Treasury Bills: Rate Tracking, Discussion, and FAQs

Thanks mariojm

ruthiesb said: mariojm: haven't balked out of the guniea pig role...still continuing with experiments on using C o I and banks like HSBC, ING, emigrant, etc. I have no bills to redeem yet...only the C of I balance which I will try to transfer this week [no holiday shortening week]

ruthiesb: what happened with your experiments of transfering the change left in a C of I to a bank account? How long was the hold time?

Engineer said: Many economists were suprised by the Fed's action and/or remarks. Just look at the stock market yesterday to see the suprise (I'm in the black again for the year in my 401k plan! ).

I've been very busy and will be over the next few weeks as a hot job needs to be finished and shipped and the vendor isn't helping me one damn bit!

I look for a flat to slightly down auction this week. Maybe 5.30% APY. Here's hoping I'm wrong!

Look for a sharp drop in the 4 week bills based on the rather large drop on the daily yeild curve of 4 week treasuries. Hopefully, the earnings being tax deferred for an extra year will be nice.

That's CD sure does sound nice Mario!!!Should we really believe BB? He seems to be seesawing as new data rolls out. Never know what he'll say next week that will start the market sliding the other direction. My hunch is rates will have to go up in August, and I do suspect there is a little game of chicken being played with other central banks.

However, for purposes of tax deferral, tomorrow seems to be the best day. I just have a stubborn feeling rates will still go up (to offset a falling dollar? not sure), maybe it is a good idea to ladder?

BTW, have a good one tomorrow!!

RagingBull said: So is today the first day that we can finally purchase the new 6 months treasury bills?

Today is the first day that we can but 6 month T-bills that will mature in 2007 therefore avoiding tax on the earnings until 2008.

76hhma said: I have $10K to put in 6-month TB, I will do it this week and the next ($5K each time).I decided to do the laddering approach also (each week in July), instead of all in today. I believe rates will continue to rise, either tbills, CDs or some other instrument in the coming weeks/months.

Here's an article written after the BB rate hike announcement a few days ago that imo raises doubts the Feds will pause in August....

davef139 said: Term: 91-Day Bill
High Rate: 4.955 %
Investment Rate*: 5.088 %
Price: 98.747486
Issue Date: 07/06/2006
Maturity Date: 10/05/2006

Term: 182-Day Bill
High Rate: 5.090 %
Investment Rate*: 5.297 %
Price: 97.426722
Issue Date: 07/06/2006
Maturity Date: 01/04/2007

Its down on the 6mo

Thanks Dave!

Engineer got it again.

My laddered approach seems to work, too.

oops...already posted!

The FED came in on soft language and drove the rates down in anticipation of a pause. Oh well, at least I don't have to pay taxes until 2008 on the earnings!

5.37% yield on the 6 month T-bill!

(Use the spreadsheet to get your specific tax equivalent yeilds by typing the 5.297 Investment rate and 182 days into the cells)!

From the spreadsheet for you California boys (to copy from the sheet, drag your mouse to highlight the cells and hit <ctrl><C> as you can't select "copy" from the right click menu)

Taxable Equivalent Yields @
State rate 9.30%
Term = 182
Rate = 5.297%
Yield = 5.367%
Non-Itemizers @ 6.027% at 15% Federal
Non-Itemizers @ 6.127% at 25% Federal
Non-Itemizers @ 6.163% at 28% Federal
Non-Itemizers @ 6.232% at 33% Federal
Non-Itemizers @ 6.264% at 35% Federal

Itemizers @ 5.918% all Federal Rates


3 month T-bills for California!

Taxable Equivalent Yields @
State rate 9.30%
Term = 91
Rate = 5.088%
Yield = 5.186%
Non-Itemizers @ 5.823% at 15% Federal
Non-Itemizers @ 5.920% at 25% Federal
Non-Itemizers @ 5.955% at 28% Federal
Non-Itemizers @ 6.022% at 33% Federal
Non-Itemizers @ 6.052% at 35% Federal

Itemizers @ 5.718% all Federal Rates

NEW YORK (AP) -- The nation's manufacturing sector expanded at a slower rate than expected in June and construction spending plunged in May, reinforcing the belief of some analysts that increasing sluggishness in the economy will prompt the Federal Reserve to pause at last in its credit-tightening regime.

Economy slowing. The FED apparantely is thinking the slowing economy will slow inflation enough to possible pause!?!?

(Above a quote from a Yahoo AP news story).

delete

DreamR2I said: ...

Beware the hikes of March

Maybe that's what julius caesar thought he heard the passerby say

Since I live in California T-bills make a lot of sense. I'm currently getting 5.03% in a money market and I can afford to have funds tied up for a month and maybe even 6 months (still deciding based on a future purchase of a home). I appreciate the info in here. I even went to Borders today to read up on treasury bills but there really wasn't much out there. There seems to be a ton of books on bonds and none on treasury bills. At best I found a few pages devoted to them.

I have a few quick questions.

If I buy T-bills out of my money market and then have them transfered back into my money market account, will it happen with no lag so that I don't lose a day of interest or how will that work? I see that some people are buying from their moneymarket initially, depositing the matured funds into the CoI and then buying their next t-bill the same day out of the CoI. That would leave the interest (or a portion of it) from your previous bill behind earning 0%. Since I plan on having funds in my moneymarket just in case of an emergency, it seems to me that I might as well just be buying/depositing t-bills out of it so that I maximize the interest.

Is this correct or am I making this too difficult?

scott1961 said: astrocase said: I appreciate the info in here. I even went to Borders today to read up on treasury bills but there really wasn't much out there. There seems to be a ton of books on bonds and none on treasury bills. At best I found a few pages devoted to them.

A few months ago I also started to consider T-Bills but gave up as I could not find much on them. The quick summary in this thread has been very helpful and have learned a lot from it. I still have a couple of questions, What is the difference between the Treasury Direct and Legacy Treasury Direct Accounts? I assume it is the Treasury Direct I open? And can you list a beneficiary on this account? Figure I would link my checking account to it so I can make unlimited withdrawals while still getting a high rate, Now at 5.44%. Figure living here in MA with only a 5.3% tax will not get the advantage that you people in CA get but like the fact you don't have to worry about FDIC limits. If I were to open an account today (7/5) would it be ready to participate in 7/10 auction? TIA

I can answer some of your questions if not all:
1. Treasury Direct is the thing everyone here refers to. No need to worry about Legacy Treasury Direct.
2. I don't see a way to add beneficiary but you can specify it as a gift to anyone. And you can add a co-owner on bills/notes/bonds level.
3. Sure you can link your checking account as both source/target accounts.
4. You can participate in an auction right after you open the account. Just make sure you open it before 12:00pm on 7/10. (Of course you may want to do it a little bit earlier, right?)

And one question for you, I also live in Mass area. Where did you get the 5.44% checking account? Sounds an terrific deal. TIA

scott1961 said: ays05 said:

I can answer some of your questions if not all:
1. Treasury Direct is the thing everyone here refers to. No need to worry about Legacy Treasury Direct.
2. I don't see a way to add beneficiary but you can specify it as a gift to anyone. And you can add a co-owner on bills/notes/bonds level.
3. Sure you can link your checking account as both source/target accounts.
4. You can participate in an auction right after you open the account. Just make sure you open it before 12:00pm on 7/10. (Of course you may want to do it a little bit earlier, right?)

And one question for you, I also live in Mass area. Where did you get the 5.44% checking account? Sounds an terrific deal. TIA
Thanks for the answers, I thought I had read somewhere about people having to mail something in before being able to buy. The checking account I have is no longer available under the terms I have, New accounts get one-month Libor rate minus 1/2 point. Still not bad at 4.94%. Is at Salem Five

The thing people have to mail in is the account authorization form. Basically it's your signature card certified by a financial institution's officer. It's not required for purchase but may be needed for redemption. ( I am sending mine out today. )

astrocase said: Since I live in California T-bills make a lot of sense. I'm currently getting 5.03% in a money market and I can afford to have funds tied up for a month and maybe even 6 months (still deciding based on a future purchase of a home). I appreciate the info in here. I even went to Borders today to read up on treasury bills but there really wasn't much out there. There seems to be a ton of books on bonds and none on treasury bills. At best I found a few pages devoted to them.

I have a few quick questions.

If I buy T-bills out of my money market and then have them transfered back into my money market account, will it happen with no lag so that I don't lose a day of interest or how will that work? I see that some people are buying from their moneymarket initially, depositing the matured funds into the CoI and then buying their next t-bill the same day out of the CoI. That would leave the interest (or a portion of it) from your previous bill behind earning 0%. Since I plan on having funds in my moneymarket just in case of an emergency, it seems to me that I might as well just be buying/depositing t-bills out of it so that I maximize the interest.

Is this correct or am I making this too difficult?

Treasury bills are nothing but a special name for short term, zero-coupon bonds. Treasury "bills," "notes," and "bonds" are all types of bonds with different time spans from issue to maturity. So look for zero-coupon bond as the closest generic bond example to T-bills. Most books will probably talk about bonds with longer term, for long term investors. One thing to note about Treasury bills is that the usual bond talk about inflation doesn't apply because of their short nature. They are driven very much by Fed action and not future inflation expectations. By the way, the TreasuryDirect website has quite a bit of information about them too.

To answer your more specific question, yes there is zero lag in transfer of the funds. True, it'll leave some portion of the interest behind; you can transfer it back to your MMA of course. (may need to wait for a week to withdraw) I'm guessing it will impact your overall rate of return very little. But yes, if you leave sufficient funds in your MMA you can cycle between your MMA instead of CoI and it should deposit the old and withdraw the new the same day (however, I wouldn't count on the old funds to cover the new from the MMA; have sufficients funds in addition, to cover new one).

Here is a little more info I gathered on fed funds forecasting in recent days (I figured this is applicable because it's the main driver for T-bill rates). Of course, the FRB of Cleveland already does this for us quite nicely every day. But, the curious nature in me still wants to understand how they are coming up with their probabilities. Also, their data is always from the previous day I want to evaluate present day information.

I've posted some of this info before but didn't quite appreciate all the details... so, if you have a simple 2-way probability for a fed action ("keep at old rate OR" or "raise/lower to new rate NR") the math is fairly straightforward. In this case, just the FF futures can be used (for instance from here). Turns out that it's one equation in one unknown, that being probability "p" for the rate to move to NR, and the corresponding probability for the rate to stay at OR being (1-p).

Something that I didn't understand before was which futures contract to use. June was straightforward - for June 29, use July futures contract (because July FF futures rate depends on June 29 decision). But what about August 8? Use August? September?

So, I found a FF futures reference guide which discusses the issue. Turns out the FF futures are initially (before the contract month) based on future expecations of the rate, but the final settlement value of the contract then becomes 100 minus the arithmetic average of the daily effective FF rates for all days in the contract month. So if a federal reserve meeting falls somewhere in the middle of a month, it'll be a blended rate of the old and new fed funds rate. So to calculate the probability, you also need to include the date of the FOMC meeting in the calculation.

So I did a little math based on above named reference guide and here is what I came up with: (this applies for anytime a meeting falls in the first half of a calendar month):

p = M(100 - FFF - OR)/((NR-OR)*(M-D))

where:
OR ... old rate before FOMC meeting in %
NR ... expected new rate after FOMC meeting in %
p ... probability to move to NR (expressed as fraction)
(1-p) ... probability to leave at OR
FFF ... FF futures contract value for the contract month of the meeting
M ... number of days in contract month
D ... day of the month of the meeting, D <= M/2

If the meeting falls in the second half of the month, the reference guide suggests to use the following month's FF futures contract value. Since the meeting occured in the prior month it's the same as setting D to zero in the above equation. It would then be calculated as follows:

P = (100 - FFFN - OR)/((NR-OR)

where:
FFFN ... FF futures contract value for the contract month after the meeting
subject to D > M/2.

The derivation of these equations is left as an exercise.

Here is an example for today:

We'd like to predict August 10 meeting: D = 10, M = 31
Since the meeting falls in the first half of the month we need to look at August FF futures.
The current value at CBOT is listed as: FFF = 94.635
We assume the target fed funds rate at the beginning of August will be the same as now: OR = 5.25%
We assume the only possible change is a 25 bps rise: NR = 5.50%

p = 31*(100 - 94.635 - 5.25)/((5.50-5.25)*(31-10)) = 0.68

I.e. the implied probability of a rise to 5.50 is 68%
The implied probability of the rate to stay at 5.25 is 32%.

The limitation, of course, is that we only have 2 possible outcomes that we allow. We must know the old rate (which would be difficult for a meeting anytime after the next) and have confidence in the only possible outcome for a potential new rate, i.e. raise 25 bps, lower 25 bps, etc. By the way, the equations work for both rate increases and decreases. If we need to include additional outcomes, the math gets a lot more difficult and we need to also look at FF options values and their volumes. Not very pretty, but the details are described in this Binary FF futures user's guide. The beginning of that publication was a pretty interesting read, actually. It contained quite a bit of info what the FF rate actually is and how the effective FF rate differs from the targeted FF rate. I'm copying a section of it here for your reading pleasure:

Effective FFR

The overnight federal funds rate (FFR) is the cost of an unsecured, uncollateralized loan of
immediately available federal funds for one day. Federal funds are borrowed and lent by US
domestic financial institutions, chiefly commercial banks and thrifts, to adjust reserve positions or
to make day-to-day payments. The distinguishing feature of federal funds is that the lender can
make them available to the borrower immediately, rather than on the following business day (the
standard settlement lag in the government securities market) or two business days later (the
standard settlement lag in the market for interbank Eurodollar placements).
FFR is quoted on an add-on basis, with a daycount convention of actual/360. As in any financial
market where credit quality varies from one borrower to the next, quoted bid/offer spreads and
transacted rates may vary among institutions.
Effective FFR for any given day is the average – weighted by trading volume -- of rates on all
transactions in overnight federal funds arranged that day by major interbank brokers. Effective
FFR is calculated and published by the Federal Reserve Bank of New York, using data provided by
the interbank brokers.

Target FFR

Monetary policy is set by the Federal Open Market Committee (FOMC) and, in recent years, is
expressed in terms of Target FFR. Since February 2000, the FOMC’s standard practice has been
to issue a statement, around 2:15 pm Eastern time on the final day of each regularly scheduled
meeting, declaring the level of Target FFR that the Committee aims to achieve until its next
meeting.
Once announced by the FOMC, Target FFR then guides the manager of the System Open Market
Account (SOMA) in determining the tactical execution of monetary policy. The SOMA manager,
working through the trading desk of the Federal Reserve Bank of New York (FRBNY), executes
open market operations -- primarily purchases or sales of Treasury securities or, more commonly,
temporary repurchase agreements or reverse repurchase agreements -- that raise or decrease
the supply of nonborrowed reserves available to the banking system. The objective of these
tactics is to keep the supply of nonborrowed reserves in balance with the banking system’s
demands for immediately available funds, such that Target FFR emerges as the market’s
equilibrating rate.

The only question left to ask is, can Engineer build us a real time use FF probability spreadsheet for a 2-way outcome? Of course, it's nice that the FRB cleveland already has one on their website for multi-outcome but it looks infinitely difficult to use.

I guess with those probabilities the question is whether I should start putting money into 6 mo t-bills or just do some 30-90 day ones?

76hhma said: Thanks Mario.

We EE use Kalman filtering for such prediction tasks, which usually leads us to nowhere

/no exercise for me today/

Fancy, fancy. We ME's just take a wild guess and then use a sufficiently high safety factor, aka fudge factor, to eliminate all uncertainty.

Ok, since Mr. Engineer is working long hours these days, and it looks like my mathematical models were not sufficiently appreciated, () I decided to take it upon myself to also show off my spreadsheet art. After all, I'm an aspiring young engineer who wants to be mentioned in the leagues of our very own Engineer one day.

So now, without further ado, I present to you the Target Federal Funds Rate Predictor spreadsheet.

Notice there are some values to be filled in from links at CBOT. Unfortunately, I couldn't figure out tonight if and how to make them clickable links in the spreadsheet program. So for now you'll have to copy and paste them. Note that the URLs update based on the month entered.

mshen11 said: notice a pattern the feds are in: they always sound soft about the next rate hike (presumeable to prevent further steep drops in the equitities market) - and they achieved the desire the result last week.

the market seems to be pretty dumb - its been a repeating pattern where a bit down the road, the feds will start pushing for another hike.

most people outside of the general public and news media seem to think this is not the end and there will not be any pauses.

This is a very good observation.

The same-old rate hike concerns (for August) are coming back to the market last Friday ...again.

That is one of the tactics how Fed micro-steers for a "soft-landing" of the economy, I guess.

This might be way off topic, but has anyone looked at foriegn T-bills? Mexico for example has yeilds above 7%. With my current mentality I would never dream of putting my money into a Mexican T-bill but someone might know more about foriegn markets.