Treasury Bond Basic Quetions - TreasuryDirect

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ppnewbie
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Treasury Bond Basic Quetions - TreasuryDirect

Post by ppnewbie » Tue May 14, 2019 1:40 pm

I have lots of questions. I find the information on how to purchase bonds, what you are purchasing, when you are purchasing them, how many of them you are going to receive very confusing. I have a lot of questions. If anyone has answers to even one or two of the questions that will help tremendously. I am scouring youtube / web and cannot find basic answers. And treasurydirect has not been helpful in explaining the process.

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What is the maximum value of a $100 - 30 Year treasury bond paying 3 percent. Is it $190. Also for this case assuming interest rates do not go negative. What is the minimum value?

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When I buy 30 year treasury bonds on treasury direct - I do not see the rate. There is just an option to buy a 30 year treasury bond at the next auction date. Do you just put in a dollar number and a bond is purchased for you at the next auction date. Also when you buy can you put in any dollar number are does it have to be 100 dollar denominations. If I buy $1000 worth of bonds, do I get $1000 dollar bond at a rate that was determined at "auction" or is there a rate that is set somewhere that I would know ahead of time.

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I am buying something at "auction" what is the variable being auctioned. In the example of a $100 dollar bond at 3 percent for 30 years. Is the price that will vary as a result of the auction the bond price. So I would say pay $110 for the bond I mentioned above if the auction price settled on that? Very confused.

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When you buy if you put in the number 1,000,000 - Does that buy you one treasury bond at 1,000,000 and if you sell it do you have to sell the entire 1,000,000 dollar bond. Or does it say buy you 10000 - $100 treasury bonds.

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How do you sell bonds. Is it called redeeming bonds? Can you just sell treasury bonds any time you want. And when you sell them on treasury direct. How do you know what price you are going to get? If I could sell at 30 year treasury bond at any time why would I buy a short term treasury bill instead? 30 year bonds pay a higher interest rate.

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If I buy treasury bonds on the "secondary market" am I missing anything. Like say I pay more for the same $100 dollar 30 year bond at 3 percent.

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Also someone posted recently that there is a concern for the treasurydirect website security vulnerabilities. Are there anything specific concerns or is it just that the site looks like it was created in in 1985.
pmward
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by pmward » Tue May 14, 2019 2:43 pm

ppnewbie wrote:
Tue May 14, 2019 1:40 pm
I have lots of questions. I find the information on how to purchase bonds, what you are purchasing, when you are purchasing them, how many of them you are going to receive very confusing. I have a lot of questions. If anyone has answers to even one or two of the questions that will help tremendously. I am scouring youtube / web and cannot find basic answers. And treasurydirect has not been helpful in explaining the process.

-
What is the maximum value of a $100 - 30 Year treasury bond paying 3 percent. Is it $190. Also for this case assuming interest rates do not go negative. What is the minimum value?

-
When I buy 30 year treasury bonds on treasury direct - I do not see the rate. There is just an option to buy a 30 year treasury bond at the next auction date. Do you just put in a dollar number and a bond is purchased for you at the next auction date. Also when you buy can you put in any dollar number are does it have to be 100 dollar denominations. If I buy $1000 worth of bonds, do I get $1000 dollar bond at a rate that was determined at "auction" or is there a rate that is set somewhere that I would know ahead of time.

-
I am buying something at "auction" what is the variable being auctioned. In the example of a $100 dollar bond at 3 percent for 30 years. Is the price that will vary as a result of the auction the bond price. So I would say pay $110 for the bond I mentioned above if the auction price settled on that? Very confused.

-
When you buy if you put in the number 1,000,000 - Does that buy you one treasury bond at 1,000,000 and if you sell it do you have to sell the entire 1,000,000 dollar bond. Or does it say buy you 10000 - $100 treasury bonds.

-
How do you sell bonds. Is it called redeeming bonds? Can you just sell treasury bonds any time you want. And when you sell them on treasury direct. How do you know what price you are going to get? If I could sell at 30 year treasury bond at any time why would I buy a short term treasury bill instead? 30 year bonds pay a higher interest rate.

-
If I buy treasury bonds on the "secondary market" am I missing anything. Like say I pay more for the same $100 dollar 30 year bond at 3 percent.

-
Also someone posted recently that there is a concern for the treasurydirect website security vulnerabilities. Are there anything specific concerns or is it just that the site looks like it was created in in 1985.
Personally I don't mess with treasury direct for anything other than I Bonds where there is no choice. Any brokerage will be easier for you. I use Fidelity and I can purchase through auction or repo markets, as well as sell, quite easily. In the days leading up to the auction they display the current expected yield. Exact yield is not determined until the actual sale though, as it is set through supply and demand and the Treasury doesn't know the exact details until they do the actual auction. The actual yield you get will be close enough to the estimate though, I have personally seen no more than a few basis points difference (and the larger your purchase the better odds you get a slightly better yield fill).

Also, on Fidelity they give you bonds in $1000 increments. So if you buy 10K worth you get 10 1k bonds, which helps make it easy for rebalancing. At Fidelity selling is super easy, you can simply click the sell button on the bond and enter the amount of shares to sell, click the button, and you instantly have your cash; it's no different than selling a stock. Fidelity also has a convenient auto-roll feature for T-Bills for the cash portion, which makes purchasing and holding T-Bills no more difficult to maintain than buying an ETF. I would recommend sticking with your brokerage for this. If you're open on your choice of brokerage then I can't recommend Fidelity enough for their excellent bond platform.

For the repo markets you don't purchase based only on face value like at the auction, but based upon a combination of difference in yield and face value. The rules are not hard on this, but as a generalization you have to prorate out the difference in total yield to the remaining years. So if a bond had 10 years left and interest current rates changed by exactly 1% from the coupon then you would calculate 10 * 1% of face value and that would be approximately the difference in value from face value. You will pay that much more for higher yield, that much less for lower yield, essentially making the secondary purchase a wash over the duration vs buying a new treasury either way and that was why I mentioned on your last post that just buying all new at auction should still be about the same overall as laddering equally back into the past, as you will be paying or saving any and all the difference in yield from current rates up front in the purchase price. And if you are going to purchase long term treasuries in the repo market Harry used to recommend preferring lower yielding bonds in taxable accounts, so you have more of your profits in capital gains as opposed to yield paid out yearly.

Bond markets took me a few to wrap my head around as well, but they are not so bad once you get the hang of things. Let us know if you have any other questions or if any of that doesn't make sense.
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by ppnewbie » Tue May 14, 2019 3:10 pm

pmward wrote:
Tue May 14, 2019 2:43 pm

Personally I don't mess with treasury direct for anything other than I Bonds where there is no choice. Any brokerage will be easier for you. I use Fidelity and I can purchase through auction or repo markets, as well as sell, quite easily. In the days leading up to the auction they display the current expected yield. Exact yield is not determined until the actual sale though, as it is set through supply and demand and the Treasury doesn't know the exact details until they do the actual auction. The actual yield you get will be close enough to the estimate though, I have personally seen no more than a few basis points difference (and the larger your purchase the better odds you get a slightly better yield fill).

Also, on Fidelity they give you bonds in $1000 increments. So if you buy 10K worth you get 10 1k bonds, which helps make it easy for rebalancing. At Fidelity selling is super easy, you can simply click the sell button on the bond and enter the amount of shares to sell, click the button, and you instantly have your cash; it's no different than selling a stock. Fidelity also has a convenient auto-roll feature for T-Bills for the cash portion, which makes purchasing and holding T-Bills no more difficult to maintain than buying an ETF. I would recommend sticking with your brokerage for this. If you're open on your choice of brokerage then I can't recommend Fidelity enough for their excellent bond platform.

For the repo markets you don't purchase based only on face value like at the auction, but based upon a combination of difference in yield and face value. The rules are not hard on this, but as a generalization you have to prorate out the difference in total yield to the remaining years. So if a bond had 10 years left and interest current rates changed by exactly 1% from the coupon then you would calculate 10 * 1% of face value and that would be approximately the difference in value from face value. You will pay that much more for higher yield, that much less for lower yield, essentially making the secondary purchase a wash over the duration vs buying a new treasury either way and that was why I mentioned on your last post that just buying all new at auction should still be about the same overall as laddering equally back into the past, as you will be paying or saving any and all the difference in yield from current rates up front in the purchase price. And if you are going to purchase long term treasuries in the repo market Harry used to recommend preferring lower yielding bonds in taxable accounts, so you have more of your profits in capital gains as opposed to yield paid out yearly.

Bond markets took me a few to wrap my head around as well, but they are not so bad once you get the hang of things. Let us know if you have any other questions or if any of that doesn't make sense.
OK - so if I buy on Fidelity I would just buy something like a 28 or 29 year treasury bond and the purchase price will be adjusted automatically to give me approximately the same yield as the original 30 year bond? Or do I have to try to make sure that that the bond I am purchasing is priced optimally?
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by jhogue » Tue May 14, 2019 3:25 pm

Please see Gumby’s Treasury Bond Buying Tutorial at the beginning of the Bond section of the forum. I would do that first, because I think it might answer most of your questions and clear up any confusion you have. It worked for me when I decided to shift my LTT position from the ETF TLT to direct ownership of 30 year T-bonds.

I agree with pmward’s points in his previous post. In addition, consider the following:

1. You can buy Treasury bonds through Fidelity for your tax deferred or Roth accounts. That is the most tax efficient way to hold T-bonds because they pay out a predictable stream of taxable interest. You can’t buy T bonds for tax-advantaged accounts through treasurydirect.gov.

2. You can call Fidelity Fixed Income Service (800-544-5372) and speak with a knowledgeable rep to answer any question you might have on a specific trade or issue. I have never been charged for this service.

3. You do not redeem T-Bonds. They either mature and are repaid with interest owed or you sell them at market value some time short of maturity. US savings bonds are redeemed through treasurydirect.gov, because they are not marketable securities, but are purchased and redeemed via the US Treasury.
“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!"
ppnewbie
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by ppnewbie » Tue May 14, 2019 5:02 pm

Thanks I tried to review the tutorial but for some reason the jpegs are not visible. Based on your suggestion, I'll call the Fidelity bond desk as well.
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by pmward » Tue May 14, 2019 5:10 pm

ppnewbie wrote:
Tue May 14, 2019 3:10 pm

OK - so if I buy on Fidelity I would just buy something like a 28 or 29 year treasury bond and the purchase price will be adjusted automatically to give me approximately the same yield as the original 30 year bond? Or do I have to try to make sure that that the bond I am purchasing is priced optimally?
Bonds trade like a stock. U.S. treasuries are the largest and most liquid market in the entire world. So the repo markets are well arbitraged and you really don't have to worry about this. But just like a stock, there is some speculation that can skew the market in one direction or the other based on what the markets think will happen in the future. So it won't be a perfect match mathematically in the difference of yield, but close enough. Non-treasury bonds are not as liquid and you might have to worry about this stuff if you ever purchase any of these.

You can also buy at auction at Fidelity commission free and if you do that you won't have to even worry about spreads or tracking error on purchase.
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by ppnewbie » Wed May 15, 2019 1:32 pm

jhogue wrote:
Tue May 14, 2019 3:25 pm

2. You can call Fidelity Fixed Income Service (800-544-5372) and speak with a knowledgeable rep to answer any question you might have on a specific trade or issue. I have never been charged for this service.
Great advice. I called Fidelity yesterday. The rep was very knowledgable. Thanks again.
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by Pet Hog » Wed May 15, 2019 3:29 pm

ppnewbie wrote:
Tue May 14, 2019 1:40 pm
What is the maximum value of a $100 - 30 Year treasury bond paying 3 percent. Is it $190. Also for this case assuming interest rates do not go negative. What is the minimum value?
If interest rates go to zero and there's no inflation, then I think you're right that the maximum value of that bond is $190. A potential buyer would have to ask, "How much am I willing to pay in today's dollars for something that will be worth $190 in 30 years' time?" (I guess that's the fundamental question for any investor and investment.) And in such a no-interest/no-inflation world, $190 in today's dollars would still have $190 in value in 30 years, so that's how much a $100/3% bond would be worth today.

With similar logic, if we have hyperinflation, $190 in 30 years' time would literally be worthless, so the minimum value of a $100 bond is zero.

Bond valuation is interesting to me because it is so precise. You really can value a bond just by knowing present-day interest rates (see, for example, here). There's only really that one variable. So I think there's so much less room for investor psychology to get in the way, as in the case with gold or stocks. I wish I had understood bonds before I began investing in the stock market. I don't think I would have made as many stupid decisions!
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by pmward » Wed May 15, 2019 3:39 pm

Pet Hog wrote:
Wed May 15, 2019 3:29 pm
With similar logic, if we have hyperinflation, $190 in 30 years' time would literally be worthless, so the minimum value of a $100 bond is zero.
Well to be fair it wouldn't be 0. In a true hyperinflation it would be very small, but it still would not be 0 because a nominal coupon will be paid out over the time period (of which inflation will be variable), and nominal value will be paid out at the end.

Also, the odds of hyperinflation in a developed country with no debt denominated in a foreign currency is essentially 0. Can we get high inflation like the 70s? Sure. Hyperinflation, barring some apocalyptic type situation, it's just not possible. And in the apocalyptic circumstance inflation would be the least of our worries.
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Re: Treasury Bond Basic Quetions - TreasuryDirect

Post by Pet Hog » Wed May 15, 2019 3:54 pm

pmward wrote:
Wed May 15, 2019 3:39 pm
Pet Hog wrote:
Wed May 15, 2019 3:29 pm
With similar logic, if we have hyperinflation, $190 in 30 years' time would literally be worthless, so the minimum value of a $100 bond is zero.
Well to be fair it wouldn't be 0. In a true hyperinflation it would be very small, but it still would not be 0 because a nominal coupon will be paid out over the time period (of which inflation will be variable), and nominal value will be paid out at the end.

Also, the odds of hyperinflation in a developed country with no debt denominated in a foreign currency is essentially 0. Can we get high inflation like the 70s? Sure. Hyperinflation, barring some apocalyptic type situation, it's just not possible. And in the apocalyptic circumstance inflation would be the least of our worries.
Also, you'd reinvest your coupons at extraordinarily high interest rates, so perhaps you'd get a little something in the end. I was just stating that the minimum value is zero. It might be very unlikely, but that's the floor. I don't know the answer, but how much is a Venezuelan long bond, purchased (say) three years ago, worth today?

The Investopedia bond valuation tool I linked to allows only 99% as the limit to future interest rates. Even so, it gives a valuation of less that $4 for a $100/3%/30-year bond in that scenario.
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