, notes, bonds -- at auction. If I buy a t-bill at auction and then sell it, that's how it appears in the secondary market. Superficially, it's like buying a book new, and the secondary market is like the "used books" page. Of course, with books the price is expected to go down. :-)

It does appear, though, that most pp investors here prefer the secondary market. Secondary:
- You can buy immediately instead of waiting for your bid to settle a week later.
- You can select the most desirable coupon.

If there's an advantage to using the auction, I'm unaware of it, other than the fact that you can get nearly your full six months on t-bills or nearly a full 30 years from a bond.
I'd supply you with a screenshot, but right now my wife is uploading a massive video to the web thus things are moving slowly here.
You should be able to see an 'Auction' link on the Vanguard bond-buying page for treasuries if you're curious.
thanks for your information.

by the way, i am investing in EU, so here in not probable that non institutionals can auction (but i will get the information).

in the other hand, what are your advises to acquire short bonds in the secondary market? variables? parameters? number of months left for the maturity date? type of cupon? yield? how do you analyze short bonds to buy them?

this is the kind of information that i can't find anywhere and would be nice somebody could provide some clues :-),

regards
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Re: short bonds - how to buy them

Post by frugal » Mon Feb 25, 2013 3:47 am

Ad Orientem wrote: SHV... It's just so much easier and less hassle with a very low risk level.
rickb wrote:
Ad Orientem wrote: SHV... It's just so much easier and less hassle with a very low risk level.
(bold added)

Are you sure?  SHV can loan out up to 1/3 of the treasuries they own in return for "cash" collateral that they can invest in Black Rock MM funds (that aren't backed by treasuries - in the pursuit of higher returns). 

The notion that SHV is a collection of T-bills that you buy a piece of is simply incorrect, perhaps even quaint.  They'll take your money.  They'll promise they'll invest it in treasuries.  They'll buy treasuries.  But then they'll loan out the treasuries and take the cash collateral and put it in something that returns more than the 0% treasuries are returning.  What kind of fool keeps billions of dollars tied up in treasuries returning 0%?  Certainly not the smart guys that run Black Rock!  Surely you'd rather loan out as many of these dead-weight bills as you possibly can and put the cash collateral into higher paying loans to folks like Morgan Stanley, Credit Suisse, Bnp Paribas Securities, Jp Morgan, and Deutsche Bank (see http://financials.morningstar.com/money ... te?t=XTSLA - this is the MM fund in which SHV, and SHY, and IEF, and TLT invest the collateral they hold for loaned out shares).

It's kind of complicated, but the bottom line here is up to 1/3 of your investments in any of SHV/SHY/IEF/TLT, which look like investments in nice safe treasuries, actually consist of short term loans to other banks.  I'm sure there's no circumstance in which anything could possibly go wrong here.  Oh wait, in 2008 didn't the entire interlinked financial system nearly collapse?  Maybe something can go wrong.
Which one shall I follow? :-)
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Re: short bonds - how to buy them

Post by CA PP » Mon Feb 25, 2013 8:50 am

For EU PP, You could simply consider dividing cash allocation into 3 ladders (one maturing  on March 2014, the other march 2015 and the third march 2016), just choose from the list below (Fälligkeit=maturity in german), take note of ISIN number and call your broker or purchase online:

Just make sure you do not select a german TIPS.

Keep it safe and simple.

http://www.deutsche-finanzagentur.de/fi ... ynopse.pdf
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Re: short bonds - how to buy them

Post by Arturo » Mon Feb 25, 2013 9:55 am

CA PP wrote: For EU PP, You could simply consider dividing cash allocation into 3 ladders (one maturing  on March 2014, the other march 2015 and the third march 2016), just choose from the list below (Fälligkeit=maturity in german), take note of ISIN number and call your broker or purchase online:

Just make sure you do not select a german TIPS.

Keep it safe and simple.

http://www.deutsche-finanzagentur.de/fi ... ynopse.pdf
Hi CA PP,

thanks for your advises.

i have been testing some bonds from your list, but in all cases, my broker doesn't recognize them. I like to check on this two links, that i think are a little more accurate:

http://www.boerse-frankfurt.de/en/bonds ... limit=NONE

http://www.bundesbank.de/Redaktion/EN/D ... cationFile

by the way, whats the principle of buying three ladders with this maturity? is it the same buying a maturity date on march 2014, but with a issue date of 2000 or issue date of 2013? are you obtaining the same cupons and return?

i want to keep it the safest and simplest possible, believe me, but i need to understand the principles of buying short bonds before buying them. Is a must to me.

regards
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Re: short bonds - how to buy them

Post by Ad Orientem » Mon Feb 25, 2013 10:20 am

rickb wrote:
Ad Orientem wrote: SHV... It's just so much easier and less hassle with a very low risk level.
(bold added)

Are you sure?  SHV can loan out up to 1/3 of the treasuries they own in return for "cash" collateral that they can invest in Black Rock MM funds (that aren't backed by treasuries - in the pursuit of higher returns). 

The notion that SHV is a collection of T-bills that you buy a piece of is simply incorrect, perhaps even quaint.  They'll take your money.  They'll promise they'll invest it in treasuries.  They'll buy treasuries.  But then they'll loan out the treasuries and take the cash collateral and put it in something that returns more than the 0% treasuries are returning.  What kind of fool keeps billions of dollars tied up in treasuries returning 0%?  Certainly not the smart guys that run Black Rock!  Surely you'd rather loan out as many of these dead-weight bills as you possibly can and put the cash collateral into higher paying loans to folks like Morgan Stanley, Credit Suisse, Bnp Paribas Securities, Jp Morgan, and Deutsche Bank (see http://financials.morningstar.com/money ... te?t=XTSLA - this is the MM fund in which SHV, and SHY, and IEF, and TLT invest the collateral they hold for loaned out shares).

It's kind of complicated, but the bottom line here is up to 1/3 of your investments in any of SHV/SHY/IEF/TLT, which look like investments in nice safe treasuries, actually consist of short term loans to other banks.  I'm sure there's no circumstance in which anything could possibly go wrong here.  Oh wait, in 2008 didn't the entire interlinked financial system nearly collapse?  Maybe something can go wrong.
Hi Rick
While you raise a valid point I think you are overstating your case. The risks of loaned out securities is much more of a concern for the longer dated bonds than the short ones. To understand the risk you need to ask what the loaned securities are being used for. And the answer is almost always to short sell the asset.

But who puts a short on cash?

If you expect higher interest rates and or inflation (not at all unreasonable) the obvious target for a short would be long dated bonds, not T-Bills. I think you read that they are allowed to loan out up to one third of the funds securities and concluded that such is happening when in fact it almost certainly is not. TLT on the other hand would be a subject of greater concern. (Caveat I also use TLT but am seriously considering migrating to direct ownership of LTTs for exactly the reasons you raised.)

But yes, you are correct that SHV carries a higher risk level than owning T-Bills directly. The issue to my mind is convenience vs nuisance coupled with slightly lower risk levels. IMHO the risk level for SHV, while not nonexistent, is in fact extremely low and I am more than comfortable holding it for most of the cash portion of my PP.

But let's consider the scenarios under which SHV could be threatened. I see two. The first would be catastrophic deflation where parties who were betting heavily on extreme inflation might find themselves in a short squeeze. But again why would they be shorting cash when longer dated bonds offer the obvious gains for such a move? The second scenario would be a major emergency that might cause a long term disruption or closure of the financial markets.

How likely is that? Well a nuclear war could do it. The British closed their stock exchange for the first six months or so of the First World War. But that was in a very different world and I am having difficulty seeing a scenario that would close the financial markets for a prolonged period in modern times that would not also call into question the stability of the government itself. In any scenario of that nature paper is not what I would want, even if it had the promise of the US Government behind it. That's when you want gold which should if at all practicable, be held in physical form.

In summary, SHV is riskier than holding T-Bills directly which you fairly point out. But that risk level is in fact very low and one that I am comfortable with as a trade off for convenience. Different people of course have different risk tolerances but one of the main attractions of the PP for me beyond its safety is its simplicity. To which end I tend to look askance at anything that is going to involve unnecessary work.

I think this is one of those areas where you need to ask yourself if holding SHV will keep you awake at night. If the answer is "yes" then you need to switch to holding directly your STTs. I however sleep quite soundly.
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Re: short bonds - how to buy them

Post by frugal » Mon Feb 25, 2013 4:29 pm

Dear Arturo,

what about IBCA + IBGL + DBXT + DBXN

?
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Re: short bonds - how to buy them

Post by rickb » Mon Feb 25, 2013 10:58 pm

Ad Orientem wrote:
I think you read that they are allowed to loan out up to one third of the funds securities and concluded that such is happening when in fact it almost certainly is not. TLT on the other hand would be a subject of greater concern. (Caveat I also use TLT but am seriously considering migrating to direct ownership of LTTs for exactly the reasons you raised.)

I think this is one of those areas where you need to ask yourself if holding SHV will keep you awake at night. If the answer is "yes" then you need to switch to holding directly your STTs. I however sleep quite soundly.
I'm not actually saying they loan out 1/3 of SHV's treasuries, but that they can.  Looking at their most recent semi annual report, it looks like the following amounts are (or may be) loaned out:

SHV O.25%
SHY 0.49%
IEI 36.6%
IEF 39.6%
TLH 28.5%
TLT 42.1%

So, yes this is a minuscule portion of SHV and SHY.  However, the fact that they do loan out large percentages (curiously, it appears well more than 1/3!) of the other funds and can similarly loan out SHV's or SHY's assets basically makes me think they're not entirely trustworthy.  And, to be clear, my issue is primarily what they're doing with the borrower's cash collateral (they're putting it in a non-treasury backed MM that mostly consists of short term loans to the banks I listed above).  This is precisely the kind of MM that was on the verge of being in big trouble in 2008.  Even if the borrower returns the treasuries, if the fund loses money on the collateral there's a problem.

I used to use TLT, but have migrated to direct ownership of LTTs (it took all of about 10 minutes).  I used to primarily use SHY, but am migrating to direct ownership of STTs.  Perhaps I'm cynical, but IMO Black Rock is run by a bunch of greedy motherf***ers and having any of my money in their funds is causing me to lose sleep.  One of the main attractions of the PP for me is its safety.  A lot of its safety is due to its simplicity, but if you put your money in funds that do things like loan out what they say they hold (for cash) and reinvest the cash in things wholly unlike what the fund is supposed to own, you're losing out on both simplicity and safety.  It's easy to buy SHV.  But SHV is inherently not simple.  And it's hardly anything like a treasury backed MM.
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Re: short bonds - how to buy them

Post by CA PP » Tue Feb 26, 2013 1:59 am

Arturo,

Just choose from the list below 3 bonds with the maturity you require. 3 rungs of a 3 year ladder. Once year 1 matures you roll it to a new 3 year maturity.

See: http://www.investopedia.com/terms/b/bondladder.asp

The issue date and coupon size is not relevant. Just maturity. 

Also have a look at the content of short term bond funds and you ll see the bonds listed below from germany.... but also some other bonds from second world countries like Italy, Portugal, etc... that you certainly do not want exposure to.  The iShares Barclays Euro Government Bond 1-3 (IBGS) is a good example of this.  There are however ETF of German only bonds.... but why buy that when you can buy a simple safer, a in most cases cheaper german bond ladder.

You can apply the same for the long term bond position in the EU PP: buy the ISIN DE0001135481, german bond maturity 04.07.2044, coupon 2.5%

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Re: short bonds - how to buy them

Post by frugal » Tue Feb 26, 2013 4:20 am

Hi all!

Do you think this is normal:

ETFs

- 0,08% buy / sell 
- 0,16% per year


Direct Bonds

- 0,50%+0,50% buy and sell
- 2% on interest


Isn't it too expensive to have direct german bonds?
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Re: short bonds - how to buy them

Post by Arturo » Tue Feb 26, 2013 7:07 am

CA PP wrote: Arturo,

Just choose from the list below 3 bonds with the maturity you require. 3 rungs of a 3 year ladder. Once year 1 matures you roll it to a new 3 year maturity.

See: http://www.investopedia.com/terms/b/bondladder.asp

The issue date and coupon size is not relevant. Just maturity. 
Hi CA PP,

you dont need to convince me  to go for german bonds :-). I already decided it long time ago. Are the most "secure" in Europe (minimum default probability). My main issue is about how to approach the purchase of short bonds.

for instance, from the paper you posted, we can see that there is a bond that matures in 4.7.2013 (the first one in the list). As you can see, it provides a interest of 3.75%. But this is no the real interest for german Bills right now in Germany. Short bonds are even in negative interest rate. There are some details i do not understand at all.

refering to long bonds, yes, this is the bond i actually purchased.

regards
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Re: short bonds - how to buy them

Post by CA PP » Tue Feb 26, 2013 7:55 am

Arturo,

the first one on the list has coupon payments of 3.75%.  However its current yield is some .01%. 

So, for a 100EUR bond face value you will have to pay some 101.30EUR these days to buy it.  You will get 3.75% per annum coupon payment at coupon payment date (prorated for the number of days you hold it) and you will receive 100EUR at maturity.  This equals to an equivalent of 0.01% yield. 

As you see, the issue date and coupon has no relevance, except for taxes.  Interest payment has usually a different treatment than capital gain.

Take note: You practically have a negative return if you factor transaction costs and taxes (if taxable account).

Personally, for these reasons, I didnt renew my ladder for EU PP recently.  I keep cash in savings account (1%).
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Re: short bonds - how to buy them

Post by MachineGhost » Tue Feb 26, 2013 10:19 am

rickb wrote: SHV O.25%
SHY 0.49%
IEI 36.6%
IEF 39.6%
TLH 28.5%
TLT 42.1%
Why isn't BIL in this list?  It is a pure T-Bill 1-3 month fund.  Can't say the same for the above.

I don't believe in the security theatre of using ETFs but if I was, I would just buy PERM.  It's all the same B.S. at the end of the day.  Though I wonder about the actual net expense ratio of a fund of funds.
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Re: short bonds - how to buy them

Post by Arturo » Tue Feb 26, 2013 3:07 pm

CA PP wrote: Arturo,

the first one on the list has coupon payments of 3.75%.  However its current yield is some .01%. 

So, for a 100EUR bond face value you will have to pay some 101.30EUR these days to buy it.  You will get 3.75% per annum coupon payment at coupon payment date (prorated for the number of days you hold it) and you will receive 100EUR at maturity.  This equals to an equivalent of 0.01% yield. 

As you see, the issue date and coupon has no relevance, except for taxes.  Interest payment has usually a different treatment than capital gain.

Take note: You practically have a negative return if you factor transaction costs and taxes (if taxable account).

Personally, for these reasons, I didnt renew my ladder for EU PP recently.  I keep cash in savings account (1%).
Hi CA PP,

this is the first time i am reading the concept you are teaching to me. As far as i understood Harry Browne and Craig Rowland books, T-Bills are a different product than T-Bonds. Both authors never advised to buy T-Bonds that are going to mature in several months, as a way of modeling virtual T-Bills.

i am not saying that you are wrong. Just saying that this is a totally new concept i didn't know before. by the way, i appreciate your advises. hope to hear more about this.

in regard to 1% deposit bank, i am seeing some issues (correct me if i am wrong please):

1. buying long german bonds (30 years) and local country bank deposit (maybe France, Spain or Italy), aren't you creating an asynchronous investment?

2. it is supposed that a EU-PP invest in german bonds because are the less probable to default and more secure. Right now short bonds are quoting negative, because is the refuge in Europe. isn't it supposed that invest in german bonds is to protect the investment? isn't it a little bit out of this 'protection' feature investing in deposit banks?

regards
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