Gyroscopic Investing

I just moved some cash into high-coupon short term treasuries and just for fun, calculated my tax equivalent yield for the maneuver. Just thought it would be worth sharing, because depending on your tax situation, the strategy handily beats CDs. However, you need to be careful about this if you have long term capital gains (see below).

The strategy is to buy a treasury bond close to maturity with the highest coupon rate you can find. Here's how it works for a $15,000 investment and my specific tax brackets (28% federal, 11% state/local):

Purchase price: $15,606 (of which $125 is interest) for bonds with face value of $15,000 at 9.125% coupon. Last payment is in May 2018 of $684. There will be a built-in loss of $481 when the bond matures.
Federal taxes on the interest: $156
The bond will generate a short term capital loss, to be applied against short term cap gains or ordinary income. NOTE: you don't want this to be applied to long term capital gains, as instead of getting 28% on the loss, I'd effectively only get 15%.
Tax savings from short term capital loss: $135
State/local tax on interest is zero
State/local tax savings from the capital loss: $53 (same warning about long term capital gains).

Totaling up these numbers, you end up earning $110 after taxes. This is an 0.7% effective interest rate at 5 months, or 1.7% on an annual basis. To earn this from a CD, you'd need one paying 1.15% for the 5 months, or 2.8% annually. Right now, I couldn't get that even for a 5 year CD. The long term capital gains might become an issue for me though...I've got a stock index fund in taxable that generate a small amount of long term capital gains when the yearly dividend comes around.

Very nice benefit considering treasuries are the preferred instrument anyway.

Thanks for sharing.

I used Sophie’s “tax trickery” with high coupon short term Treasurys a couple of years ago. We sold our old house and had to park the proceeds in something cash-like for a short time while we finished building a new house.

An additional consideration was that the amount of cash we parked exceeded the FDIC covered account limit of $250,000. I did not want the hassle of opening another account with another FDIC-insured bank or brokerage just to be sure we were covered.