Treasury Bond Buying Tutorial

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
jimbojones
Associate Member
Associate Member
Posts: 33
Joined: Fri Sep 07, 2012 12:14 pm

Re: Treasury Bond Buying Tutorial

Post by jimbojones » Fri Nov 02, 2012 9:52 am

BearBones wrote: ...

4. In talking to the bond desk at TDA, it seems that trades are "free." The commission is from slight mark-up price which the person estimated to be about 3/8% on a 10k trade. If so, it takes about 2.5 years for the ER of TLT to equal the same. Does this sound right?
That seems relatively high.  I have a TDA account, but I haven't used it to buy/sell treasuries.  I found the ask price easily, but unfortunately, I couldn't find the bid price.  I assume the 3/8% is from the bid/ask spread, but I couldn't find the data to recalculate it.  In my experience at Vanguard, the bid/ask spread is about 0.08% on minimum-1 orders, and about 0.03% on minimum-25 orders.  There shouldn't be any other 'fees'.
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Treasury Bond Buying Tutorial

Post by BearBones » Sat Nov 03, 2012 2:14 pm

jimbojones wrote:
BearBones wrote: ...
4. In talking to the bond desk at TDA, it seems that trades are "free." The commission is from slight mark-up price which the person estimated to be about 3/8% on a 10k trade. If so, it takes about 2.5 years for the ER of TLT to equal the same. Does this sound right?
That seems relatively high.  I have a TDA account, but I haven't used it to buy/sell treasuries.  I found the ask price easily, but unfortunately, I couldn't find the bid price.  I assume the 3/8% is from the bid/ask spread, but I couldn't find the data to recalculate it... There shouldn't be any other 'fees'.
Here is the info from TDA indicating how compensation is achieved. This seems to be a hidden commission rather than bid/ask spread, right? I am interpreting the former being fixed by the brokerage and the latter variable, dictated by the market.

"TD Ameritrade may act as principal on any fixed-income transaction. When acting as principal and receiving compensation on a net yield basis, we will add a markup to any purchase, and subtract a markdown from every sale. The markup or markdown will be included in the price and yield quoted to you."
edamat
Junior Member
Junior Member
Posts: 17
Joined: Sun May 13, 2012 11:03 pm

Re: Treasury Bond Buying Tutorial

Post by edamat » Sat Nov 10, 2012 1:09 pm

[quote="Gumby"]
[quote="foglifter"]
However, I would definitely recommend that you use a limit order when selling your bonds. That way you get the price that you want.

Gumby or anyone:

I tried to sell the bonds using limit orders at Fidelity. First I set the price a bit higher than Ask price (real time quote at lower right hand), Fidelity cancelled it after a min. Then I set the price exactly at Ask price, Fidelity cancelled again. It won't let me do limit order any more because "too many attempts". So I tried to sell at Market and I got the price much less than Bid price. e.g. bid price at 99.875, market order got me at 99.828.

So have anyone successfully sell a limit order at Fidelity? if so, what did I do wrong and how would I get the price I want?

Thanks
Lowe
Executive Member
Executive Member
Posts: 248
Joined: Fri Apr 13, 2012 7:54 am

Re: Treasury Bond Buying Tutorial

Post by Lowe » Tue Jun 03, 2014 1:47 pm

BearBones wrote:
jimbojones wrote:
BearBones wrote: ...
4. In talking to the bond desk at TDA, it seems that trades are "free." The commission is from slight mark-up price which the person estimated to be about 3/8% on a 10k trade. If so, it takes about 2.5 years for the ER of TLT to equal the same. Does this sound right?
That seems relatively high.  I have a TDA account, but I haven't used it to buy/sell treasuries.  I found the ask price easily, but unfortunately, I couldn't find the bid price.  I assume the 3/8% is from the bid/ask spread, but I couldn't find the data to recalculate it... There shouldn't be any other 'fees'.
Here is the info from TDA indicating how compensation is achieved. This seems to be a hidden commission rather than bid/ask spread, right? I am interpreting the former being fixed by the brokerage and the latter variable, dictated by the market.

"TD Ameritrade may act as principal on any fixed-income transaction. When acting as principal and receiving compensation on a net yield basis, we will add a markup to any purchase, and subtract a markdown from every sale. The markup or markdown will be included in the price and yield quoted to you."
Lately I have been looking at a PP-like account at TDA, looking to rebalance.  I got to wondering how many things I did wrong.  One thing that stuck out is that I bought Treasuries from the secondary market through TDA, with little thought that there might be a markup in the price.  I feel stupid now, even though it's been over two years.

I just called the help number, which transferred me to the fixed income group.  The guy there told me there was no markup, and that prices reflect only the spread, typically 0.25 to 0.75 percent.  I see in the TDA literature that there may be a markup, but maybe they don't really do this?  Either that or he lied to me straight up.
User avatar
blue_ruin17
Senior Member
Senior Member
Posts: 137
Joined: Sat Aug 13, 2016 11:16 pm
Location: New Brunswick, Canada

Re: Treasury Bond Buying Tutorial

Post by blue_ruin17 » Sun Aug 14, 2016 10:09 am

Is there an equivalent tutorial for buying Federal Bonds in Canada? I've searched google and it puzzles me that I can't find a single guide in this regard.
"Like a confident pack, a confident portfolio provides both strength in fact, as well as — and this is the part I bet you’re missing right now and the focus of this note — strength in spirit."
User avatar
ochotona
Executive Member
Executive Member
Posts: 3214
Joined: Fri Jan 30, 2015 5:54 am

Re: Treasury Bond Buying Tutorial

Post by ochotona » Sun Aug 14, 2016 8:52 pm

blue_ruin17 wrote:Is there an equivalent tutorial for buying Federal Bonds in Canada? I've searched google and it puzzles me that I can't find a single guide in this regard.
Quote from a friend in Calgary:

"Not available to public through auction (primary market). Can buy 100% Fed bonds through ETFs from BMO: ZFL, ZFM, ZFS (traded on TSX) or on the secondary market through broker. Unless they are buying over $100,000 it's best to stick with ETF option. Other government bond ETFs are available but have provincial or agencies paper adding to the risk."
User avatar
blue_ruin17
Senior Member
Senior Member
Posts: 137
Joined: Sat Aug 13, 2016 11:16 pm
Location: New Brunswick, Canada

Re: Treasury Bond Buying Tutorial

Post by blue_ruin17 » Sun Aug 14, 2016 11:35 pm

ochotona wrote:
blue_ruin17 wrote:Is there an equivalent tutorial for buying Federal Bonds in Canada? I've searched google and it puzzles me that I can't find a single guide in this regard.
Quote from a friend in Calgary:

"Not available to public through auction (primary market). Can buy 100% Fed bonds through ETFs from BMO: ZFL, ZFM, ZFS (traded on TSX) or on the secondary market through broker. Unless they are buying over $100,000 it's best to stick with ETF option. Other government bond ETFs are available but have provincial or agencies paper adding to the risk."
Ahh, I see. Thank you...

I will call my Brokerage and ask them if they sell Long Federal Bonds on the secondary market.

If not, ZFL seems like the best Long Bond ETF for Canadians. But holding them directly is obviously preferable.
"Like a confident pack, a confident portfolio provides both strength in fact, as well as — and this is the part I bet you’re missing right now and the focus of this note — strength in spirit."
HappyMan
Senior Member
Senior Member
Posts: 132
Joined: Thu Nov 09, 2017 7:01 am

Re: Treasury Bond Buying Tutorial

Post by HappyMan » Mon Jul 02, 2018 10:24 pm

Hi,

I am still learning how to play with bonds. Am I correct in assuming that selling them is as easy as buying? I will keep the earnings for the period of holding them, right?

Thanks,
User avatar
sophie
Executive Member
Executive Member
Posts: 4536
Joined: Mon Apr 23, 2012 7:15 pm

Re: Treasury Bond Buying Tutorial

Post by sophie » Tue Jul 03, 2018 7:52 am

Selling Treasuries can be a bit complicated and it depends on where you're holding them.

Treasury Direct: you can't sell them on the site. You have to transfer them to a brokerage account and then sell. I've never tried to do this as I only use this account for savings bonds.

Fidelity: Very easy! Expand the bond in the "positions" view and hit the "sell" button. There is no fee to buy or sell, but be aware that there is a bid-ask spread, so there is a cost involved. If you own, say, 10 $1000 bonds and want to sell 5 of them, take care to enter "50" in the sell amount as bonds values are calculated in $100 lots.

Other brokerages (Vanguard, Schwab) charge a fee to sell a bond. Especially beware of Ally Bank's TradeKing investment account, where the fees can be as high as $50 a bond (not the advertised $1) and apply to buying and selling.

Some brokers (Ally Bank's TradeKing) do not allow you to sell a bond online, only by phone. Vanguard and Schwab used to, but both now allow you to sell bonds through the website (per their website; I haven't tried it).
HappyMan
Senior Member
Senior Member
Posts: 132
Joined: Thu Nov 09, 2017 7:01 am

Re: Treasury Bond Buying Tutorial

Post by HappyMan » Tue Jul 03, 2018 9:56 am

Thank you. Forgot to mention that I am with Schwab. Will check their fees.
sophie wrote:
Tue Jul 03, 2018 7:52 am
Selling Treasuries can be a bit complicated and it depends on where you're holding them.

Treasury Direct: you can't sell them on the site. You have to transfer them to a brokerage account and then sell. I've never tried to do this as I only use this account for savings bonds.

Fidelity: Very easy! Expand the bond in the "positions" view and hit the "sell" button. There is no fee to buy or sell, but be aware that there is a bid-ask spread, so there is a cost involved. If you own, say, 10 $1000 bonds and want to sell 5 of them, take care to enter "50" in the sell amount as bonds values are calculated in $100 lots.

Other brokerages (Vanguard, Schwab) charge a fee to sell a bond. Especially beware of Ally Bank's TradeKing investment account, where the fees can be as high as $50 a bond (not the advertised $1) and apply to buying and selling.

Some brokers (Ally Bank's TradeKing) do not allow you to sell a bond online, only by phone. Vanguard and Schwab used to, but both now allow you to sell bonds through the website (per their website; I haven't tried it).
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Tue Mar 24, 2020 7:24 pm

Gumby wrote:
Tue Nov 01, 2011 11:39 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?
When you covert your TLT to cash, you've effectively turned 50% of your portfolio into cash. So, a portfolio consisting of (roughly) 50% cash, 25% stocks and 25% gold probably isn't going to be all that different from a traditional 4x25 PP over the span of three days. That's because you've basically turned your portfolio into a version of PRPFX (which can't own very many Long Term Bonds). Actually, your portfolio will most closely resemble Clive's "Rate Tart" PP — which held up very well through 2008-2009. The only difference between the "Rate Tart" PP and the 4x25 PP was that the 4x25 PP recovered more quickly in Dec 2008, when the LTTs kicked in big time.

http://gyroscopicinvesting.com/forum/ht ... 730#p12730
(Keep in mind that Clive's comments are deleted from the "Rate Tart" PP discussion)

So, you can probably relax more than you think. But, my recommendation is still to buy your bonds sooner rather than later, since we may be experiencing some high volatility in the next few weeks as Greece appears to move closer and closer to its eventual default. Do what feels right, but know that it probably won't make a tremendous difference either way.


Can anyone make a case for a period of time when no one could write: "since we may be experiencing.....[due to]..]?


Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Tue Mar 24, 2020 8:48 pm

moda0306 wrote:
Wed Mar 28, 2012 10:56 am
If anyone here has done a few Vanguard bond trades and would be willing to post a tutorial it would be MUCH appreciated by myself and others.
I read through all the posts here and I don't think anyone ever fulfilled his request.

Hopefully, before the week is over I will finally buy my first bonds ever - Treasury Bills with Vanguard. If I do do so, I'll probably just naturally document it which would enable this request to finally be fulfilled.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
dualstow
Executive Member
Executive Member
Posts: 11785
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: Treasury Bond Buying Tutorial

Post by dualstow » Tue Mar 24, 2020 9:36 pm

I think you’re right, but things have changed since then anyway. Craig mentions Vanguard’s “Bond Desk” and I don’t think they even use the term anymore. You used to have to call to order bonds, hence the desk.

There’s some good info on page 8, beginning with Krieg’s post.

I would post a tutorial if i thought I could cover everything that a new buyer of bonds would like to do.
I only know how to do what I do, which doesn’t require a tutorial because it is so limited. (For example, I almost always use the auctions, not the secondary market).
I have always just clicked my way through it. It was easy.
RIP Dusty Hill and be well, Bob Odenkirk
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Tue Mar 24, 2020 9:49 pm

dualstow wrote:
Tue Mar 24, 2020 9:36 pm
I think you’re right, but things have changed since then anyway. Craig mentions Vanguard’s “Bond Desk” and I don’t think they even use the term anymore. You used to have to call to order bonds, hence the desk.

There’s some good info on page 8, beginning with Krieg’s post.

I would post a tutorial if i thought I could cover everything that a new buyer of bonds would like to do.
I only know how to do what I do, which doesn’t require a tutorial because it is so limited. (For example, I almost always use the auctions, not the secondary market).
I have always just clicked my way through it. It was easy.
Using Vanguard?

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
dualstow
Executive Member
Executive Member
Posts: 11785
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: Treasury Bond Buying Tutorial

Post by dualstow » Wed Mar 25, 2020 6:58 am

Yep
RIP Dusty Hill and be well, Bob Odenkirk
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 3760
Joined: Sun Sep 16, 2012 5:28 pm

Re: Treasury Bond Buying Tutorial

Post by Kriegsspiel » Wed Mar 25, 2020 7:30 am

Vinny I just took some screenshots, since I'm not sure if you've tried it before... In your brokerage, click on Buy and Sell, then Trade Bonds or CDs
v1.png
v1.png (35.57 KiB) Viewed 5863 times
Now, here it looks like Vanguard has changed it, because the quick search here used to go out to 30 years, not just 10:
v2.png
v2.png (33.45 KiB) Viewed 5863 times
But you can just click on Treasuries from that top menu:
v3.png
v3.png (16.98 KiB) Viewed 5863 times
v5.png
v5.png (32.12 KiB) Viewed 5863 times
v4.png
v4.png (78.45 KiB) Viewed 5863 times
Click the buy button, then say how many you want, and buy them. You can buy and sell less than the "min qty" but you won't get the advertised price/yield.
"You haven't, I suppose, ever mixed with politicians at close quarters. They're awful. I think some of these must have been the dregs anyhow, but I've discovered, what previously I didn't believe possible, that politicians behave in private life and say exactly the same things as they do in public. Their stupidity is inhuman.
- John Maynard Keynes
User avatar
jhogue
Executive Member
Executive Member
Posts: 619
Joined: Wed Jun 28, 2017 10:47 am

Re: Treasury Bond Buying Tutorial

Post by jhogue » Wed Mar 25, 2020 8:48 am

Vinny,

Given all of the difficulties that you have described in multiple threads on this forum dealing with Vanguard over the telephone, I wonder if you would not be more satisfied establishing your accounts in-person at your nearest Fidelity brick-and-mortar office.

-Fidelity's headquarters is in Boston, but their satellite office nearest you is in Shrewsbury, about 45 miles from Montague, MA, tel.1-800-521-3026. You could call ahead, get an appointment, and outline all the changes you want to make.

-My general impression is that Fidelity's bond operation is more extensive than Vanguard's.

-The local office would certainly help you transfer and consolidated your accounts at Fidelity, and while they don't offer tax advice as such, I have found their representatives well-informed about state and local tax situations. Last time I used my local Fidelity office, they helped me establish a new Roth conversion IRA to avoid tax complications down the road.


You should also realize that you are attempting to move into the bond market at a moment of truly unprecedented volatility. Massive swings up and down on a daily basis have caught all the major brokerage firms trying to catch up with severe dislocations caused by enormous volumes of transactions and unanticipated liquidity issues. Stuff happens.
“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!"
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Wed Mar 25, 2020 9:16 am

Kriegsspiel wrote:
Wed Mar 25, 2020 7:30 am
Vinny I just took some screenshots, since I'm not sure if you've tried it before... In your brokerage, click on Buy and Sell, then Trade Bonds or CDs

v1.png

Now, here it looks like Vanguard has changed it, because the quick search here used to go out to 30 years, not just 10:

v2.png

But you can just click on Treasuries from that top menu:

v3.png

v5.png
v4.png

Click the buy button, then say how many you want, and buy them. You can buy and sell less than the "min qty" but you won't get the advertised price/yield.
Thanks for all of this! Yesterday I got caught up with "working from home" from 9 AM until about 6:30 PM so I could not get into my Vanguard account to see what you have put here because the broker said you could only see pricing when the market is open.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 3760
Joined: Sun Sep 16, 2012 5:28 pm

Re: Treasury Bond Buying Tutorial

Post by Kriegsspiel » Wed Mar 25, 2020 9:22 am

vnatale wrote:
Wed Mar 25, 2020 9:16 am
Thanks for all of this! Yesterday I got caught up with "working from home" from 9 AM until about 6:30 PM so I could not get into my Vanguard account to see what you have put here because the broker said you could only see pricing when the market is open.

Vinny
No problem. Keep in mind you can also only trade Treasuries when the market is open.
"You haven't, I suppose, ever mixed with politicians at close quarters. They're awful. I think some of these must have been the dregs anyhow, but I've discovered, what previously I didn't believe possible, that politicians behave in private life and say exactly the same things as they do in public. Their stupidity is inhuman.
- John Maynard Keynes
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Wed Mar 25, 2020 9:25 am

jhogue wrote:
Wed Mar 25, 2020 8:48 am
Vinny,

Given all of the difficulties that you have described in multiple threads on this forum dealing with Vanguard over the telephone, I wonder if you would not be more satisfied establishing your accounts in-person at your nearest Fidelity brick-and-mortar office.

-Fidelity's headquarters is in Boston, but their satellite office nearest you is in Shrewsbury, about 45 miles from Montague, MA, tel.1-800-521-3026. You could call ahead, get an appointment, and outline all the changes you want to make.

-My general impression is that Fidelity's bond operation is more extensive than Vanguard's.

-The local office would certainly help you transfer and consolidated your accounts at Fidelity, and while they don't offer tax advice as such, I have found their representatives well-informed about state and local tax situations. Last time I used my local Fidelity office, they helped me establish a new Roth conversion IRA to avoid tax complications down the road.


You should also realize that you are attempting to move into the bond market at a moment of truly unprecedented volatility. Massive swings up and down on a daily basis have caught all the major brokerage firms trying to catch up with severe dislocations caused by enormous volumes of transactions and unanticipated liquidity issues. Stuff happens.
Thanks for the above. I'm familiar with Shrewsbury as it is next door to where my first college is located (Worcester). However, rather than it being 45 minutes from me, it's at least 1 hour and 15 minutes, if not one hour and one-half from me. Boston would only be 15 minutes to half hour farther for me.

Part of the issue is that Vanguard's hours for business also seem to be the same times as my hours of "working from home". Once I can free up some "working from home" hours I can follow through with bond buying with Vanguard. And, initially, it is only strictly going to be buying Treasury Bills for cash in an attempt to mimic Treasury Bill money market fund. But one that IS 100% Treasury Bills.

I'd decided by last July 4, 2019 that I was going full Permanent Portfolio but other things kept getting in the way so that implementation never happened. I had plans for how I wanted to do the implementation. But I am, finally, making some baby steps towards implementation and am constantly learning new things via this forum and my interactions with Vanguard. But once I am fully implemented THE final step will be to then take 1/2 of what I have at Vanguard and put it with Fidelity.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 6208
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Treasury Bond Buying Tutorial

Post by vnatale » Fri Apr 24, 2020 5:07 pm

Gumby wrote:
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.

Absolutely PACKED with useful information!


Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
Post Reply