Treasury Bond Buying Tutorial

Discussion of the Bond portion of the Permanent Portfolio

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dragoncar
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Re: Treasury Bond Buying Tutorial

Post by dragoncar » Wed Nov 02, 2011 1:59 pm

6 Iron wrote: I sold about 80% of my TLT today at the market open, and I have an internal conflict. With the bulk of my long bonds liquidated, I feel as if my left flank is uncovered as I have the three business days before I can buy bonds. On the other hand, and I realize that I am violating the code here, but, I am extraordinarily tempted to market time or dollar cost average my move back in.

What would you do?

Why can't you buy bonds now?
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Re: Treasury Bond Buying Tutorial

Post by stone » Wed Nov 02, 2011 2:08 pm

dragoncar, The lower coupon one will have a longer duration (ie be more volatile) because of the lower coupon. It is further towards the spectrum of being like a zero coupon such as in EDV. Most people see that as a problem but for us PPs it is an advantage. The longer duration one gets the higher yield because most people dont like long duration (that is why the 30y has better yield than 10y most of the time). The second one is the best for the PP IMO. There are online duration calculators you can use. On the whole just going for the longest duration is best.
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Re: Treasury Bond Buying Tutorial

Post by dragoncar » Wed Nov 02, 2011 3:28 pm

Thanks, Stone... although I understand the fundamental of how a bond works, I obviously need to do more research on how the bond market works -- I had forgotten about the duration calculation.

Thanks also to Gumby for the tutorial.  One note that was still confusing to me: What exactly does the "price" mean?  For example, Fidelity may give you a confirmation screen that looks like this:

Price: $114.00
Quantity: 10,000.00
Total: $11,400.00

It seems like the total should = quantity * price.  However, if you enter "10" into the quantity, the total will be quantity * 10 * price.  Is it just convention to list the price as 1/10 of the actual price?
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Re: Treasury Bond Buying Tutorial

Post by 6 Iron » Wed Nov 02, 2011 7:26 pm

dragoncar wrote:
6 Iron wrote: I sold about 80% of my TLT today at the market open, and I have an internal conflict. With the bulk of my long bonds liquidated, I feel as if my left flank is uncovered as I have the three business days before I can buy bonds. On the other hand, and I realize that I am violating the code here, but, I am extraordinarily tempted to market time or dollar cost average my move back in.

What would you do?

Why can't you buy bonds now?
I can, but not with the proceeds of the sale of TLT until it clears. I suppose that I could have moved cash positions into the trading account but that seemed cumbersome, and I thought I would wait. Of course, that means that Greece and the Euro will go into a nosedive tomorrow.
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Re: Treasury Bond Buying Tutorial

Post by dragoncar » Thu Nov 03, 2011 10:26 am

6 Iron wrote:
dragoncar wrote:
Why can't you buy bonds now?
I can, but not with the proceeds of the sale of TLT until it clears. I suppose that I could have moved cash positions into the trading account but that seemed cumbersome, and I thought I would wait. Of course, that means that Greece and the Euro will go into a nosedive tomorrow.
Oh, I saw you say something about settling time, but I didn't understand.  Fidelity is cool with using unsettled funds to buy.  You just can't "freeride" by then selling the new securities before the funds with which you bought them settle.  Examples:

Sell tlt, buy bonds same day: ok (I just did this in my Roth Ira)
Sell tlt, buy bonds same day, sell bonds next day: freeriding (I think you just get a warning though the first time)
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Thu Nov 03, 2011 10:59 am

foglifter wrote: A couple of questions came to my mind after reading your post:

1. Market order vs. limit order: does it really matter which type of order to use?
It depends on what you want. If you know what price you want to pay for the bonds — and don't mind waiting for the market to hit that price — then use a limit order. If you just want the bonds now — and don't mind paying the market price — use a market order. With a market order, you are going to pay something close to the latest "Ask" price. However, with a limit order, you risk not getting the bonds at all if the market price rises from that point forward. I have also used market orders for Treasuries many times and never been disappointed. So, it really depends on what you want and how much you're willing to spend.

One easy way to decide is to look at the Bid/Ask spread. Since the Treasury market is very liquid, the Bid/Ask spread is almost always very tight. In other words, the bidder's price will almost always be extremely close to the asker's price. When you place a market order, you are basically saying that you're willing to take the "Ask" price, whatever it may be. With Treasuries, I don't think it really matters because of the liquidity and the spread is almost always going to be very tight.

Keep in mind that retail brokerages don't put you at the front of the line when limit trades happen. Most of these brokerage houses will usually only sell you something as a limit order if the price drops a few pennies below your bid price, because they will typically try to buy for a slight discount and then quickly sell it to you for the price you asked for. This is even true in full-service brokerage houses — and it's been a long-standing tradition on Wall Street. Remember, most people on Wall Street make most of their money through billions and billions of pennies that add up.

However, I would definitely recommend that you use a limit order when selling your bonds. That way you get the price that you want.
foglifter wrote:2. Is it better to use a ladder of bonds spreading the purchases in time or just sell all my EDV/TLT and buy bonds at once?
If you're unhappy with TLT, just sell it and buy 30 year Treasuries all at once. Your 20-30 year ladder will happen gradually over time as you rebalance into bonds over the years. The truth is that if taxes (and simplicity) weren't a factor you're PP might actually be better off rolling over 29 year Treasuries back into 30 year Treasuries each year. But, for the sake of our sanity, we just let a natural ladder happen on its own. There are some advantages to having a naturally occurring 20-30 year ladder in your pocket. For example, if you ever have a capital gain in another asset, like your Stocks, you might be able to sell a losing 23 year Treasury — take a capital loss, for tax loss harvesting — and roll it over to a new 30-year Treasury without any wash sale issues (since the durations are so different). Of course, that's just a futuristic hypothetical situation (since a seven-year-old 2034 Treasury should be doing pretty well right now).
foglifter wrote:3. What is the difference between buying at the auction or secondary market?
In terms of the actual bond, there is no difference whatsoever — since the bonds themselves are just electronic records in your account. Some brokerage houses will charge a fee to transact with the secondary market. But, at Fidelity, they are free either way. So, it makes no difference at Fidelity or Schwab. If you want the bonds immediately, just buy them on the secondary market.

If you happen to be just a day or two away from the regularly scheduled 30 year auction, you may want to participate in the auction just for fun. Just understand that you will be entering a "non-competitive" bid at the auction — which means that you are willing to pay the market price, for that bond, at the time of auction. If the auction isn't as highly over-subscribed as it usually is, you may get a nice little discount at the auction (maybe something like $999 per bond) — which is always fun. And the level of participation in the auction will typically affect the mood of the bond market. But, it's probably not worth waiting a week or two just to participate in the auction.

So, the secondary market is where all the trading action is. The auction is where the bonds are handed out to the public for trading and holding. After the auction is complete and the accounts are settled, most of those new bonds will be trading on the secondary market anyway — and that's why the Treasury market is so liquid.

Bottom line...if your brokerage house isn't going to charge you anything to participate in the secondary market, you'll have more control in the secondary market. And, of course, remember that you can only sell your bonds on the secondary market. The auction is really for those who want to have a little fun with it.
Last edited by Gumby on Thu Nov 03, 2011 11:03 am, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Thu Nov 10, 2011 3:00 pm

So... the 30-year Treasury Auction happened at 1PM today, and if you were lucky enough to have taken part in it, you got in at a nice discount. Why? Because the 30-year auction had disappointing results since it didn't have as many bidders as it normally does. It was "only" oversubscribed by 2.40:1 (versus the 2.94:1 Bid-to-Cover Ratio from last month). The Primary Dealers (the banks that help make the Treasury market more liquid) had to pick up a greater share of the slack from the weak public reception — as their Fed contract requires them to do.

http://www.treasurydirect.gov/instit/an ... 1110_1.pdf

I wouldn't read too much into the weak public reception. There are a lot of things happening in the bond market that would have attracted money away from the 30-year auction.

In any case, you can see the moment when the results were released as TLT (the blue line), instantly tracked the temporary spike in yields...

[align=center]Image[/align]

And as you can see, the dip was temporary — nothing more than a welcome blip for those who took part in the auction.

In recent months, the Treasury auctions have provided a nice little discount to Long Term Treasury buyers. But, my feeling is that the auction doesn't necessarily help you if you end up needing the bonds sooner than the auction schedule allows, since market conditions can often change a lot in between auction dates.

Still, congrats to those who took part in the auction.
Last edited by Gumby on Thu Nov 10, 2011 3:13 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by ZedThou » Fri Nov 11, 2011 9:28 pm

Gumby, thanks very much for this guide. I hold TLT in a Scottrade Roth IRA and am now considering buying the bonds themselves instead, but I don't quite understand how it works at Scottrade. I guess Scottrade acts as principal and thus marks the bonds up a bit for investors who wish to buy. Here is an example of Scottrade's Treasury bond offerings today:

Image

So comparing the 8/15/2041 maturity price to the bid/ask of 112.3594/112.4375 taken from http://online.wsj.com/mdc/public/page/2 ... asury.html it looks like the markup is roughly 0.27% Then to buy $100,000 worth of these bonds would cost around $270, which is almost enough to make me consider moving to Fidelity if indeed they offer this service for free.

Clicking the first 8/15/2041 bond "Buy" link gives this

Image

which is where it gets confusing to me. First of all, are these $10,000 bonds? Secondly, am I paying for accrued interest in some way? Thirdly, why is the order quantity in dollars?

And this is just the buying process, I'm not sure at all how selling works.

I suppose I should just give them a call on Monday to hold my hand through the process.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Fri Nov 11, 2011 10:13 pm

The minimum denomination is $1,000 at Fidelity

https://www.fidelity.com/bonds/us-treasury-bonds

...Your screenshot seems to imply that the denomination at Scottrade is $1,000 as well. (I believe you can buy the bonds in $100 denominations on TreasuryDirect, so that's probably why the official market price is quoted near $100). Clicking "Calculate" should provide some clues. But, you should call Scottrade's Bond Desk up and they will let you know for sure. I'm sure they will be able to clear it all up for you. When in doubt, always call up the bond desk and ask.

Unless I'm missing something, it's difficult to tell if the markup is as high as you suspect it is. The WSJ link suggests that the quotes were calculated at 3PM. Unless your screenshot was taken at 3PM, I'm not sure you can really come to any conclusions.

Your best bet is to call them up if you have questions.
Last edited by Gumby on Fri Nov 11, 2011 10:54 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by ZedThou » Fri Nov 11, 2011 10:33 pm

3pm Thursday was the last time bonds were traded, which explains the time stamp on the quotes I believe. The $11,000 numbers were confusing me, and I think you're right about them being $1,000 bonds. The numbers quoted in the image seem to have been for a default value of 10 bonds. Any integer input into the form along with "Calculate" gives the expected result. Still don't understand the accrued interest, but I'll take that up with customer service.
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Re: Treasury Bond Buying Tutorial

Post by ZedThou » Thu Nov 17, 2011 9:05 am

I've given up on the idea of trading treasury bonds in my Scottrade Roth IRA and have transferred the assets to a Fidelity Roth IRA. I'm about to sell TLT and buy bonds, and just wanted to make sure there was no reason to avoid the just-issued 11/15/2041 maturity treasury bonds - CUSIP 912810QT8. For the purposes of the Permanent Portfolio, they are just fine?
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Re: Treasury Bond Buying Tutorial

Post by SteveGo » Thu Nov 17, 2011 10:05 am

Just bought some myself. For the LT's buy the longest dated ones you can IMO.

You pay accrued interest, when you buy. That is the interest that has accumulated since the last coupon payment. When the coupon comes due, you get the full interest payment, so you get that money back at that time. On the other side of the trade, the seller gets that accrued interest for the time he has held the bond since the last interest payment.

The 11/15 Bond pays in May 15 and Nov 15, so right now there is not much accrued interest.

When I value my bond and note holdings, I add in the accrued interest, since that would be what I would receive if I sold them.




ZedThou wrote: I've given up on the idea of trading treasury bonds in my Scottrade Roth IRA and have transferred the assets to a Fidelity Roth IRA. I'm about to sell TLT and buy bonds, and just wanted to make sure there was no reason to avoid the just-issued 11/15/2041 maturity treasury bonds - CUSIP 912810QT8. For the purposes of the Permanent Portfolio, they are just fine?
Last edited by SteveGo on Thu Nov 17, 2011 10:09 am, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by foglifter » Tue Nov 22, 2011 12:23 am

Gumby,

I haven't bought bonds at Fidelity yet so I wanted to ask you:
When you look at your bond position in the Fidelity account is the current price (real-time or last close) displayed as it is displayed for stocks/ETFs/funds? I'm talking about the Positions view of the Accounts & Trade -> Portfolio page.
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Re: Treasury Bond Buying Tutorial

Post by rickb » Tue Nov 22, 2011 10:25 am

foglifter wrote: When you look at your bond position in the Fidelity account is the current price (real-time or last close) displayed as it is displayed for stocks/ETFs/funds? I'm talking about the Positions view of the Accounts & Trade -> Portfolio page.
Yes, it is.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Tue Nov 22, 2011 11:50 am

rickb wrote:
foglifter wrote: When you look at your bond position in the Fidelity account is the current price (real-time or last close) displayed as it is displayed for stocks/ETFs/funds? I'm talking about the Positions view of the Accounts & Trade -> Portfolio page.
Yes, it is.
They update the value of the bonds once a day...For example, here is what an account would look like when looking in the Cost Basis tab:

[align=center]Image[/align]

Just be aware that the bond values are not real time. They tend to post the bond values late at night for some reason (much later than the mutual funds).

You'll also notice there is a little "d" next to the cost basis of the bonds. In fine print, the little "d" says:
d - For fixed income securities, adjusted cost basis reflects any cumulative original issue discount, premium, or acquisition premium (including any year-to-date amount). It assumes such amounts were amortized or accrued for tax purposes from the acquisition date through the disposition date (or, for securities still held, through the maturity date). Premium amortization was calculated using the yield-to-maturity method. Acquisition premium was calculated using the ratable accrual method. Any market discount accretion for this position was calculated using the straight-line method and, if applicable, recognized upon disposition. Gain/loss displayed for this position is calculated using the cost basis adjustments as described above. The adjusted cost basis used here may not reflect all adjustments necessary for tax reporting purposes (such as wash sale adjustments) and may not apply if you are using an alternative amortization calculation method. Refer to IRS Publication 550, Investment Income and Expenses, for additional information.
Last edited by Gumby on Tue Nov 22, 2011 12:11 pm, edited 1 time in total.
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Re: Treasury Bond Buying Tutorial

Post by foglifter » Tue Nov 22, 2011 2:06 pm

Sweet, thank you!
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Re: Treasury Bond Buying Tutorial

Post by dualstow » Mon Jan 30, 2012 9:01 am

Gumby (or anyone): Have you ever bought zero coupon bonds via Fidelity?

I'm thinking about buying some for my vp in the future. I've bought 30-year treasuries in Fidelity using the auction. I never see offerings of zeroes in the 'fixed income offerings' emails I get from Fidelity. Those emails mention treasury auctions (all maturities), CDs, "structured products" and individual corporate bonds, but no zeroes.

I can see from your tutorial that you can include them in the search of the U.S. Treasury Secondary market, but my search didn't turn anything up. Maybe I'm doing it wrong.

I do hold some EDV, but I'm curious about buying zeroes directly in my 401(k).
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Re: Treasury Bond Buying Tutorial

Post by ZedThou » Mon Jan 30, 2012 6:12 pm

dualstow, if I go to http://fixedincome.fidelity.com/fi/FISe ... chTreasury and leave everything default except select "Yes" for both Call Protection and Zero Coupon, lots of STRIPS come up. Seems like the key is Type=All.
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Re: Treasury Bond Buying Tutorial

Post by dualstow » Mon Jan 30, 2012 9:54 pm

Many thanks, Zed! I'm not sure what else I selected before, but leaving every other option alone worked great.
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Re: Treasury Bond Buying Tutorial

Post by bigamish » Tue Jan 31, 2012 6:44 am

Any chance we can sticky this thread?  There is really good stuff here.
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Re: Treasury Bond Buying Tutorial

Post by MediumTex » Tue Jan 31, 2012 9:54 am

bigamish wrote: Any chance we can sticky this thread?  There is really good stuff here.
I stickied it.
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Re: Treasury Bond Buying Tutorial

Post by foglifter » Tue Jan 31, 2012 12:00 pm

bigamish wrote: Any chance we can sticky this thread?  There is really good stuff here.
Second that, this thread should be on the top.
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Re: Treasury Bond Buying Tutorial

Post by Gumby » Tue Mar 13, 2012 5:04 pm

mdsw wrote:I just thought I'd add that Vanguard does not charge a fee for the purchase of Long-Term Treasuries through the Vanguard Brokerage account. Someone posted earlier that Vanguard charges a fee (unlike Fidelity) per purchase for all accounts, but that was for stocks and non-Vanguard ETFs.
Actually, the statement was accurate when the post was originally written as Vanguard used to charge a fee to buy and sell Treasuries. Vanguard only recently changed its fee structure to match Fidelity.
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No bonds listed at Vanguard?

Post by MikeK » Mon Mar 19, 2012 9:20 pm

Based on the recent news about TLT, I figured it'd be a good time to go look into how to buy LTT bonds directly.  The above instructions for Fidelity are very helpful and I'll be using them when I've accumulated enough cash to need a rebalance. 

I also have an account with Vanguard and figured I'd look over their Bond desk.  But I can never get anything to show up with the searches I've done thus far.

Image

Image

What am doing wrong?  It's gotta be something obvious, because I can't see it!

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Re: No bonds listed at Vanguard?

Post by foglifter » Mon Mar 19, 2012 9:27 pm

MikeK wrote: Based on the recent news about TLT, I figured it'd be a good time to go look into how to buy LTT bonds directly. 
What news about TLT did you mean? I haven't been following the market  lately...
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