Danger of Bond ETF's vs Direct Purchase

[christina]

Thanks, CA PP! I can see the bond you mention in the list from scotia itrade. Yes, this is a much better option than ZFL.

[Tortoise]

This is very discouraging. Nothing is simple!

I know what you mean. This latest can of worms is making me feel like I need to go back to school to get degrees in both law and finance just to understand exactly what the hell is going on with the funds I own.

The legal gobbledygook in these prospectuses and SAIs makes me want to cry sometimes. Okay, maybe not cry. But definitely frown.

[dualstow]

Sorry for the late reply. Just saw this.

dualstow,
...
Can you give me (or direct me to) a rundown on how to buy these on Vanguard.  My dad has a lot of his money tied up in TLT on Vanguard and I want to pull a good chunk out and leave TLT just for trading purposes on the top end.  How much is it?
...

You mean how to hold treasurys directly at Vanguard? I haven't bought them there yet, only Fidelity, but you can click through in this order:

Research Funds & Stocks > Stocks, Bonds and CDs > {click account from which you wish to buy the treasurys } > { from here, you will see two links below "Treasuries": At Auction, and Secondary.

[WildAboutHarry]

Thoughts on investments with little or no counter party risk (order not significant):

1) physical gold/silver/platinum et al. (physical wheat, pork bellies, oil, etc. have storage issues)

2) Federal Reserve Notes

3) a low-interest rate mortgage (inflation hedge)

4) Treasury bearer bonds (I don't think these exist anymore)

5)  FDIC insured deposits

6) Savings Bonds (paper somewhat better than electronic)

7) Treasury bills, notes, bonds held with Treasury Direct

livestock (the smiley was unintentional, but appropriate!)

9) the means of production

10) ?

[craigr]

just to be clear, physical doesn't mean they're not lent out. To wit, see this correspondence:

Very true. But this is the reality of using funds vs. owning directly. For long term bonds owning directly is simple and pain free. For a little more time upfront to get it going you don't have to worry about these things. For cash though it becomes more complicated.

But iShares continue to be the least worst option compared to others.

[AdamA]

For cash though it becomes more complicated

Why is it more complicated?  Why not just buy 1 year T-bills?

[craigr]

For cash though it becomes more complicated

Why is it more complicated?  Why not just buy 1 year T-bills?

Completely doable depending on how your brokerage can handle it. I end up just using funds for the convenience.

[stone]

Wild about Harry "Thoughts on investments with little or no counter party risk (order not significant):"

I suppose in a true SHTF scenario the only asset with any value is the goodwill of your neighbours. Anything else will be seized

[WildAboutHarry]

Back to the OP's original point:

1) Is the loaning of fund holdings by TLT et al. a big problem?  Big enough to render the fund less-than-useful for PP purposes?

2) If #1 is a big problem, is it worse than Vanguard loading up to 20% of fund assets in non-treasury stuff (but not loaning fund assets)?

[moda0306]

My 2 cents:

1) I'm not all that sure... TLT survived 2008.  It pisses me off more on principal than actual knowledge of risk figures.

2) I'm starting to wonder that myself.

Not very useful answers... sorry.

[WildAboutHarry]

Presumably TLT's loan of securities is "secured" by something of equivalent value.

How has TLT reported annual income?  Is it all derived from treasury holdings or is there a fraction that comes from other sources and thus is subject to state income tax?  Any taxable TLT holders out there?

[dragoncar]

Someone please explain why my newly purchased 30 year treasuries are down 1.5% today while tlt is up 2%.  It's not because of a coupon payment (issue date 8/15, first coupon 2/15/12 unless fidelity is lying).

This is really disturbing... Perhaps the bond market isn't as liquid as we'd like?

[Gumby]

Someone please explain why my newly purchased 30 year treasuries are down 1.5% today while tlt is up 2%.  It's not because of a coupon payment (issue date 8/15, first coupon 2/15/12 unless fidelity is lying).

This is really disturbing... Perhaps the bond market isn't as liquid as we'd like?

That's yesterday's results. They haven't updated today's price for each bond yet. Should be there in the morning. If you're looking at your portfolio in Fidelity, only the yellow/highlighted assets represent today's change.

[WildAboutHarry]

Someone please explain why my newly purchased 30 year treasuries are down 1.5% today while tlt is up 2%

I see the 2041 bond up over 2% today, like TLT.

See here.http://online.wsj.com/mdc/public/page/2 ... nav_2_3020

Coupon payments do not typically impact the price of the bonds or bond funds. 

[dragoncar]

Thanks, I did end up figuring it out eventually...  I don't understand why nobody offers a daily/whatever chart for each bond.  It's not like we don't have the hard drive space to store it!  Maybe it's out there and I just haven't found it.

I never pay attention to yellow... just red and green :-)

I don't like how my "real" treasuries underperformed TLT yesterday and perfectly tracked TLT today.

Speaking of coupon payments, that accrued interest thing threw me for a loop when I bought the bonds, so I should have remembered (I couldn't figure out why I didn't have enough funds)

[WildAboutHarry]

I don't understand why nobody offers a daily/whatever chart for each bond.

The link provided above takes you to tables that show the 3pm eastern time price, etc. for every treasury issue (there is a table for Notes and Bonds and a separate table for Bills).

[Gumby]

I don't like how my "real" treasuries underperformed TLT yesterday and perfectly tracked TLT today.

You're also comparing the daily price movements of a 20-30 year ladder with a single bond. I don't think you can worry about short term inconsistencies. These individual bonds tend to closely zig and zag with each other, over time. But, they don't all move in perfect lock-step together.

For instance, yesterday was a POMO day (Permanent Open Market Operations) for the Federal Reserve.

They publish a list of the settlements from their purchases (and sales).

http://www.ny.frb.org/markets/pomo/disp ... rtype=orig

If you search through the long list of purchases, you will see that the Fed bought some specific long term bonds, among others. They targeted each individual bond in different ways. These bonds were announced, in advance, and it affects the way Primary Dealers and bond traders buy and sell those specific long term bonds on those POMO days. It's basically free money for Wall Street bond traders who ride the wave of Fed purchases — although, really anyone can see the Fed's POMO purchase lists/schedules.

The moral of the story is that TLT is a 20-30 year ladder, and it's not going to move exactly the same way as your single long term bond. But, over time, it's all going to even out as the Fed diversifies its bond portfolio with each scheduled POMO day.

In other words... you don't need to worry about such short term inconsistencies. This is just how the market works on a daily basis.

[Austen Heller]

Found this topic while searching for info on securities lending within iShares TLT, and I just wanted to comment that the problem seems to be even worse with other treasury ETFs of theirs, such as the iShares 3-7 year Treasury ETF (ticker IEI).  Last year, IEI only received 9.58% of its income from US gov't obligations .  This could be a real shocker if you had invested in this treasury ETF and were expecting that the interest payments would be exempt from state taxes; looks like less than 10% of them would be.

http://us.ishares.com/content/stream.js ... cation/pdf

Looks like the way to go with treasuries, if you're trying to maximize the state tax exemption, is to hold them directly, within a brokerage account or Treasury Direct.

Has anyone been able to shed any light on whether securities directly held within brokerage accounts (such as Vanguard or Fidelity) are subject to securities lending?

[Libertarian666]

Found this topic while searching for info on securities lending within iShares TLT, and I just wanted to comment that the problem seems to be even worse with other treasury ETFs of theirs, such as the iShares 3-7 year Treasury ETF (ticker IEI).  Last year, IEI only received 9.58% of its income from US gov't obligations .  This could be a real shocker if you had invested in this treasury ETF and were expecting that the interest payments would be exempt from state taxes; looks like less than 10% of them would be.

http://us.ishares.com/content/stream.js ... cation/pdf

Looks like the way to go with treasuries, if you're trying to maximize the state tax exemption, is to hold them directly, within a brokerage account or Treasury Direct.

Has anyone been able to shed any light on whether securities directly held within brokerage accounts (such as Vanguard or Fidelity) are subject to securities lending?

If you have a margin account, they can lend out your securities.