Managing IT Treasury allocation

Discussion of the Bond portion of the Permanent Portfolio

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Lonestar
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Managing IT Treasury allocation

Post by Lonestar » Fri Apr 08, 2016 12:36 pm

I'm trying to keep my fixed income allocation based around 5-7 year maturity.  I'm holding IT Treasury funds, ETF's, and also some individual bonds.

I'd like to increase my individual bond holdings and since I buy/sell through Fidelity there are no transaction costs.  My questions is: if for example I want to maintain a 5 year maturity would there be any disadvantage to just buying a 5 year treasury at the beginning of each year, selling it at the end of the year, and re-purchasing another 5 year bond?

The only other way I can think of would be a 10 year ladder, but I really don't want to go through the bookkeeping of that.
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Re: Managing IT Treasury allocation

Post by mukramesh » Fri Apr 08, 2016 1:15 pm

I was once told by a forum member named Joe that commissions aren't the only type of charge. Brokerages can also apply a markup on treasury transactions. I am also with Fidelity and am not exactly sure if they apply markups to treasuries on the secondary market.

For that reason, it may be slightly better to just go with the treasury ladder so you can reduce transaction costs that appear in the form of a markup. Maybe other members have more info?
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Re: Managing IT Treasury allocation

Post by dualstow » Fri Apr 08, 2016 1:23 pm

There may be a disadvantage, but I'm unaware of it myself. I'd probably be reluctant to sell at a loss at the end of the year if rates have risen, and would probably just prefer to buy ticker IEI and ignore it. But, I see that you explicitly said you want to increase individual bond holdings.

(What I actually do in practice these days is to buy 5-year-notes and hold them to maturity, but of course that won't give you the duration you're looking for).
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Re: Managing IT Treasury allocation

Post by Lonestar » Fri Apr 08, 2016 1:40 pm

mukramesh wrote: I was once told by a forum member named Joe that commissions aren't the only type of charge. Brokerages can also apply a markup on treasury transactions. I am also with Fidelity and am not exactly sure if they apply markups to treasuries on the secondary market.

For that reason, it may be slightly better to just go with the treasury ladder so you can reduce transaction costs that appear in the form of a markup. Maybe other members have more info?
You've got the bid/ask price so how could there be anymore markup?  At any given time you know what you can buy it for and what you can sell it for.  If they markup the ask then they are marking up the bid price.  A wash??
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Re: Managing IT Treasury allocation

Post by Lonestar » Fri Apr 08, 2016 1:50 pm

dualstow wrote: There may be a disadvantage, but I'm unaware of it myself. I'd probably be reluctant to sell at a loss at the end of the year if rates have risen, and would probably just prefer to buy ticker IEI and ignore it. But, I see that you explicitly said you want to increase individual bond holdings.

(What I actually do in practice these days is to buy 5-year-notes and hold them to maturity, but of course that won't give you the duration you're looking for).
Selling at a loss is what I'm wrestling over.  But is it different than where you are holding a ETF/fund and rates go up.  You loose money on decreasing NAV but increase yield.  Any difference on the paper loss of that and the real loss of an individual treasury sell if you are going to immediately re-invest the loss.  You take a hit but you reinvest at the higher yield.  Am I going off the wall on this??

You are probably right on just buying the 5 year and holding.

I do hold IEI and honestly that's the most simple way to look at it (or FIBAX).
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dualstow
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Re: Managing IT Treasury allocation

Post by dualstow » Fri Apr 08, 2016 1:52 pm

Lonestar wrote: But is it different than where you are holding a ETF/fund and rates go up. 
No, you're right. As far as I know, the difference is only psychological.
This comes up all the time at the bogleheads forum.
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Re: Managing IT Treasury allocation

Post by Lonestar » Fri Apr 08, 2016 2:05 pm

I'll see if I can search out a thread over there.  Don't recall seeing it.  I've talked with the guys at the fixed income dept at Fidelity and they kinda sound like they think I'm crazy.  BUT, they can't give a good answer as to why not.

I doubt they encounter folks that are this concerned with maintaining a fixed duration in their portfolio.  If they do, they buy funds or ETF's.

I've thought about a 3 to 7 year ladder, but that still leaves the possibility of selling the 3 year maturity at a loss.
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Re: Managing IT Treasury allocation

Post by dualstow » Fri Apr 08, 2016 2:50 pm

What I should have asked at the beginning was, "Why do you want to maintain a maturity of 5-years?" I assume this is outside of your pp? The reason I can get away with holding my notes to maturity is because it's not supposed to be an average of 5 years anyway. (I've mostly got 3-years left in the cash quarter of my pp. 5- and 7-yr notes in the vp get moved over to the pp's cash section sometimes when there are 3 or fewer years left on them).
Lonestar wrote: I'll see if I can search out a thread over there.  Don't recall seeing it.
It's not that they have any great strategy for you to follow. They just explain, as rickb has done around here, that buying and holding bonds is not necessarily better than holding a fund. (Yes, it may be better if the fund turns out to be run by a bad organization, but with respect to rising rates, it doesn't really matter).

I've talked with the guys at the fixed income dept at Fidelity and they kinda sound like they think I'm crazy.

No, they just wish they could get some kind of commission out of you.  ;)
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Re: Managing IT Treasury allocation

Post by Lonestar » Fri Apr 08, 2016 5:06 pm

It's in my VP which is a 30/70 allocation.  Equities are all index funds.  The backtesting I've done shows a 5-7 year FI maturity gives me the risk profile and volatility I'm looking for.  Shorter maturity decreases my CAGR and longer maturity increases risk.  To be candid I'm probably way over thinking this whole thing.

I have seen the threads on Bogleheads regarding bond funds vs. individual bonds, and I agree that it probably makes no difference.  In fact funds and ETF's offer the convenient re-investment benefit.
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Re: Managing IT Treasury allocation

Post by Austen Heller » Sat Apr 09, 2016 3:27 pm

Here are the reasons I can think of to maintain your own treasury bond ladder:
- You save the expense ratio (0.1% or 0.15% depending on the funds/ETFs).
- You control exactly which securities are held (100% treasuries, no other securities like MBS).
- You can buy at auction, so no bid/ask spread there.
- You control when securities are sold, if at all (you can just let them mature, or only sell once the capital gains have become long-term).

It does take a little extra bookkeeping effort compared to just buying IEI or VFIUX.  You have to decide how much your time is worth.
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Re: Managing IT Treasury allocation

Post by dualstow » Sat Apr 09, 2016 5:00 pm

I like Desert's quotes in this thread. Semi-relevant.
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Re: Managing IT Treasury allocation

Post by mukramesh » Mon Apr 11, 2016 12:22 pm

This message states that Fidelity does add a markup to bonds purchased on the secondary market. I assume this is placed on the Bid/Ask price listed.

https://www.fidelity.com/about-fidelity ... -investors
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