Treasurys for Sale

[dualstow]

Auction, Vanguard, Friday, November 22, 2019

treasury auction this morning

Screen Shot 2019-11-22 at 10.18.33 AM.png (92.83 KiB) Viewed 7822 times

[mukramesh]

Is there any advantage to buying at auction rather than the secondary market?

[dualstow]

Is there any advantage to buying at auction rather than the secondary market?

This has come up once or twice. The first time it ended with someone writing, "I guess some people just like that new bond smell."
The second time, I think someone said there may be a slight bargain in it over time.

[Tortoise]

The Treasury market is very liquid, so I doubt there’s much of an advantage of auction over secondary market.

If such an advantage existed, it would quickly get arbitraged away by big financial institutions.

[Kbg]

Main disadvantage...a small spread you will pay both ways and potentially a commission to pay

Main advantage...you can sell them before they mature

[dualstow]

Main disadvantage...a small spread you will pay both ways and potentially a commission to pay

Main advantage...you can sell them before they mature

I don't understand. What treasuries can you not sell before they mature?

[Kbg]

Secondary market you can buy and sell at will. So while you can buy on the primary market via your broker or TDirect, you can only sell early via the secondary market with a spread/and maybe a commission before maturity. If you buy on TD you have to wait until maturity or transfer the bills/notes to another account (brokerage) and then sell on the secondary market.

[dualstow]

Weird. I've sold at Vanguard a few times for free. If anything the price may be affected by the very small number of notes that I hold (opposite of a volume discount), but no fees. Sold at Fidelity, too.

I hold most to maturity and only plan to sell long bonds early, per Harry's and now Craig's instructions.
So far so good.

[Kbg]

I can guarantee you, if you are selling a bond before maturity you are paying a spread even if it is not visible to you. For those with larger accounts, commissions are usually not your largest cost of trade.

[dualstow]

I can guarantee you, if you are selling a bond before maturity you are paying a spread even if it is not visible to you. For those with larger accounts, commissions are usually not your largest cost of trade.

Why would that be dictated by whether you bought at auction or on the secondary market?

[Kbg]

I'll leave the googling/self-education up to you. It's easy enough to find.

[dualstow]

I'll leave the googling/self-education up to you. It's easy enough to find.

Hmm, so far I see this obvious part,

When you sell a bond before maturity, you may get more or less than you paid for it. If interest rates have risen since the bond was purchased, its value will have declined. If rates have declined, the bond’s value will have increased.

but I'll keep digging.

...
I see this - https://investor.vanguard.com/investing ... ary-market
which says there's no bid-ask spread for buying in the primary market (yup)

but nothing about selling a bond before maturity that was bought at auction vs one that was already used when you bought it.

Well, I'm not going to worry about it.

[Kbg]

I wouldn’t worry anymore than you would worry about a spread when selling an ETF.

[dualstow]

I wouldn’t worry anymore than you would worry about a spread when selling an ETF.

When selling a what now?

Just kidding.

[Kbg]

LOL

[Kriegsspiel]

which says there's no bid-ask spread for buying in the primary market (yup)

but nothing about selling a bond before maturity that was bought at auction vs one that was already used when you bought it.

Well, I'm not going to worry about it.

Since KGB wasn't very helpful, I'll offer a wild guess! I wonder if Vanguard uses a wider spread to get a bond from the primary purchaser into the secondary market to recoup higher associated costs. Then when they broker secondary market trades, their spread is smaller. That's how they make money without charging commission.

[dualstow]

hmm, makes sense.Maybe that’s it.

[Kbg]

Details of how this is done at your brokerage should be available from them via a disclosure. It may take some digging.

[Kbg]

Details of how this is done at your brokerage should be available from them via a disclosure. Finding it may take some digging.

The main point to all of this is that bonds also have bid/ask spreads just like stocks, ETFs, futures, options etc. Some brokerages are more transparent about it.

[Tortoise]

On the secondary market, I’ve noticed that sometimes smaller trades or odd-sized trades have higher spreads than the large trades involving nice, round numbers. Whereas at auction, I believe the size of your purchase makes no difference.

But for a PP investor who is trading bonds only a couple of times a year at the most, the secondary market spreads are negligible when viewed as an annualized “expense ratio.” Lower than most Treasury ETFs, I would think.