Are free trades for treasuries really free?

[jason]

Both Fidelity and Vanguard say they offer free trades for treasuries.  But are these trades really free, in the sense that aren't there markups somewhere when you buy and sell?  For example, let's say today I buy 100 30 year treasury bonds through Fidelity's bond trading desk (not auction).  Let's say tomorrow I sell 50 of them, and I instantly take the proceeds and buy back the exact same bonds.  If, hypothetically, the price of the bonds does not change between the instant I sell and the instant I buy them back, will I be able to buy all 50 bonds back, or will I have 49 or 48 in the end, due to losing a little bit when I sell and a little more when I buy back?  When Fidelity shows me the value of my bonds in my portfolio, they display the "third-party price".  That price is always below the bid and ask prices.  The bid is the price someone is actually willing to pay, so the fact they are quoting me a price that is lower than the bid indicates to me that I will get a little bit screwed when I sell the bonds.  I also get the feeling that I don't pay the third-party price when I buy.  I'm guessing I pay something around the ask price.  But I really don't know.

[notsheigetz]

But I really don't know.

I don't really know either but I suspect that trading treasuries for free is at least as much about sucking up to the government as it is about pleasing customers.

[Austen Heller]

Yep, they are pretty much free.  Of course there is a bid-ask spread with all these things, but it's extremely small with treasuries.  I was looking at this earlier today, and a bond I had just bought auction was selling at a yield of 0.003% more on the secondary market.  So the spreads are pretty small.  If you want to get the absolute best deals, buy everything at auction, and then let them mature.  Otherwise you're paying the spreads, tiny though they may be.  You won't be "getting your face ripped off" trading these things, it's always talked about as the MOST efficient market in the world.

[jason]

Yep, they are pretty much free.  Of course there is a bid-ask spread with all these things, but it's extremely small with treasuries.  I was looking at this earlier today, and a bond I had just bought auction was selling at a yield of 0.003% more on the secondary market.  So the spreads are pretty small.  If you want to get the absolute best deals, buy everything at auction, and then let them mature.  Otherwise you're paying the spreads, tiny though they may be.  You won't be "getting your face ripped off" trading these things, it's always talked about as the MOST efficient market in the world.

Thanks.  I am specifically looking to tax-lost harvest since my treasuries are down over 4%.  I'm not sure it's worth it if I am going to get dinged on the sell and dinged again when I buy them back (I will buy back a different maturity date so the wash sale rule does not apply).  If it were 100% free, I would definitely do it.  I wish I knew exactly what it would cost me.

[dragoncar]

You might end up accelerating some interest payments... Not sure how the taxes work on accrued interest

[Austen Heller]

You might end up accelerating some interest payments... Not sure how the taxes work on accrued interest

Good point.  You will pay taxes on the accrued interest, but you would have paid this eventually anyway if you had just kept the bond.  It may complicate your tax returns a little bit though, let me give an example:

If you're halfway through the interest accrual period (say 3-months into the normal 6-month accrual period), you will receive 3-months worth of interest upon selling the bond.  This is simple to understand.  But then if you immediately bought a similar bond back, you would pay the seller his of 3-months worth of accrued interest, and then in 3 more months you would receive the entire 6-month interest payment.  However, I have seen examples of people on the TurboTax website complaining that brokerages often report that you received the whole 6-month interest payment , but they don't account for the fact that you already paid out accrued interest to the bond seller.  So then the numbers on your tax return won't match what your brokerage has reported to the IRS.  I'm not sure how much of a problem this would be, but I sure wouldn't want to do something that risks the hassle of an audit.

Thanks.  I am specifically looking to tax-lost harvest since my treasuries are down over 4%.  I'm not sure it's worth it if I am going to get dinged on the sell and dinged again when I buy them back (I will buy back a different maturity date so the wash sale rule does not apply).  If it were 100% free, I would definitely do it.  I wish I knew exactly what it would cost me.

Returning to the original subject, whether trading treasuries is 'free', I just checked the buy-sell spreads for trading treasuries maturing in 2040 or later, and the spread is about $0.07 for every $100 of bonds traded, or 0.07%.  So if you're selling & then buying back $100,000 worth of bonds, it will cost you $70.  Not as 'free' as I had thought it was.

[Gumby]

When you purchase bonds through a brokerage, such as Fidelity, the bonds are typically held in the brokerage's "street name" registration.

http://www.sec.gov/investor/pubs/holdsec.htm

In other words, the bonds are registered in the brokerage's name, and they act as a custodian for your bonds. You are the "beneficial owner" only in their internal records. I believe that means your brokerage house may "borrow" your bonds for their own lending purposes, and there is always a small amount of counterparty risk with this arrangement.

So, I believe this is how the brokerage is able to offer "free" Treasury trades. You're basically buying assets for the brokerage's own use as far as I can tell. You absolutely have a legal right to those bonds. But, it just illustrates that all brokers have small amounts of counterparty risk.

Furthermore, some brokerages may delay "street name" coupon payments to you on a delayed schedule that benefits them.

[Tortoise]

When Fidelity shows me the value of my bonds in my portfolio, they display the "third-party price".  That price is always below the bid and ask prices.

You sure about that? I looked up one of my bonds in Fidelity just now, and the listed third-party price is higher than the bid and ask prices (by about 0.4%). I've seen it both ways.

Per Fidelity's web site, the third-party price is just an analytical estimate that is updated by the third party only once per day. It is not an actual real-time market price:

Third-Party Price

Third Party Price: depicts a security’s price formulated from a 3rd party vendor’s proprietary pricing methodology. To establish this modeled price, a host of factors such as recent trade activity, size, timing, and yields of comparable bonds are used. In the case of a comparable bond comparison, the vendor assigns a "fair market" yield to the security, then extrapolates a representative price based on the fair market yield assigned. In many cases, this modeled price provides price discovery and transparency for bonds that may not have traded for days, months or even years. Understandably, in scenarios where a security hasn’t traded recently, attempting to accurately predict the “market price”? can be a challenging endeavor. Nevertheless, the vendor prices bonds on a daily basis. Please Note: Given the nature of the modeled pricing provided, it is not accurate to characterize such pricing as a “closing price”? or to suggest that the price was based on specific recent (prior day's end of day) trading activity.

Source: https://scs.fidelity.com/webxpress/help ... partyprice

[Xan]

I've been toying with the idea of doing a Vanguard bond ladder for my cash holdings instead of holding VGSH.  It'd be, say, six-month T-bills.  This would lead to a high frequency of bond transactions.  Would I end up losing my shirt to the spread if I were to do this?

[rickb]

I've been toying with the idea of doing a Vanguard bond ladder for my cash holdings instead of holding VGSH.  It'd be, say, six-month T-bills.  This would lead to a high frequency of bond transactions.  Would I end up losing my shirt to the spread if I were to do this?

If you buy 26-week bills at auction and hold them to maturity seems like there's no spread involved whatsoever.

[Xan]

Oh, of course!  I forgot about just getting them at auction.