Tresurydirect for "deep" cash

[BearBones]

This has been touched on before, but I don't see that the idea has been fully developed. There have been a lot of posts lately about holding treasuries directly "in your name" vs indirectly through a brokerage (who can theoretically lend out %, just as TLT seems to do). Seems that HB would recommend the former, when possible, just as it is best to hold physical gold or allocated gold in storage compared to unallocated, pooled gold or gold ETF.

It is very cumbersome to hold 30 yr TBs directly at Treasurydirect in the PP, since they have to be transferred to an outside institutions to sell. But for "deep" cash (beyond that needed for emergencies) it would seem that selling before maturity would rare, and the most direct and safe way of holding would be through a short term TD ladder at TD rather in treasury MM fund or in ladder at Fidelity (such as what LW has advocated, http://gyroscopicinvesting.com/forum/ht ... 082#p10082).

Before I struggle through setting up short term ladder at TD, I am curious if others feel the same way and if others have done the same. Thanks!

[MediumTex]

Assuming you have maxed out your savings bond quota, I think this sounds like a good "deep cash" strategy.

[BearBones]

Thanks, MT.
So, from Tyler's recent post on LTTs not being lent out when purchased at Fidelity [url=http://(http://gyroscopicinvesting.com/forum/index.php?topic=2249.90](http://gyroscopicinvesting.com/forum/in ... ic=2249.90[/url]), do you and others think that there are significant benefits to holding short term treasuries at Treasurydirect compared to purchasing at Fidelity, such as what LW does?

Advantage: 1) Held directly in your name at US governmental institution (for whatever it is worth) 2) Institutional diversification if one has LTTs through Fidelity (or the like).
Disadvantage: 1) More difficult to sell if you were in deep s*** and misjudged your need for deep cash. 2) Cash will spend some time in non-interest-bearing S of I before reinvested.

I am most curious as to whether HBPP purists would place a lot of weight on advantage #1 above. As I see it, this is an important question for those trying to protect from remote SHTF scenarios, such as by buying LTTs directly, maintaining institutional diversification, and holding some gold in an overseas account.

[rickb]

So, from Tyler's recent post on LTTs not being lent out when purchased at Fidelity [url=http://(http://gyroscopicinvesting.com/forum/index.php?topic=2249.90](http://gyroscopicinvesting.com/forum/in ... ic=2249.90[/url]), do you and others think that there are significant benefits to holding short term treasuries at Treasurydirect compared to purchasing at Fidelity, such as what LW does?

Advantage: 1) Held directly in your name at US governmental institution (for whatever it is worth) 2) Institutional diversification if one has LTTs through Fidelity (or the like).
Disadvantage: 1) More difficult to sell if you were in deep s*** and misjudged your need for deep cash. 2) Cash will spend some time in non-interest-bearing S of I before reinvested.

I am most curious as to whether HBPP purists would place a lot of weight on advantage #1 above. As I see it, this is an important question for those trying to protect from remote SHTF scenarios, such as by buying LTTs directly, maintaining institutional diversification, and holding some gold in an overseas account.

Eliminating middlemen between you and what you own is generically a good thing.  In this case, by holding the bonds with Fidelity the risk is that Fidelity collapses in some way sort of like MF Global and although you thought you had $X in bonds with Fidelity the bonds simply aren't there. The possibilities here are

1) You have less than the SIPC's limit (currently $500,000).  Whatever evil happened, you get your (up to) $500,000 back (perhaps some time later).

2) You have less the the SIPC's limit, but whatever has happened has affected so many brokerages that the SIPC can't cover its obligations.  If this happens, my guess is you'll get a fraction (perhaps a small fraction) of your money (and possibly only a long time later).

3) You have more than the SIPC's limit.  I think Fidelity probably advertizes it has insurance beyond SIPC's limits, but really, if Fidelity is collapsing what insurance company is going to be able to pay up?  If this scenario happens, I'd be surprised if you get anything beyond the SIPC limit, and I'd be really surprised if whatever was happening here wasn't making the SIPC go bust putting us back at #2.

Is the risk here significant?  Well, it's certainly WAY more than 0, which is the risk of these things affecting you if you hold bonds with TreasuryDirect.  I suspect it's probably not quite as high as (but similar to) the risk of losing cash in a non-treasury backed MM.

I think the bottom line here is you should strive to eliminate middlemen wherever you possibly can.  Completely eliminating risks, however remote they may be, is always better.

[smurff]

1) You have less than the SIPC's limit (currently $500,000).  Whatever evil happened, you get your (up to) $500,000 back (perhaps some time later).

2) You have less the the SIPC's limit, but whatever has happened has affected so many brokerages that the SIPC can't cover its obligations.  If this happens, my guess is you'll get a fraction (perhaps a small fraction) of your money (and possibly only a long time later).

3) You have more than the SIPC's limit.  I think Fidelity probably advertizes it has insurance beyond SIPC's limits, but really, if Fidelity is collapsing what insurance company is going to be able to pay up?  If this scenario happens, I'd be surprised if you get anything beyond the SIPC limit, and I'd be really surprised if whatever was happening here wasn't making the SIPC go bust putting us back at #2.

Don't forget clawbacks.  If you have $500,000 or less, in theory your assets are covered 100%.  In reality you could receive less than the SIPC limit if the trustee decides to impose clawbacks, or ever worse, you may owe your balance or more to the SIPC/trustee.  For example, if you initially deposited $750,000 but withdrew $500,000 within a certain time limit, that does not mean you'll receive the balance of $250,000.  Or worse yet, say you initially deposited $250,000, it grew over five years to $500,000, you withdrew $400,000 in year 5.  There's now a $100,000 balance in the account, but if there was a Madoff situation, you may now owe SIPC/trustee that $100,000 balance plus up to an extra $150,000, depending on the nature of the fake trading involved.  (Some or all of that "owed" amount may be negotiated away if you have a good lawyer, but then you have to pay their fees.)

Keeping as few intermediaries as possible between you and your assets is a way to avoid clawbacks, but it's not always possible with certain types of accounts, particularly anything retirement-related.

[BearBones]

Thank you so much rikb and smurff. That was what I was thinking as well, although not to your level of detail. I am not aware that this has been discussed very much, so I thought that I was missing something obvious.
Anyone ou there disagree? Lone Wolf? CraigR?

[Lone Wolf]

Advantage: 1) Held directly in your name at US governmental institution (for whatever it is worth) 2) Institutional diversification if one has LTTs through Fidelity (or the like).

I like the way that you're thinking about institutional diversification.  For me personally, I don't think that I'd go with everything in TreasuryDirect simply because of disadvantage #1 that you mentioned.  But since this is your plan for deep cash, it all sounds very solid to me.

I have not yet tried to throw any of my ladder's rungs into TreasuryDirect (which I currently only use for savings bonds.)  Therefore I can't yet vouch for how nice their interface is for viewing your current bill/note holdings.  The quality of their tax reporting is an unknown to me as well but I assume it is very good.

My 3-year rung is slightly light at the moment, though, so I may try a TD purchase and see how it goes.

Disadvantage: 1) More difficult to sell if you were in deep s*** and misjudged your need for deep cash. 2) Cash will spend some time in non-interest-bearing S of I before reinvested.

To expand a bit on point #1, TreasuryDirect holdings require a 45-day holding period before they may be transferred to another institution for an early sale.  (More here.)  No problem at all for "deep cash", but something to consider for any cash you might need to get your hands on with a month and a half.  It'd definitely be a no-no for cash you consider to be part of your "emergency fund".  It's also an argument to move into TD gradually so that you don't have lots of cash locked up for 45 days.

Can you expand a bit on when the C of I comes into play?  I was under the impression that you could direct your bill/note interest payments from TreasuryDirect back into your bank account (and, presumably, the principal upon maturity.)  When are you required to use a C of I?

Anyway, TreasuryDirect sounds like it work great for your ladder.  I'd still recommend T-bills held at Fidelity or Vanguard for any amount of cash you could conceivably need to touch for expenditures or rebalances.

My ideal setup would be a 0-3 ladder stretched across Fidelity, Vanguard, and TreasuryDirect (all of whom offer free Treasury trades.)  I still like I-bonds and EE-bonds for the deepest of the deep cash.  No fees of any kind, lots of institutional diversification, and lots of safety.  For people that hate screwing around with this sort of thing, the Harry Browne recommendation of a Treasury Money Market is probably a better bet.

[sophie]

Lone Wolf, could you explain why you've opted for the 0-3 year treasury bond ladder over savings bonds?  Not questioning as much as curious.  Aside from the need to keep the amount of cash in the 11-12 month "lock" period under control, I like savings bonds better.  While I bonds risk dropping to zero yield during outright deflation, the rates on current EE bonds are not worse than 3 year treasuries.

I'm still not quite sure what to do with cash, but so far I've got about 1/3 in savings bonds and the rest in very short term treasuries (my DIY money market), plus some in a money market that earns approximately what my mattress would, and plan to keep moving $$ to savings bonds as the older ones "unlock".

(Dang....still haven't broken out of "associate" level!!)

[MediumTex]

(Dang....still haven't broken out of "associate" level!!)

I hereby give you a field commission of "Exalted Wizardess of Calculus and Other Mathematical Mysteries."

[Lone Wolf]

Lone Wolf, could you explain why you've opted for the 0-3 year treasury bond ladder over savings bonds?  Not questioning as much as curious.  Aside from the need to keep the amount of cash in the 11-12 month "lock" period under control, I like savings bonds better.  While I bonds risk dropping to zero yield during outright deflation, the rates on current EE bonds are not worse than 3 year treasuries.

I'm still not quite sure what to do with cash, but so far I've got about 1/3 in savings bonds and the rest in very short term treasuries (my DIY money market), plus some in a money market that earns approximately what my mattress would, and plan to keep moving $$ to savings bonds as the older ones "unlock".

Yes, I also advocate savings bonds first so long as one has their liquidity needs (both emergency and standard) very well-covered.  Since you can't redeem savings bonds in their first year you of course have to be careful there.

After that, it is mostly down to annual limits.  I-bonds are to me clear winners.  Just fantastic instruments.  EE bonds are also good so long as you handle them properly if/when rates rise.  I typically buy a full measure of savings bonds ($20k) every year but I have been accumulating for long enough that I still have cash left over that must be handled some other way.  For that I've chosen to use a Treasury ladder.

Your approach sounds great.  I don't see much need to adjust it.

(Dang....still haven't broken out of "associate" level!!)

Don't give up!  You are in the home stretch! 

[BearBones]

What do others think about cash held in the following forms, in descending order of liquidity with "deep cash" being on the right?

Cash in safe at home or SD box > cash at local FDIC insured bank > treasury MM fund (e.g., VUSXX) > Tresurydirect 1-3 year ladder > iBonds & EE Bonds

[Greg]

What do others think about cash held in the following forms, in descending order of liquidity with "deep cash" being on the right?

Cash in safe at home or SD box > cash at local FDIC insured bank > treasury MM fund (e.g., VUSXX) > Tresurydirect 1-3 year ladder > iBonds & EE Bonds

To clarify, what do you mean when you say liquidity. Are you speaking about if you had a personal emergency and you needed to liquify assets to cash so you can pay for something? Or are you talking about a catastrophic bank run environment where you need safety of the cash over the liquidity.

If you're just talking about regular emergency funds, I think your method up above works quite well.

If we're in a bank run environment, wouldn't the treasury MM funds potentially be more "liquid" than FDIC "insured" bank funds?

[Lone Wolf]

Lone Wolf, could you explain why you've opted for the 0-3 year treasury bond ladder over savings bonds?  Not questioning as much as curious.  Aside from the need to keep the amount of cash in the 11-12 month "lock" period under control, I like savings bonds better.  While I bonds risk dropping to zero yield during outright deflation, the rates on current EE bonds are not worse than 3 year treasuries.

I do want to add one more point about savings bonds that I didn't mention earlier.  Unlike the Harry Browne approach of just holding short term T-bills or a Treasury Money Market for cash, savings bonds are not necessarily a "fire and forget" approach, particularly if interest rates rise.

It's easiest to see this with EE bonds.  If interest rates rise, the 0.6% EE bond rate will no longer be an attractive yield.  If rates rise high enough, we must be willing to liquidate these things and head for greener pastures.  (This of course must be weighed against the 20-year doubling opportunity these have too!)

Furthermore, I can envision an environment where even today's I-bonds would be far less attractive to hold.  For example, in early 1982, interest rates were at 17% while inflation was around 8%.  That's a 9% real yield!  We are currently in an environment of very low interest rates and strongly negative real yields.  But in a positive yield environment (especially one that is highly positive) 0% real yield I-bonds lose a bit of their luster.

The genius of Harry Browne's original recipe is that it deals with situations like this automatically.  (I argue that a Treasury ladder does as well.)  If we hold savings bonds, though, we have to be vigilant if/when the interest rate environment changes in an interesting way.  That makes them a slightly more "advanced play" IMO.

Just something to consider for down the road.  The future may look a bit different than the present.

[hoost]

What do others think about cash held in the following forms, in descending order of liquidity with "deep cash" being on the right?

Cash in safe at home or SD box > cash at local FDIC insured bank > treasury MM fund (e.g., VUSXX) > Tresurydirect 1-3 year ladder > iBonds & EE Bonds

I would bump the FDIC cash at least one notch to the right.  I would expect the Treasury Money Market to maintain it's value in more scenarios than FDIC cash would.  I would probably put T-bills held at Treasury Direct before the TMM fund.

[BearBones]

To clarify, what do you mean when you say liquidity. Are you speaking about if you had a personal emergency and you needed to liquify assets to cash so you can pay for something? Or are you talking about a catastrophic bank run environment where you need safety of the cash over the liquidity.

If you're just talking about regular emergency funds, I think your method up above works quite well...

Yes, the former. Thanks.

I would bump the FDIC cash at least one notch to the right.  I would expect the Treasury Money Market to maintain it's value in more scenarios than FDIC cash would.  I would probably put T-bills held at Treasury Direct before the TMM fund.

Agree. However, I put in this order because I would generally have to transfer money to local bank before having cash in hand. Although safer untouched in TMM, it is one more step removed from my hand. Thoughts?

[Greg]

As a thought, if you have treasury bills in an account such as Fidelity, you can sell them within your investment account and if you have a savings account within Fidelity (I believe they are good to have, and you can get a 2% AMEX credit card to boot for your brokerage account) you can just pull the money directly out at any ATM for the most part and they reimburse any fees. Essentially you wouldn't need to worry about the FDIC insured banks as a step then.

[hoost]

I would bump the FDIC cash at least one notch to the right.  I would expect the Treasury Money Market to maintain it's value in more scenarios than FDIC cash would.  I would probably put T-bills held at Treasury Direct before the TMM fund.

Agree. However, I put in this order because I would generally have to transfer money to local bank before having cash in hand. Although safer untouched in TMM, it is one more step removed from my hand. Thoughts?

Ah, yes, I see your logic.  I read "liquidity" and thought "safety".  In that case, you can add check-writing privileges to some TMM's, so it still might make sense to put TMM w/check-writing privileges in front of a savings acct.  I hadn't really looked at it like that, but that's the justification I have for holding our e-fund in TMM fund w/check-writing privileges vs individual t-bills. 

[sophie]

My biggest problem with the treasury money market funds available is that they are either closed, yielding zero, or have high minimum balances (like $25,000).  Other than that, they are probably a safer place to stash money than at home, and the turnkey feature is worth noting.  My "DIY" alternative is purely for tinkerers like me.  It definitely serves as a great distraction that helps keep my paws off the rest of my portfolio 

Regarding keeping cash at home....I'm actually far less worried about theft than I am about the hiding place being breached accidentally, or forgotten.  It would be just like me to bury a stash behind a light switch, and then years later do a renovation, forgetting to move the stash, and the contractor finds it.  There's also the problem of making sure enough other people know about it that it can be recovered by family if something happens to me.  Unlike with physical gold, there seems little reason to take this risk with cash.