TBills as "the best horse at the glue factory?"

Discussion of the Bond portion of the Permanent Portfolio

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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 8:28 pm

Cortopassi wrote:
Thu Sep 29, 2022 7:47 pm

That last comment by Kevin is where I am at too.

So I buy, say, 10 year Tips. With a sub 2% base rate. And inflation is non existent.

Is that not like having my money in a savings account paying 2% or so interest nowadays?


If interest is non-existent .. yet then it would be the same as a saving account.

If inflation is what I always assume it to be is 3% then it'd be nominal 5% with a real return of 2% while that savings account would be at -1%.

KBG is way more on top of the TIPS than I am so he correct anything I have not correctly stated.

But I was hoping that you particularly would see what Bernstein had to say regarding commercial annuities. They could FAIL just when you are depending upon them the most -- in a future financial crisis. Any Treasury product is going to be the last investment standing.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Thu Sep 29, 2022 9:23 pm

Vinny, exactly why I am on a t bill topic!

Always thinking of safety.

Assuming social security is still good when I hit 70, we easily live on that , and it gets inflation adjustments.

so I am more focusing on the 10 years between 60 and 70 and realizing I can probably do it without an annuity.
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 9:37 pm

Cortopassi wrote:
Thu Sep 29, 2022 9:23 pm

Vinny, exactly why I am on a t bill topic!

Always thinking of safety.

Assuming social security is still good when I hit 70, we easily live on that , and it gets inflation adjustments.

so I am more focusing on the 10 years between 60 and 70 and realizing I can probably do it without an annuity.


And, as I believe that as mathjack has several times pointed out there is almost no better financial decision than delaying until 70 when you start collecting Social Security, which as you pointed out will yearly be inflation adjusted. Depending upon your longevity outlook it is worth many, many, many $$$$$ as a lump sum investment today that would be producing future income while also being drawn down in principal.
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Re: TBills as "the best horse at the glue factory?"

Post by Kbg » Fri Sep 30, 2022 8:02 am

Cortopassi wrote:
Thu Sep 29, 2022 7:47 pm
That last comment by Kevin is where I am at too.

So I buy, say, 10 year Tips. With a sub 2% base rate. And inflation is non existent.

Is that not like having my money in a savings account paying 2% or so interest nowadays?
Yes and no. Yes, all things being equal. No because with TIPS you are guaranteed your 2% is going to be real not nominal. No such promise with a savings account.

If you are familiar with options, consider yourself to have bought a "real interest" straddle when you buy a TIPS. That rate is locked, and in exchange you are going to get a smaller interest rate as compared to an equivalent treasury.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Fri Sep 30, 2022 9:43 am

God I am so waffling here!

--Excited about treasury and CD returns!
--But those are likely to be short lived because we are going to dump into a recession and Fed will need to ease again!
--So wait for one or two more rate hikes and then put some money into an income annuity to lock it the higher payout!
--And then feel freer to be riskier with the remaining assets

These are the main points sloshing around in my head.

I'd love to live off treasury ladders, but when we move in the other direction on rates, the income starts drying up and at the same time annuity payouts will be dropping....
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Re: TBills as "the best horse at the glue factory?"

Post by Kevin K. » Fri Sep 30, 2022 11:23 am

Thanks Kbg and Cortopassi for sharing your thoughts. I don't know whether my thoughts here will add any clarity or just add to the murkiness but I can certainly see why there's a thread on Bogleheads at the moment asking whether folks would go all-in on TIPS for their fixed income when/if real rates go to 2%.

I think this short piece and especially the chart in it from Wade Pfau is interesting:

https://retirementresearcher.com/histor ... -part-two/

Scroll down past the nominal returns by asset class and look at the real returns and you see that historically intermediate-term Treasuries, which have long constituted the risk:return sweet spot, have only yielding about 2% real. So I can totally see how someone in a position (in terms of the overall size of their nest egg), might lock up a million dollars in a ladder of 5-10 year tips to provide a stream of guaranteed, inflation-adjusted income in retirement, and/or to make it easy to delay Social Security until age 70, or as (per Bernstein) a much more palatable alternative to buying an annuity.

But getting back to the PP and GB it does make me appreciate once again the elegant simplicity of having cash as part of the portfolio rather than having to have a "bucket" off to the side a la the typical Boglehead 60:40 or Three Fund. Could be as simple as using ITT's (I like VGIT for its low cost and shortish ~5 year duration) for as much of the 40% (GB)-50% (PP) total bond-and-cash allocation as one feels comfortable with and carving out a meaningful (as in sufficient to cover 3-5 years of residual living expenses (if retired - otherwise delete the "residual") - and putting that in a 13-26 month TBill ladder with automatic rollover and/or iBonds.

What I'm seeing among financially-savvy folks I know who are early retirees is a bit of panic among those who have been able to rely on a total-return approach, keeping very little cash and just selling a bit of the winners in their portfolios as needed to cover living expenses while also rebalancing to their target allocations in the process. The current market exposes the weakness of that approach in forcing them to sell at a loss since there are no winners to harvest. Same thing of course for less sophisticated retirees who went all-in on "conservative" all-in-one funds like Vanguard Target Retirement Income or Wellesley while forgetting (or just never knowing) that they still needed to have 2-3 years of expenses in cash on the side.

In the case of the PP I think it's arguably worse still in that you've got 25% in a TSM fund that is not only doing poorly but whose returns and ability to recover in the future are entirely tied to the fate of a handful of mega-cap tech stocks; gold getting killed in dollar terms (only, mind you - it's actually doing okay for those who own it in any other currency!) due to the surge in the USD; cash (if in SHY or the like as is typical, rather than a pure Treasury MM fund) also slightly in the red due to interest rate increases, and worst of all a full 25% in 30 year Treasuries whose losses exceed those of the equities. In short not only significant losses YTD but nowhere near enough in diversified equities to recover in a turnaround and 25% sunk into bonds whose risk:return made them a very bad idea starting years ago that has now turned toxic.
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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Fri Sep 30, 2022 12:28 pm

Tyler (as usual) has a thoughtful essay on the pros and cons of TIPS in Portfolio Charts.

https://portfoliocharts.com/2022/09/27/ ... #takeaways
“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!"
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Fri Sep 30, 2022 1:27 pm

jhogue wrote:
Fri Sep 30, 2022 12:28 pm
Tyler (as usual) has a thoughtful essay on the pros and cons of TIPS in Portfolio Charts.

https://portfoliocharts.com/2022/09/27/ ... #takeaways
Perfect! Wish I was able to read that earlier this year before putting a bunch into DIPSX (inflation protected fund in my 401k)

My experience since, exactly Tyler's comment:

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

So I understand better now that funds vs. individual bonds have a big holding until maturity difference.
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Re: TBills as "the best horse at the glue factory?"

Post by Kevin K. » Fri Sep 30, 2022 3:15 pm

Cortopassi wrote:
Fri Sep 30, 2022 1:27 pm
jhogue wrote:
Fri Sep 30, 2022 12:28 pm
Tyler (as usual) has a thoughtful essay on the pros and cons of TIPS in Portfolio Charts.

https://portfoliocharts.com/2022/09/27/ ... #takeaways
Perfect! Wish I was able to read that earlier this year before putting a bunch into DIPSX (inflation protected fund in my 401k)

My experience since, exactly Tyler's comment:

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

So I understand better now that funds vs. individual bonds have a big holding until maturity difference.
Well, yes and no when it comes to the "TIPS have a nasty habit of getting kneecapped when they're needed most" statement. It's true but it's just as true of other bonds of similar duration and even truer of longer-duration bonds under many circumstances - as owners of TLT should surely know by now. The "needed most" thing suggests that TIPS buyers somehow thought that they'd bought some sort of magical instant inoculation against inflation instead of a Treasury bond with special features. And if that's what you want you buy your annual limit in iBonds, or if you do dabble in TIPS at least stick to VTIP.

Here's a comparison of Schwab's intermediate TIPS ETF with their regular Intermediate Treasury one:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

And here's the same comparison for short-term bonds using VGSH and VTIP:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

In both cases the returns are better from the TIPS funds and drawdowns are shallower.

For anyone who wants to go further down the rabbit hole with TIPS I posted Tyler's blog post on Bogleheads and there's a good bit of discussion there (with Tyler participating). I especially recommend the posts from vineviz, who may be the single most savvy bond expert (among many) on that forum:

https://www.bogleheads.org/forum/viewtopic.php?t=386923

This exchange between Tyler and vineviz specifically addresses the misconception that holding individual TIPS to maturity somehow changes the risks:

"Tyler9000 wrote:

However, as can be seen with the YTD return of a fund like TIP (currently -13% before inflation) "removing all risk" only applies to TIPS held individually all the way to maturity rather than through a liquid index fund that is subject to interest rate risk. One of my main goals with the article is to illustrate the difference."

vineviz: "We haven't touched on this, but this "difference" is also not actually a difference. A TIPS has the same amount of interest rate risk for an investor whether held directly or through a fund. It's not the method of holding that matters, but rather the degree of mismatch between the investor's investment horizon and the bond/fund's duration.

It's simply not true that a TIPS fund like has interest rate risk but an individual TIPS does not."


Anyway for me the take-away is that exactly as Dr. Bernstein says TIPS are best bought as individual bonds held to maturity to meet specific known expenses. But contrary to what Tyler and even Dr. Bernstein suggest TIPS funds aren't exactly a disaster - as long as you're treating them as the Treasury bonds they are, subject to the same ups and downs in their current value as any other Treasury, albeit with more short-term volatility. Expecting TIPS to save you in a market meltdown is foolish - but expecting other Treasuries (especially LTT's) to do so is exponentially more foolish and yet is a bedrock assumption on the part of many PP'ers. That canard is right up there with the claim that gold is an inflation hedge. 2022 is providing abundant proof that both of those ideas need to be retired.
Last edited by Kevin K. on Fri Sep 30, 2022 3:55 pm, edited 2 times in total.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Fri Sep 30, 2022 3:28 pm

Well, TLT is a good example, yes.

So this is where I get lost. Two scenarios:

1) I buy a 30 year bond from treasury direct. 30 years from now I get my original principal plus whatever interest along the way.

2) I buy an equivalent $ amount of TLT. What am I getting in 30 years? Since they have to continue buying new 30 year bonds to keep the duration up, and if rates are rising along the way, will the increased interest I get keep up with the dropping share price and effectively end up the same as a straight bond purchase?

I am losing confidence in what I thought was the "certainty" of bond "funds" vs. real bonds. And that is currently biting me in the ass.
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Re: TBills as "the best horse at the glue factory?"

Post by Kevin K. » Fri Sep 30, 2022 4:11 pm

Cortopassi wrote:
Fri Sep 30, 2022 3:28 pm
Well, TLT is a good example, yes.

So this is where I get lost. Two scenarios:

1) I buy a 30 year bond from treasury direct. 30 years from now I get my original principal plus whatever interest along the way.

2) I buy an equivalent $ amount of TLT. What am I getting in 30 years? Since they have to continue buying new 30 year bonds to keep the duration up, and if rates are rising along the way, will the increased interest I get keep up with the dropping share price and effectively end up the same as a straight bond purchase?

I am losing confidence in what I thought was the "certainty" of bond "funds" vs. real bonds. And that is currently biting me in the ass.
It seems to me what you're getting with TLT is the "privilege" of paying iShares .15% a year to save you the 15 minutes of your time every five years required to sell a 30 year Treasury that has only 25 years left on it and buy a new one. Of course if you buy your individual bonds at Treasury Direct rather than through a brokerage account you can avoid seeing the wild fluctuations in the value of your bond that you can't avoid seeing if your assets are in a brokerage or fund or ETF such as TLT.

How often do we hear that the advantage of holding individual bonds vs. a fund is that you can't lose money as long as you hold your bond to maturity? That's wrong of course but surely there's comfort in not seeing the volatility staring you in the face every time you long on to your account. One can really start to see the appeal of all-in-one funds like Wellesley that are opaque about what's going on under the hood, and which by nature prevent investors from doing any tinkering during market meltdowns. Heck if I had it to do over I might just go with Tyler's idea of 80% Wellesley 20% gold and call it a day. That's a "permanent portfolio" you can't screw up with second-guessing - with historical returns that are essentially identical to the Golden Butterfly and management by a group with a 52 year track record of great results in all market conditions.
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Re: TBills as "the best horse at the glue factory?"

Post by Maddy » Sat Oct 01, 2022 8:54 am

Kevin, I always get a lot out of your posts. Thank you.
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Re: TBills as "the best horse at the glue factory?"

Post by dockinGA » Sat Oct 01, 2022 9:32 am

Kevin K. wrote:
Fri Sep 30, 2022 4:11 pm
Cortopassi wrote:
Fri Sep 30, 2022 3:28 pm
Well, TLT is a good example, yes.

So this is where I get lost. Two scenarios:

1) I buy a 30 year bond from treasury direct. 30 years from now I get my original principal plus whatever interest along the way.

2) I buy an equivalent $ amount of TLT. What am I getting in 30 years? Since they have to continue buying new 30 year bonds to keep the duration up, and if rates are rising along the way, will the increased interest I get keep up with the dropping share price and effectively end up the same as a straight bond purchase?

I am losing confidence in what I thought was the "certainty" of bond "funds" vs. real bonds. And that is currently biting me in the ass.
It seems to me what you're getting with TLT is the "privilege" of paying iShares .15% a year to save you the 15 minutes of your time every five years required to sell a 30 year Treasury that has only 25 years left on it and buy a new one. Of course if you buy your individual bonds at Treasury Direct rather than through a brokerage account you can avoid seeing the wild fluctuations in the value of your bond that you can't avoid seeing if your assets are in a brokerage or fund or ETF such as TLT.
I agree with this sentiment, and is the reason why I bought and sold individual treasuries for years. However, at some point over the last couple of years I started to have quite a bit of trouble actually selling LTT's, at both Fidelity and Vanguard, in the small quantities that I was selling at any one time. I became concerned that I might actually be losing some return in the bid/ask spreads that I was able to get for the quantities I was selling.
Add to that the extra time required getting current prices for each bond when checking portfolio balances by asset to figure out which asset to dump extra money in to each month, and I finally broke down and decided the expense ratio was worth it. With much weeping and gnashing of teeth, I might add.
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Re: TBills as "the best horse at the glue factory?"

Post by jalanlong » Sat Oct 01, 2022 10:00 am

dockinGA wrote:
Sat Oct 01, 2022 9:32 am
Kevin K. wrote:
Fri Sep 30, 2022 4:11 pm
Cortopassi wrote:
Fri Sep 30, 2022 3:28 pm
Well, TLT is a good example, yes.

So this is where I get lost. Two scenarios:

1) I buy a 30 year bond from treasury direct. 30 years from now I get my original principal plus whatever interest along the way.

2) I buy an equivalent $ amount of TLT. What am I getting in 30 years? Since they have to continue buying new 30 year bonds to keep the duration up, and if rates are rising along the way, will the increased interest I get keep up with the dropping share price and effectively end up the same as a straight bond purchase?

I am losing confidence in what I thought was the "certainty" of bond "funds" vs. real bonds. And that is currently biting me in the ass.
It seems to me what you're getting with TLT is the "privilege" of paying iShares .15% a year to save you the 15 minutes of your time every five years required to sell a 30 year Treasury that has only 25 years left on it and buy a new one. Of course if you buy your individual bonds at Treasury Direct rather than through a brokerage account you can avoid seeing the wild fluctuations in the value of your bond that you can't avoid seeing if your assets are in a brokerage or fund or ETF such as TLT.
I agree with this sentiment, and is the reason why I bought and sold individual treasuries for years. However, at some point over the last couple of years I started to have quite a bit of trouble actually selling LTT's, at both Fidelity and Vanguard, in the small quantities that I was selling at any one time. I became concerned that I might actually be losing some return in the bid/ask spreads that I was able to get for the quantities I was selling.
Add to that the extra time required getting current prices for each bond when checking portfolio balances by asset to figure out which asset to dump extra money in to each month, and I finally broke down and decided the expense ratio was worth it. With much weeping and gnashing of teeth, I might add.
I was actually wondering why there wasn't more love for treasury bill ETFs. You can get them with expense ratios of .10 and below now. Yes that is money you don't have to pay if you roll your own 1 year bills but you can reinvest the interest into more shares which you cannot do buying treasury bills directly. Also, you or your heirs don't have to deal with Treasury Direct.
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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Sat Oct 01, 2022 10:09 am

Right on time, Jason Zweig has a column in the weekend Wall Street Journal, "Three Ways You Can Cash in on Your Cash."

His column analyzes better returns from money market funds, I-bonds, and T-bills. I note that he does not mention CD's or TIPS.
“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!"
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Sat Oct 01, 2022 11:25 am

jhogue wrote:
Sat Oct 01, 2022 10:09 am

Right on time, Jason Zweig has a column in the weekend Wall Street Journal, "Three Ways You Can Cash in on Your Cash."

His column analyzes better returns from money market funds, I-bonds, and T-bills. I note that he does not mention CD's or TIPS.


He is vying for a spot on my Mount Rushmore of people of personal finance.

Lookes like he does not share those columns on his own web site?

https://jasonzweig.com/
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Sat Oct 01, 2022 11:42 am

jhogue wrote:
Sat Oct 01, 2022 10:09 am

Right on time, Jason Zweig has a column in the weekend Wall Street Journal, "Three Ways You Can Cash in on Your Cash."

His column analyzes better returns from money market funds, I-bonds, and T-bills. I note that he does not mention CD's or TIPS.


Tried to get to the article by following this:

https://www.wikihow.com/Read-the-Wall-S ... l-for-Free

First method does not work.

I did use the third method: "
Track down news stories posted on social media. Some readers may post the article links on social media. On Twitter, search for "WSJ." Click on the "News" tab at the top of the page. You’ll see a list of recent posts about WSJ articles. Click on a post to be taken to the article on The Wall Street Journal’s site."

To actually get to the article but then I hit the paywall.

Method two stated: "2
Have WSJ subscribers send you article links. If you know someone who subscribes to the WSJ, they can provide access to the articles. Ask them to send you any article you’d like to read. After clicking the link, you’ll be able to read the associated article for free.[7]"

But BREAKING NEWS is that after I pasted that link above that hit the paywall into Firefox I now get the entire article with no firewall!
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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Sat Oct 01, 2022 1:49 pm

Vinny,
You can also buy paper copies of the Wall Street Journal at your local news outlet. As far as I know, the People's Republic of Massachusetts has not cancelled it yet.
“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!"
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Re: TBills as "the best horse at the glue factory?"

Post by whatchamacallit » Sat Oct 01, 2022 1:52 pm

Speaking of treasury bill funds. Here are some good options I have come across that may help some:

SGOV
https://www.ishares.com/us/products/314 ... y-bond-etf
Expense Ratio: 0.05%
Effective Duration: 0.10 yrs
30 Day SEC Yield: 2.42%

VUSXX
https://investor.vanguard.com/investmen ... file/vusxx
Expense Ratio: 0.09%
Average maturity: 29.0 days
7 Day SEC Yield: 2.55%

SHV
https://www.ishares.com/us/products/239 ... y-bond-etf
Expense Ratio: 0.15%
Effective Duration: 0.30 yrs
30 Day SEC Yield: 2.84%
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Re: TBills as "the best horse at the glue factory?"

Post by jalanlong » Sat Oct 01, 2022 2:19 pm

whatchamacallit wrote:
Sat Oct 01, 2022 1:52 pm
Speaking of treasury bill funds. Here are some good options I have come across that may help some:

SGOV
https://www.ishares.com/us/products/314 ... y-bond-etf
Expense Ratio: 0.05%
Effective Duration: 0.10 yrs
30 Day SEC Yield: 2.42%

VUSXX
https://investor.vanguard.com/investmen ... file/vusxx
Expense Ratio: 0.09%
Average maturity: 29.0 days
7 Day SEC Yield: 2.55%

SHV
https://www.ishares.com/us/products/239 ... y-bond-etf
Expense Ratio: 0.15%
Effective Duration: 0.30 yrs
30 Day SEC Yield: 2.84%


Add to those:

Gbill

https://www.gsam.com/content/gsam/us/en ... r-etf.html


Cltl

https://www.invesco.com/us/financial-pr ... icker=CLTL
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Re: TBills as "the best horse at the glue factory?"

Post by whatchamacallit » Sat Oct 01, 2022 2:46 pm

Thanks Jalanlong.

I wasn't aware of CLTL and it looks especially nice.

Effective Duration 0.39 yrs
Expense Ratio 0.08%
SEC 30 Day Yield 2.93%
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Sat Oct 01, 2022 3:23 pm

In a tax deferred IRA account, is there any reason I would not buy a 3 month CD vs. a 3 month Treasury? See the clip of rates. The higher rate on the Treasury is because maturity date is closer to end of Jan 2023, so closer to 4 months vs. 3. If I look at Treasury maturity dates in the range of the CD date, they are 0.1 to 0.2% lower than 3.3%

Just wondering. No fees for either, and the CDs are FDIC insured.

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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Sat Oct 01, 2022 3:31 pm

Cortopassi wrote:
Sat Oct 01, 2022 3:23 pm

In a tax deferred IRA account, is there any reason I would not buy a 3 month CD vs. a 3 month Treasury? See the clip of rates. The higher rate on the Treasury is because maturity date is closer to end of Jan 2023, so closer to 4 months vs. 3. If I look at Treasury maturity dates in the range of the CD date, they are 0.1 to 0.2% lower than 3.3%

Just wondering. No fees for either, and the CDs are FDIC insured.

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Yes, FDIC insured. But if the FDIC gets involved there could be a wait to get at your money. So some small risk. All depends how riskless you want your cash investments to be. I will address my attitude towards cash risk in my next post here.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
whatchamacallit
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Re: TBills as "the best horse at the glue factory?"

Post by whatchamacallit » Sat Oct 01, 2022 4:06 pm

Corto I would also say .25% of yield is worth one more month duration for me.

Also my experience is a CD wouldn't be as liquid if you did want sell early. The spread on selling CD would eat into profits.
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Cortopassi
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Sat Oct 01, 2022 4:12 pm

whatchamacallit wrote:
Sat Oct 01, 2022 4:06 pm
Corto I would also say .25% of yield is worth one more month duration for me.

Also my experience is a CD wouldn't be as liquid if you did want sell early. The spread on selling CD would eat into profits.
Thanks!
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