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Re: Treasury Bond Buying Tutorial

Posted: Wed Nov 02, 2011 1:42 pm
by dragoncar
I would also like to know what the advantage of buying at auction is.  It seems like you'd get slippage due to the multi-day difference between the auction close and the issue date.

I'm currently looking at Fidelity and trying to choose between two secondary-market options:

Name: UNITED STATES TREAS BDS
Coupon: 4.37500%
Maturity: 05/15/2041
Price: 126.687 / 126.781
Yield: 3.005 / 3.001
Quantity: 1,000(1) / 1,000 (1)

Name: UNITED STATES TREAS BDS
Coupon: 3.75000%
Maturity: 08/15/2041
Price: 114.125 / 114.172
Yield: 3.027 / 3.024
Quantity: 999(1) / 999 (1)

So what's causing the difference in yield?  Is it really the extra 3 months, or $1 difference in quantity?  I was going to grab some of the second, but it's clear I don't completely understand how bond buying works (I have TLT now)

Edit: OK, now that I've logged in I can see the images and this question has been addressed (kind of).  People are paying more for the higher coupon, even though the effective yield is therefore lower?  That seems kind of silly.

Re: Treasury Bond Buying Tutorial

Posted: Wed Nov 02, 2011 1:59 pm
by dragoncar
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?

Re: Treasury Bond Buying Tutorial

Posted: Wed Nov 02, 2011 2:08 pm
by stone
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.

Re: Treasury Bond Buying Tutorial

Posted: Wed Nov 02, 2011 3:28 pm
by dragoncar
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?

Re: Treasury Bond Buying Tutorial

Posted: Wed Nov 02, 2011 7:26 pm
by 6 Iron
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.

Re: Treasury Bond Buying Tutorial

Posted: Thu Nov 03, 2011 10:26 am
by dragoncar
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)

Re: Treasury Bond Buying Tutorial

Posted: Thu Nov 03, 2011 10:59 am
by Gumby
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.

Re: Treasury Bond Buying Tutorial

Posted: Thu Nov 10, 2011 3:00 pm
by Gumby
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.

Re: Treasury Bond Buying Tutorial

Posted: Fri Nov 11, 2011 9:28 pm
by ZedThou
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.

Re: Treasury Bond Buying Tutorial

Posted: Fri Nov 11, 2011 10:13 pm
by Gumby
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.

Re: Treasury Bond Buying Tutorial

Posted: Fri Nov 11, 2011 10:33 pm
by ZedThou
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.

Re: Treasury Bond Buying Tutorial

Posted: Thu Nov 17, 2011 9:05 am
by ZedThou
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?