Zeros for cash?

Discussion of the Cash portion of the Permanent Portfolio

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thisisallen
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Zeros for cash?

Post by thisisallen » Tue Mar 27, 2018 9:15 pm

Is it OK (PP-wise) to buy 1 yr zero coupon Treasurys and hold them in the Cash portion of the PP?
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sophie
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Re: Zeros for cash?

Post by sophie » Tue Mar 27, 2018 9:27 pm

1 year zero coupon Treasury - otherwise known as Treasury bills.

Yes, that's a a canonical product for the cash portion, plus it just happens to be beating just about any cash investment out there with a similar time to maturity.
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Re: Zeros for cash?

Post by ochotona » Wed Mar 28, 2018 5:02 am

sophie wrote:1 year zero coupon Treasury - otherwise known as Treasury bills.

Yes, that's a a canonical product for the cash portion, plus it just happens to be beating just about any cash investment out there with a similar time to maturity.
Sophie, do you pay short term capital gains tax on 1 year zeroes?
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Re: Zeros for cash?

Post by dualstow » Wed Mar 28, 2018 8:50 am

ochotona wrote:Sophie, do you pay short term capital gains tax on 1 year zeroes?

Tax trickery with short term treasuries
(by Sophie)
viewtopic.php?t=2653
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Kriegsspiel
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Re: Zeros for cash?

Post by Kriegsspiel » Wed Mar 28, 2018 9:50 am

I'd been buying 1 year bills for years, but I've been switching to VGSH (Vanguard's 1-3 year Treasury ETF) as they mature. I found the yields on bills with an acceptable minimum buy amount is too low to be worth the hassle anymore.
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Re: Zeros for cash?

Post by sophie » Wed Mar 28, 2018 10:11 am

ochotona wrote:
sophie wrote:1 year zero coupon Treasury - otherwise known as Treasury bills.

Yes, that's a a canonical product for the cash portion, plus it just happens to be beating just about any cash investment out there with a similar time to maturity.
Sophie, do you pay short term capital gains tax on 1 year zeroes?
Good question! Short term cap gains and interest income are the same tax rates, no? The interesting question is whether you'd get long term gains on a 1 year bill. I would think not, but has anyone has bought 1 year treasuries in taxable? I've only done 3 months so far. If so, that would make a 1 year Treasury the slam-dunk winner, instead of just THE winner in the Best Cash Return for a 1 Year Duration contest.
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Kriegsspiel
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Re: Zeros for cash?

Post by Kriegsspiel » Wed Mar 28, 2018 11:18 am

sophie wrote:
ochotona wrote:
sophie wrote:1 year zero coupon Treasury - otherwise known as Treasury bills.

Yes, that's a a canonical product for the cash portion, plus it just happens to be beating just about any cash investment out there with a similar time to maturity.
Sophie, do you pay short term capital gains tax on 1 year zeroes?
Good question! Short term cap gains and interest income are the same tax rates, no? The interesting question is whether you'd get long term gains on a 1 year bill. I would think not, but has anyone has bought 1 year treasuries in taxable? I've only done 3 months so far. If so, that would make a 1 year Treasury the slam-dunk winner, instead of just THE winner in the Best Cash Return for a 1 Year Duration contest.
One year bills earn interest. I use Vanguard, and they calculate it for you, since you're not buying them at the original issue discount.

If you buy a bill that pays interest (2 or 3 year), the interest that's already accumulated is also counted as interest, it's called the bond premium on Treasury obligations and it's in box 12 on the 1099.
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Re: Zeros for cash?

Post by dualstow » Wed Mar 28, 2018 2:24 pm

Kriegsspiel wrote:I'd been buying 1 year bills for years, but I've been switching to VGSH (Vanguard's 1-3 year Treasury ETF) as they mature. I found the yields on bills with an acceptable minimum buy amount is too low to be worth the hassle anymore.
I started doing the same thing (VSBSX, the equivalent of VGSH) when you mentioned that minimum in the past. I mean, I was able to buy real T-bills in small amounts, but I didn't realize I might be getting a worse rate without doing $100,000.
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Re: Zeros for cash?

Post by barrett » Thu Mar 29, 2018 4:11 am

dualstow wrote:
Kriegsspiel wrote:I'd been buying 1 year bills for years, but I've been switching to VGSH (Vanguard's 1-3 year Treasury ETF) as they mature. I found the yields on bills with an acceptable minimum buy amount is too low to be worth the hassle anymore.
I started doing the same thing (VSBSX, the equivalent of VGSH) when you mentioned that minimum in the past. I mean, I was able to buy real T-bills in small amounts, but I didn't realize I might be getting a worse rate without doing $100,000.
It looks like VSBSX has an expense ratio of .07%. I THINK that more or less offsets any hit you take by buying smaller lots of T-Bills. For example, when I bought some bills at Fidelity recently, the "list price" in their one-year bill area was 2.13%, but when I hit "depth of book" I ended up getting about 2.06% for my smaller lot (didn't have the $50,000 or $100,000 I needed to avoid that). One can see that actual yield right before hitting the execute trade button.

To answer Sophie's question, yes, I have started buying one-year bills but won't see what the tax treatment is on them until early 2020 as the first one will mature in early 2019. And by 2020 I will have forgotten to pay attention!

With all that bloviating out of the way, I do like the idea of having just one cash position in any account, as it's much easier to keep track of than a T-Bill ladder.
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Re: Zeros for cash?

Post by Mr Vacuum » Thu Mar 29, 2018 7:21 am

The irony of a clear answer about precise tax treatment of 1 year tbills not yet appearing in this thread amongst analyzers and tweakers is a bit much considering they were Harry Browne’s clear and simple recommendation for one fourth or the portfolio ;)

Indeed, I previously switched from funds to bills in taxable thinking it would mean less capital gains to think about and report since i was not selling but holding to maturity (but apparently didn’t check for sure??). I’ve got some maturing in July, so I’ll see how Fidelity classifies the gains then.
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Re: Zeros for cash?

Post by sophie » Thu Mar 29, 2018 8:35 am

Interesting, I wasn't aware of the reduced yield for small lots of T bills bought at auction. I wanted to stay away from > 1 year durations as long as the Fed is still in rate-raising mode.

Pugchief - don't funds report interest as government vs non, for tax treatment purposes? How does Illinois know whether interest comes from a maturing T bill vs a fund?
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Re: Zeros for cash?

Post by Kriegsspiel » Thu Mar 29, 2018 10:38 am

barrett wrote: It looks like VSBSX has an expense ratio of .07%. I THINK that more or less offsets any hit you take by buying smaller lots of T-Bills. For example, when I bought some bills at Fidelity recently, the "list price" in their one-year bill area was 2.13%, but when I hit "depth of book" I ended up getting about 2.06% for my smaller lot (didn't have the $50,000 or $100,000 I needed to avoid that). One can see that actual yield right before hitting the execute trade button.
Yea, that's what I looked at previously (I think it was Xan on the other side of the discussion). I'm fine with paying Vanguard the ER, they can take care of all the details. If the yield on individual bills ever looks attractive vs the yield - ER of VGSH I would just switch back.
To answer Sophie's question, yes, I have started buying one-year bills but won't see what the tax treatment is on them until early 2020 as the first one will mature in early 2019. And by 2020 I will have forgotten to pay attention!
Mr Vacuum wrote:The irony of a clear answer about precise tax treatment of 1 year tbills not yet appearing in this thread amongst analyzers and tweakers is a bit much considering they were Harry Browne’s clear and simple recommendation for one fourth or the portfolio ;)

Indeed, I previously switched from funds to bills in taxable thinking it would mean less capital gains to think about and report since i was not selling but holding to maturity (but apparently didn’t check for sure??). I’ve got some maturing in July, so I’ll see how Fidelity classifies the gains then.
Like I said, at Vanguard when the bill mature, $1,000 is deposited in your settlement fund. Then you buy another bill for $997 or whatever. When it matures, $1,000 in the settlement fund again. When Vanguard spits out your 1099 it will have added up all the interest for you. If you sell them Vanguard calculates your capital gains/loss. Are you guys saying something I'm not getting?
MangoMan wrote:
barrett wrote: I do like the idea of having just one cash position in any account, as it's much easier to keep track of than a T-Bill ladder.
How exactly does one track the price of individual treasuries on google sheets? Will google finance pull the value from cuspis?

I am thinking about switching, as IL does not allow for the US Treasury state income tax exemption if they are held thru mutual funds or ETFs. >:(
I was just manually updating the price of the bill in my spreadsheet whenever I calculated my NW. I do that for my individual long bonds too.
sophie wrote:Interesting, I wasn't aware of the reduced yield for small lots of T bills bought at auction.
If you're referring to my comment, that was for bonds bought on the secondary market through Vanguard, not at auction through Treasury Direct.
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Re: Zeros for cash?

Post by dualstow » Thu Mar 29, 2018 11:41 am

barrett wrote:It looks like VSBSX has an expense ratio of .07%. I THINK that more or less offsets any hit you take by buying smaller lots of T-Bills. For example, when I bought some bills at Fidelity recently, the "list price" in their one-year bill area was 2.13%, but when I hit "depth of book" I ended up getting about 2.06% for my smaller lot (didn't have the $50,000 or $100,000 I needed to avoid that). One can see that actual yield right before hitting the execute trade button.
That could very well be, Barrett, that the expense ratio is even worse. Perhaps it's a "the devil you know" situation. Kind of a funny thing to say, coming from someone who buys at auction. O0 I suppose I could do it your way- buy secondary and know the yield. I guess I'm comfortable now, letting VSBSX do its thing, and just adding to it as my T-Bill rungs are redeemed. And, like Kriegs, I could always go back.
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Re: Zeros for cash?

Post by Mr Vacuum » Thu Mar 29, 2018 4:29 pm

Kriegsspiel wrote:
Mr Vacuum wrote:The irony of a clear answer about precise tax treatment of 1 year tbills not yet appearing in this thread amongst analyzers and tweakers is a bit much considering they were Harry Browne’s clear and simple recommendation for one fourth or the portfolio ;)

Indeed, I previously switched from funds to bills in taxable thinking it would mean less capital gains to think about and report since i was not selling but holding to maturity (but apparently didn’t check for sure??). I’ve got some maturing in July, so I’ll see how Fidelity classifies the gains then.
Like I said, at Vanguard when the bill mature, $1,000 is deposited in your settlement fund. Then you buy another bill for $997 or whatever. When it matures, $1,000 in the settlement fund again. When Vanguard spits out your 1099 it will have added up all the interest for you. If you sell them Vanguard calculates your capital gains/loss. Are you guys saying something I'm not getting?
Sorry, Kriegs, I missed your post when I wrote that. Or else it didn't compute at first because you said the bills pay interest, while I'm looking at "ZERO CPN" thinking that can't be interest.

Looking at my Fidelity tax info in more detail, I can confirm zero cpn bills listed under "Interest on U.S. Treasury Bonds & Notes" but no capital gains, just as you describe. The bills were a mix of secondary market purchases and auction purchases with maturities of 6 months or less, all but a few held to maturity. Now what I'm not connecting is that even the few bills I sold don't list capital gains--that part doesn't add up.
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Re: Zeros for cash?

Post by barrett » Fri Mar 30, 2018 11:38 am

Mr Vacuum wrote:Looking at my Fidelity tax info in more detail, I can confirm zero cpn bills listed under "Interest on U.S. Treasury Bonds & Notes" but no capital gains, just as you describe. The bills were a mix of secondary market purchases and auction purchases with maturities of 6 months or less, all but a few held to maturity. Now what I'm not connecting is that even the few bills I sold don't list capital gains--that part doesn't add up.
Not a tax expert at all but, I think you may be confusing interest income with capital gains. I believe the interest income on treasuries would be reported as 1099-INT income, and that the tax treatment on that income is dependent on your marginal tax rate for that particular year.

Do I have that right?
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