Engineering Your Own SHY

[Kriegsspiel]

Are you guys on Fidelity, and trading SHY with no commissions?

[sophie]

There is a big advantage with a 3 year treasury bond ladder over SHY that might make it worthwhile. If you keep money evenly distributed, at any one time about 1/3 of your cash will mature in less than one year. So if you need to sell and the interest rates have gone up, you'll incur less of a loss than if you had to sell SHY. Maintaining the ladder is a pain though, as you can't use the autoroll feature, which otherwise can usefully mimic a money market fund.

Waiting for dualstow to chime in as he does the 3 year bond ladder.

[KevinW]

BTW, it's not through that Investing In Bonds site... that's just a click through to Morningstar where you can input your CUSIP. Now anyways, according to them, the last trade (on the day I bought it for 100.74) was 100.72. The day before it was 100.62, so it probably was trading between 100.62 and 100.72 when I bought it, for a markup somewhere between .02% and .12%. Maybe I just got lucky, and the markups are usually higher?

Sorry about that. Yes it sounds like you got a good deal on a small markup, but from what I've read it's usually higher.

[KevinW]

Couldn't you just avoid that by only buying on the run issues?

AFAIK yes, but I don't know whether any brokers allow you to buy bills at auction commission free. You can buy auction bills through Treasury Direct but that's taxable only. Also there's the issue of what you do with idle cash in between the auctions, it has to go somewhere.

And CD's bought direct probably don't have the markup either.

CDs are not the same thing as T-bills. If one is comfortable with the heightened risk of FDIC-issued bank securities then they can save themselves a lot of trouble and use an online high yield savings account.

[Kbg]

BTW, it's not through that Investing In Bonds site... that's just a click through to Morningstar where you can input your CUSIP. Now anyways, according to them, the last trade (on the day I bought it for 100.74) was 100.72. The day before it was 100.62, so it probably was trading between 100.62 and 100.72 when I bought it, for a markup somewhere between .02% and .12%. Maybe I just got lucky, and the markups are usually higher?

Sorry about that. Yes it sounds like you got a good deal on a small markup, but from what I've read it's usually higher.

I think the big mark ups are more commercial and muni bond related. A decent broker should have pretty good spreads on treasuries (or I'd go somewhere else).

Thanks for all the input. I think it looks like breakeven to maybe even a bit more expensive to do the ladder vs. SHY given my likely trade size. And certainly SHY wins in the hassle factor category.

[KevinW]

I think it looks like breakeven to maybe even a bit more expensive to do the ladder vs. SHY given my likely trade size. And certainly SHY wins in the hassle factor category.

Yeah, that's my feeling. The ladder works and people who use it are not wrong, but for me it's not worth the hassle.

[MachineGhost]

AFAIK yes, but I don't know whether any brokers allow you to buy bills at auction commission free. You can buy auction bills through Treasury Direct but that's taxable only. Also there's the issue of what you do with idle cash in between the auctions, it has to go somewhere.

Several brokers do ineed let you buy Treasuries for free including at auction as well as on the secondary market. Fidelity comes to mind. But none offer autoinvest. I'm willing to pay for that as I have better things to do and I don't like seeing gains or losses when I login to place a manual trade.