Gyroscopic Investing

After reading craigr's terrific post on how Vanguard “Treasury”? Bond Funds Filled with Mortgage Garbage, I've decided to sell all of my Vanguard Short Term Treasury Fund (VFISX). The money will be transferred to my savings bank over the next few days. Of course, my bank account is no better than VFISX, so I need to figure out a better place to put that stack of cash.

I have a TreasuryDirect account, but don't like the idea of having a ladder that ties up a portion of my cash for a particular duration. It has occurred to me that TreasuryDirect offers Zero-Percent Certificated of Indebtedness (C of I) that is used as a sweep account:

http://www.treasurydirect.gov/indiv/hel ... rnMore.htm

The C of I is basically a non-interest-bearing security (really, you can just imagine it’s a no-fee savings account earning 0% interest) that’s used as a temporary storage place for funds in between Treasury coupons/purchases.

Seems like using a C of I would be an easy way to mimic a Treasury Money Market Fund (without any of the benefits of BillPay or check writing). And my understanding is that the transfer from C of I to your bank account is relatively quick when you actually need the money.

Does anyone here think that a C of I is a bad idea for short term PP cash storage?

It seems like this works all right at today's ultra-low interest rates but if interest rates rise then obviously the C of I will be screwing you over.  At the paltry, what 0.1% interest rate of short term debt, I admit you aren't giving up terribly much.

If interest rates rose, would you have a fallback plan that you could quickly transition into?

Gumby wrote: I have a TreasuryDirect account, but don't like the idea of having a ladder that ties up a portion of my cash for a particular duration.

I see what you mean about TreasuryDirect.  From what I understand (although I've not done it) selling securities on the secondary market through TD isn't the most convenient thing.

If you have an account with Fidelity, you can do free Treasury trades with them.  If you needed cash you could easily liquidate some portion of your ladder on the secondary market.  If you are liquidating the securities with the shortest duration, there's virtually no interest rate risk in doing this.  The shorter your ladder, the more easily liquid you'll be.

Lone Wolf wrote:If interest rates rose, would you have a fallback plan that you could quickly transition into?

Yes. It seems like having the money in a C of I would make it very easy to quickly start up a short term ladder, if necessary. In which case, I think it should be beating the older ladder if that happened sooner than later.

Lone Wolf wrote:

Gumby wrote: I have a TreasuryDirect account, but don't like the idea of having a ladder that ties up a portion of my cash for a particular duration.

I see what you mean about TreasuryDirect.  From what I understand (although I've not done it) selling securities on the secondary market through TD isn't the most convenient thing.

If you have an account with Fidelity, you can do free Treasury trades with them.  If you needed cash you could easily liquidate some portion of your ladder on the secondary market.  If you are liquidating the securities with the shortest duration, there's virtually no interest rate risk in doing this.  The shorter your ladder, the more easily liquid you'll be.

Right.. That's true. And I do have a Fidelity account with an active Ladder. This is a different stack of cash that I want to move back into my Vanguard account if/when I ever have to rebalance into Total Stock Market again. So, this C of I cash storage would be for short term cash storage, until the next rebalance.

Lone Wolf wrote: If interest rates rose, would you have a fallback plan that you could quickly transition into?

Why do you need to quickly transition? So what if takes even a full month to transition into something else?

What are interest rates going to go up to over the course of one month? Maybe 1% tops. So you give up 1/12 of 1% if it takes you one month to find a new situation.

And if interest rates go back up to 1% then the VG Treasury MMF will reopen, so there is your answer.

This C of I account seems find and I wrote a post on it recently in this subforum but I don't think anyone replied.

I think glancing at the short term interest rates each month is fine. I think LW just wanted to make sure we don't leave it in C of I and forget about it.

From LW's perspective, (and I agree with him) creating one's own short term treasury ladder is the better option for cash that needs to stay as cash.

But, from my perspective, I will be using C of I for a 2 or 3 month temporary storage of cash.

Also, I think the C of I is probably a great "Eject" button for a small bank account, if a run on the banks ever happens and you don't have time to think about where to move it to.

If there's a run on the banks how are you going to get it out of the C of I account? You can't spend it from there. You would need to ACH it to a bank/CU.

Yes. ACH/transfer to a surviving bank once the coast is clear. Ideally one should a stash of paper currency for real emergencies.

So... it turns out that the C of I 'hack' doesn't work exactly as planned. The purchase limits prevent you from buying more than $1,000 of C of I, per transaction.

Savings Bonds: You may purchase up to $5,000 each of electronic EE and I Savings Bonds, per person (individual or entity), each calendar year. Purchases of any other Treasury securities - including paper EE and I Savings Bonds or marketable securities - do not alter the purchase limits for electronic EE and I Savings Bonds. The minimum purchase amount is $25, increasing with penny increments not to exceed $5,000. The purchase amount of the savings bonds you transfer, deliver as gifts, or de-link to another TreasuryDirect account holder is applied to the recipient's annual purchase limitation for the year the transaction occurs. (Note: Gift delivery and de-linking are not available in entity accounts.)

Zero-Percent Certificate of Indebtedness (Zero-Percent C of I or C of I): There's no limit to the total amount you may hold in your C of I – but remember, this type of security does not earn any interest. Your C of I security is not included in the savings bond or marketable security purchase limitation. When you choose to withdraw funds from a designated bank account to purchase a C of I, the maximum purchase amount is $1,000 per transaction.

Payroll Zero-Percent Certificate of Indebtedness (Payroll C of I): There's no limit to the total amount you may hold in your Payroll C of I (used to fund the Payroll Savings Plan) – but this type of security does not earn any interest. Your Payroll C of I security is not included in the savings bond or marketable security purchase limitation.

Marketable Securities - Bills, Notes, Bonds, and TIPS: You may purchase up to $5 million of each marketable security type - in Bills, Notes, Bonds, and TIPS - when you bid noncompetitively in an auction through your TreasuryDirect account. Note: No matter what method you use to purchase Treasury marketable securities, you can only bid noncompetitively for a total of $5 million for each security type in a single auction. The minimum purchase amount is $100 with multiples sold in the same increment. The purchase limit of $5 million does not apply to securities issued through reinvestment.

Source: TreasuryDirect

But... an easy way around this is to put all the money into 4-week Bills and let the money roll back into C of I after 1 month. But again, T-Bills are a better long term solution.

Gumby wrote: So... it turns out that the C of I 'hack' doesn't work exactly as planned. The purchase limits prevent you from buying more than $1,000 of C of I, per transaction.

This might be a bit of a dense question, but can you just do a whole bunch of transactions?  For example, to do $10,000, can you perform ten transactions on the spot?

Not that this sounds like a whole lot of fun, of course, but just wondering.