Treasury Notes (Auction vs Secondary - basically a wash?)

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joypog
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Treasury Notes (Auction vs Secondary - basically a wash?)

Post by joypog » Mon Nov 07, 2022 2:47 pm

I think it's been covered plenty in the past, but I'm moving a decent amount of money around for the next couple of years so I thought I'd ask one more time before pushing buttons around.

From what I've read, there is no real difference between buying US Treasury Notes (2 and 3 year durations) on the secondary market versus in auction. With auctions you avoid bid/ask spreads and get the best price everyone is paying...but you lose a few weeks of interest while waiting for the auction date and then the settlement. So for something as liquid as T-notes it seems to be something that is generally considered a wash. (I plan to hold them to maturity)

Do I have it right? Thanks!
Last edited by joypog on Mon Nov 07, 2022 6:43 pm, edited 2 times in total.
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Re: Treasury Bonds (Auction vs Secondary - basically a wash?)

Post by Kbg » Mon Nov 07, 2022 5:24 pm

Depends.

Municipal, USG or commercial? Your post slightly points to USG bonds. Assuming that is a yes (or no), there may be some tax implications. Let's assume you bought a bond during ZIRP days which was yielding .25%. It is most definitely selling at a discount to par now.

https://msrb.org/sites/default/files/Ta ... -Bonds.pdf

Consult a qualified tax accountant blah blah disclaimer.
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Re: Treasury Bonds (Auction vs Secondary - basically a wash?)

Post by joypog » Mon Nov 07, 2022 6:42 pm

Kbg wrote:
Mon Nov 07, 2022 5:24 pm
Depends.

Municipal, USG or commercial? Your post slightly points to USG bonds. Assuming that is a yes (or no), there may be some tax implications. Let's assume you bought a bond during ZIRP days which was yielding .25%. It is most definitely selling at a discount to par now.
Yes, thank you for clarifying. I'm talking about just good old US Treasury Notes (to be held to maturity). I've edited the OP to clarify.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by Kbg » Tue Nov 08, 2022 1:40 pm

So your return will be whatever your broker states it will be for the ask price but there may be tax implications in terms of interest vs. cap gains.

See last line of previous post. :-)
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by welderwannabe » Sun Nov 13, 2022 9:50 am

my opinion is auction is always better. you get the same price as the institutions.

obviously this depends on your lot size. If you're buying a $100K+ bond in the secondary market, might not be much of a spread. Lower lot sizes, like maybe a $5K or $10K bond its a lot harder to get the best pricing in the secondary market.

This is for nominal treasurys. TIPS and other more thinly traded treasurys, i'd always do the auction.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by barrett » Mon Nov 14, 2022 4:10 am

joypog wrote:
Mon Nov 07, 2022 2:47 pm
From what I've read, there is no real difference between buying US Treasury Notes (2 and 3 year durations) on the secondary market versus in auction. With auctions you avoid bid/ask spreads and get the best price everyone is paying...but you lose a few weeks of interest while waiting for the auction date and then the settlement. So for something as liquid as T-notes it seems to be something that is generally considered a wash. (I plan to hold them to maturity)
This is the way I am doing it, but with only one-year maturities so far. Haven't been able to pull the trigger on longer maturities yet as yields have been going up so steadily (until last week, at least).

Hopefully Kbg will clarify what he is talking about with capital gains. I think capital gains do not occur for Treasuries unless they are sold before they mature.

Most of our Treasuries are in tax-advantaged accounts but I'd still like to be sure about the capital gains. You have stated that you are holding yours to maturity so my take is no capital gains or losses but don't take my word for it. Always happy to learn something new.

And, yes, I believe you have it right about buying on the secondary market asap rather than waiting for the auctions and missing out on interest in the meantime
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by welderwannabe » Mon Nov 14, 2022 9:39 am

Im not a tax expert, but in short secondary market brings up two challenges

1) If you buy a treasury on the secondary market for a price less than its original issue price, then you bought it at a discount. This extra discount may not be state tax exempt depending on the state, as that extra discount is basically given to you by the seller of the treasury to buy his bond, and NOT by the US GOVT itself. Therefore its not "interest from a direct obligation". States are all different.

2) Consequently, if you SELL a treasury on the secondary market above what you paid for it, that is a capital gain and extra money paid to you by the buyer of the treasury, and not by the uUS GOVT itself. Therefore also not a direct obligation payment and also possibly taxable at the state leve depending on the statel.

If you buy a treasury at an auction and hold it to term, none of these things are a problem as you'll never have a capital gain. The POSSIBLE exception to this is a reissued treasury, which usually happens on the longer issues. For example, the 30 year treasury they tend to reoffer the same treasury CUSIP for a total of 3 months. The first month its a 30 year treasury. The next month they are really selling a 29 year 11 month treasury. The third a 29 year 10 month and so forth. If interest rates changed between the first time they offered it and the 3rd month, you may pay a further discount or pay a premium over its original issue price. You are getting this extra discount / premium from the US GOVT, so its state tax status is a little more murky, again depending on the state.

From a federal tax status none of this really matters much except you do have some options as to whether or not to amoritize premiums if you paid over original cost for a bond. If you paid less than the original face value, then you have an original issue discount, which is tracked like interest and you have to pay taxes on a percentage of that discount every year over the life of the bond. Most brokers should track this for you.

This is my understanding, but i'm not a tax pro. My wife is however and she did help walk me through this for our finances.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by welderwannabe » Mon Nov 14, 2022 9:47 am

joypog wrote:
Mon Nov 07, 2022 2:47 pm
lose a few weeks of interests
With a properly functioning yield curve, that is correct. With an inverted one like we have today, depending on what instrument your money is currently in, and the one you want to buy, you may actually make more waiting for the auction.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by Kbg » Tue Nov 15, 2022 11:05 am

Here's a good article on taxation when bonds are bought at a discount or premium.

https://www.investopedia.com/articles/t ... nd-tax.asp

A bond bought at issue and held to maturity will have no tax effects other than the interest portion. Secondary market purchases are when the more complicated tax impacts come in to play.

I've deliberately been vague as your tax status and where you live and what kind of bond you purchased all have an impact. The main point I was trying to make is that bonds bought at a discount or a premium will be treated differently than those bought at auction/issue.

A cap gain/loss is a cap/gain loss and is computed based on purchase and selling prices of the instrument involved.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by joypog » Thu Nov 17, 2022 9:01 am

Makes a lot of sense. I'm gonna learn good and hard next April concerning the tax shenanigans cause I jumped with both feet into both the auction and secondary market earlier this year! Oh well live and learn...

Moving forward, I think the conversation pushed me towards a rule of thumb of "buy at auction if it's a week or two away (and the maturity date is within two months of my ideal target)". If this tax season is painful, I may well just stick to auctions moving forward.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by barrett » Thu Nov 17, 2022 1:23 pm

This has nothing to do with auction vs. secondary market but I had an "interesting" development today. Had T-Bills maturing today at both Fidelity & Etrade. At Fido the funds were available first thing in the morning and are already reinvested. The Etrade Bills have not yet been kicked over to the cash core so I guess I have to wait until tomorrow to reinvest that money.*

Still learning this stuff. We'll probably have some tax shenanigans ourselves with our secondary market purchases, but by this time next year I'll be a crusty T-Bill veteran posting know-it-all replies to newbies on Bogleheads.

*ETA... Of course the one-year issues I was looking to buy this morning are up about seven basis points today, so buying a day later could be a tiny plus.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by jhogue » Fri Nov 18, 2022 10:19 am

Just for the sake of discussion…

I have a T-Bill ladder in my taxable account at Fidelity composed of 3, 6, and 9 month T-Bills, purchased on the secondary market, that I will to hold to maturity. It currently yields about 4.5%-- which is far better than an HBPP-designated Treasury money market fund like FDLXX (YTD +0.83%). It also bests 2 -- 3 year T-Notes (currently 4.25-4.5%).

1. I don’t worry about capital gains with durations this short, but if there are a few, well, that is why TurboTax was invented.
2. My Cash “barbell within a barbell” is composed of FDLXX + T-bill ladder +I-bonds (roughly 5%). It requires some management, but it’s less likely to get me into trouble than tinkering with bitcoin or leveraged futures.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by coasting » Fri Nov 18, 2022 1:33 pm

jhogue wrote:
Fri Nov 18, 2022 10:19 am
Just for the sake of discussion…

I have a T-Bill ladder in my taxable account at Fidelity composed of 3, 6, and 9 month T-Bills, purchased on the secondary market, that I will to hold to maturity. It currently yields about 4.5%-- which is far better than an HBPP-designated Treasury money market fund like FDLXX (YTD +0.83%). It also bests 2 -- 3 year T-Notes (currently 4.25-4.5%).

1. I don’t worry about capital gains with durations this short, but if there are a few, well, that is why TurboTax was invented.
2. My Cash “barbell within a barbell” is composed of FDLXX + T-bill ladder +I-bonds (roughly 5%). It requires some management, but it’s less likely to get me into trouble than tinkering with bitcoin or leveraged futures.
Amazing the difference over 11 & 1/2 months. At beginning of year the curve had every T-Bill yielding less than half percent and 30 year bond barely 2%. Yesterday 11/17, the curve had every T-Bill (even the 1-month) yielding more than the 30 year.
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by jhogue » Sat Nov 19, 2022 11:42 am

Yep, no question that the era of ZIRP is over.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Treasury Notes (Auction vs Secondary - basically a wash?)

Post by welderwannabe » Tue Nov 29, 2022 9:47 am

I was looking for a till with about a month maturity yesterday so I wouldn't have to remember to enter the auction today. Looked for options yesterday and there was a bill maturing I believe on 12/27 or 12/29...anyways at my lot size of 30,000 there was a 20bp haircut between the market yield for a 1 month bill and what I could buy one for on the secondary market. To get closer to the market yield I needed a minimum of a 300k lot size.

So I'm doing the auction today. Reminder of what a good deal the auctions are, you get the same price for a 1000 bill that an institution gets for a 200,000,000 bill. It is one of the free lunches in investing we have.
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