9/29/06 EDIT: Following the suggestions from several posters, this thread has been expanded to include discussion of all Agency/GSE bonds: short, intermediate, and long maturities; at auction, issued at par, as well as in the secondary market.
For an introduction to what Agency/GSE securities are, please see recent posts in the T-bill thread about this topic! More information about them will be added here in the future.
Treasury notes are part of a series of marketable bonds issued by the U.S. Department of the Treasury. They form the intermediate maturity terms of the Treasury securities, and are currently sold in 2 to 10 year maturity terms. (per definition, they would also include Treasuries issued for over 1 year maturities)
The objective of this thread is to share information about the strategies, merits, techniques, and details of investing in them. This thread complements the Treasury bills thread (short term government bonds) and TIPS thread (inflation-protected government bonds).
Why look at T-notes at this time? We're at a point where we see a change in Fed (FOMC) policy. At the last FOMC meeting, for the first time in 17 meetings, the fed decided not to raise the target fed funds rate further. The expected outcome (supported by previous history, and yield curve forward rates, and fed funds futures) is that eventually we'll see cuts in the fed funds rate, at which point the yield curve will revert and shorter term investments will become unattractive compared to longer term. The suggestion is not necessarily that now is a good time to invest in them, but to learn about them and find out when a good time might come. There is an active fed funds rate discussion in the FOMC thread.
Treasury securities are protected with the full faith and credit of the U.S. government and therefore almost risk-free. T-notes are sold at auction in intervals ranging from monthly to quarterly, depending on the maturity. Unlike T-bills, T-notes are not zero-coupon bonds in the sense that you have to wait until maturity for the interest to be paid. Rather, the coupon interest (i.e. face value times coupon rate) is paid out in semiannual payments. The coupon is set at or before the auction by the Treasury department (usually a multiple of 1/8th of a percent) and is different from the yield determined at the auction based on the bids. Therefore, the actual price paid is slightly more or less than face value, depending if the auction yield is lower or higher than the coupon.
Some issues are later "reopenend" in which case a coupon rate determined from a previous auction would be used, but the new yield can be far off, making the price of the reopenend securities often significantly different from face value.
T-notes can also be purchased or sold on the secondary market for different than auction prices. The most important concept for market prices would be that they move inversely with prevailing rates. The price adjusts because the coupon payment is fixed. The bond's price will adjust until the added or subtracted value from face value matches the difference between the future cash flows of the coupon rate and prevailing market rates.
Recent T-note auction results are shown here and daily market yields can be found here.
Like T-bills, T-notes are state and local tax free, and a tax-equivalent yield can be calculated.
Users like you can add images, links and other relevant information about this topic.
posted: Aug. 24, 2006 @ 12:40a
LH2004
Frivolous Member
posted: Aug. 24, 2006 @ 1:24a
mariojm said: Treasury notes are part of a series of marketable bonds issued by the U.S. Department of the Treasury. They form the intermediate maturity terms of the Treasury securities, with 1-10 year maturity terms.Isn't it 2-10 -- the 1-year securities being bills?The coupon is determined by the Treasury department before the auction. At auction, the actual price is determined (which may be more or less than the face value), thereby giving an auction based yield that's (usually slightly) more or less than the coupon rate.Actually, the coupon rate is determined at the auction -- it's chosen to make the price come out as close to face as possible.
At least, that's how it worked when I was learning about this stuff; I don't know if it's changed since then.
ThursdaysChild said:First question: when you buy T-notes at a discount, does the difference between the purchase price and the amount you receive at maturity count as "interest" the same as with T-bills? (and if so do your calculations have to take into account the time value of the interest you don't get until 2 - 10 years later) (and what about the extra (premium) you might pay on a re-opened note? is there such a thing as anti-interest?!?)
ThursdaysChild, welcome to the T-note thread. Very good question, I believe this is related to Original Issue Discount (OID). There is a fairly detailed description about it here including links to the official IRS publications. In a nutshell, what the article says is:
Original issue discount (OID) is a form of taxable interest that must be reported on your tax return. If you have a bond, note, or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity, part of the original issue discount (the amount that it increases in value each tax year towards maturity) must be included in your taxable income as interest on your tax return. You report original issue discount (OID) as it accrues, whether or not you receive any taxable interest payments from the bond issuer.
There's a form 1099-OID that's different from 1099-INT. So it looks like you don't have to figure out the OID for yourself, rather whoever holds your bond (broker, TreasuryDirect, etc) will report it for you. It's similar also to the OID on TIPS, since the maturity face value of TIPS is of course expected to be higher than the purchase price due to the inflation adjustments. (Incidentally, 5-year and 10-year TIPS are also T-notes.)
mariojm
Senior Member - 2K
posted: Aug. 24, 2006 @ 1:44a
Welcome to the T-note thread, LH2004!
I'm using the T-note definition I found in several places including Investopedia as being 1-10 years. Completely agree with you that 2 years is the lowest currently being sold, but if the Treasury were to issue 1.5 year securities for whatever reason, they would be T-notes also. More strictly speaking it would be "greater than 1 year" i.e. not including 1 year. T-bills are defined as being up to and including 1 year although currently only up to 6-month T-bills are being sold (1-year bills were sold in the past).
As far as when the coupon rate is being determined ... you may be right that it's set at the auction, perhaps to the closest 1/8th percent just below the auction yield? But with reopened securities it's determined at a previous auction and the price adjusted accordingly. In any case, let's find out more about this one. My objective by mentioning this in the OP was merely that the auction yield is different from the coupon and the price is not exactly face value.
EDIT: made some corrections to address LH2004's comments.
LH2004
Frivolous Member
posted: Aug. 24, 2006 @ 2:36a
mariojm said: As far as when the coupon rate is being determined ... you may be right that it's set at the auction, perhaps to the closest 1/8th percent just below the auction yield?Back when I was taking B-school Capital Markets, which was 6+ years ago, Treasury was in the process of switching from "conventional" to Dutch auctions; my understanding is that it's now all Dutch, i.e., everybody pays the same price in the auction. In the traditional format, I think the rule was, nearest 1/8 to the high yield. It should make very little difference in a Dutch auction. Anyway, Treasury interest rates are not very volatile; in the days before an auction, there should be little doubt about what the interest rate should be (unless the appropriate yield happens to be right about on a 'steenth, halfway between two possible values). In particular, there will be a whole set of previously-issued notes and bonds maturing at the same time as the to-be-issued note; the yield of the note will need to match up with them.But with reissued securities it's determined at a previous auction and the price adjusted accordingly.With a reissue, there really isn't any determination. If the Treasury decides to reissue a particular security, they're selling more that are exactly identical to that security in every way. So, there's really nothing to determine in that case.
mariojm
Senior Member - 2K
posted: Aug. 24, 2006 @ 2:59a
Sorry, meant to say "reopened" not "reissued." I realized my mistake on the way home from work. Sorry, it's been a long day.
Essentially a few times a year, the Treasury reopens an auction, as ThursdaysChild had already mentioned, and the price can be very different because the coupon rate was determined at an auction some 3 to 6 months earlier, so the highest accepted yield can be very different from the coupon.
Do any of you know why the Treasury does this, reopen previous auctions?
I've also thought some more about LH2004's comment re 2-10 vs. 1-10 year definition and I've changed it in title and OP to make it less confusing. The 1-2 year is more of a technicality, I suppose.
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
LH2004 keep the good stuff coming - I'm sure your B-school capital markets course 6 years ago was more informative than my B-school "finance for non-business majors" course 6 years ago ...
1ofushere
Senior Member
posted: Aug. 24, 2006 @ 12:01p
mariojm said:
(snipped)
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
I am not a financial guru, nor in the financial business - just a private individual wishing to obtain returns on investments. Based on my experiences, I am not aware of ANY debt issue which has it's classification changed as the maturity draws closer. The issue continues to be known as it was identified when it was issued. This has been true with Treasury, federal Agency and general bond market debt issues.
If one had a financial reason for doing so, one can acquire Treasury bonds and non-treasury issues which had original maturities of any amount of years, which are now available on the secondary market. These can be found on "bond" sites and through brokers, and some can be viewed via print in the Wall Street Journal.
Although commissions must be accounted for, existing debt issues on the secondary market may be more advantageous financially than an new/reopened Treasury auction issue. Additionally, when buying on the secondary market, one can select the maturity date which fits in with one's planning needs. Some folks consider issues with specific interest payment dates to satisfy cash flow issues.
mariojm
Senior Member - 2K
posted: Aug. 24, 2006 @ 1:21p
1ofushere said: mariojm said:
(snipped)
Here is something I wonder ... if you buy a 30 year bond, 20 years later is it still called a "bond" or does it become a "note" by having a maturity less than 10 years? Or does the name stick with it? I guess the same could be asked if a "note" becomes a "bill" within 1 year, but notes and bills are distinctly different because of the zero-coupon nature of the bills. I don't see any difference between bonds and notes other than the maturity, or is there one?
I am not a financial guru, nor in the financial business - just a private individual wishing to obtain returns on investments. Based on my experiences, I am not aware of ANY debt issue which has it's classification changed as the maturity draws closer. The issue continues to be known as it was identified when it was issued. This has been true with Treasury, federal Agency and general bond market debt issues.
If one had a financial reason for doing so, one can acquire Treasury bonds and non-treasury issues which had original maturities of any amount of years, which are now available on the secondary market. These can be found on "bond" sites and through brokers, and some can be viewed via print in the Wall Street Journal.
Although commissions must be accounted for, existing debt issues on the secondary market may be more advantageous financially than an new/reopened Treasury auction issue. Additionally, when buying on the secondary market, one can select the maturity date which fits in with one's planning needs. Some folks consider issues with specific interest payment dates to satisfy cash flow issues.
Welcome to the T-note thread, 1ofushere! So would there be a difference between buying a "T-note" on the secondary market that has, say, 5 years let to maturity vs. a "T-bond"? I'm guessing not. Advantages I can think of to buy on the secondary market are, as you said, specific maturity date, but also known yield ... as opposed to auctions where the yield is not known a priori (unknown auction yield not really a problem for weekly issued security types, but it can be an issue for those only issued a few times a year). Of course due to the middlemen in the secondary market you'll have more fees or lower yield than buying directly from the source.
mariojm
Senior Member - 2K
posted: Aug. 24, 2006 @ 1:55p
For those who are not ready to become individual bond investors with multi-year commitment, there's also index funds/ETFs targeting the T-note segment. For instance, there are ETFs based on the following indices:
Lehman Brothers 1-3 Year US Treasury Index Lehman Brothers 7-10 Year U.S. Treasury Index Lehman Brothers U.S. Aggregate Index (this one is not just Treasury but also other bonds, avg. maturity 7 years)
If you own individual bonds you'd essentially be locking in the rate and your maturity will vary over time. The ETFs trade as if you'd constantly be buying and selling bonds, and their maturity stays roughly the same over time.
1ofushere
Senior Member
posted: Aug. 24, 2006 @ 9:54p
mariojm,
As the Treasury uses a definition of more than 10 years maturity for 'bonds', perhaps the title for this forum should not mention the word "bonds" if it is to be a forum on T-notes.
With the view of allowing more folks to be able to find this forum with searches, and just to open-up the possibility of a name change for the forum, how about making a slight change to read as follows:
Treasury Notes: Investments in US government T-notes with 2 to 10 year maturities
Adding the words 'investments' and 'T-notes' might help folks doing searches of investment related topics to find this forum.
And depending on your feelings about the purpose of the forum title, one could add the phrase 'interest every 6 months' to perhaps offer additional interest in the forum with the word 'interest'. But, that may be going too far.
I can imagine folks who come across a topic suggesting 'notes' from the Treasury, confuse Treasury with the IRS, and say , No, NO - 'don't want any notes from them!
By the way, for those wanting a fairly direct comparison between the T-bills, T-note and Treasury bonds, you might want to visit this link on the "Institutional" portal to the Treasury Direct web site. By clicking on the hot-linked topics of Bills, Notes and Bonds, one can get a very useful explanation of the general characteristics of each kind of debt.
And note the great little information box with the green tabs. I really like this single box for a quick overlook of the treasuries, and find the tab for the announced 'Upcoming Auctions' handy. One can get to the same info box if you just enter the Treasury Direct site by going to the 'Institutional' side using this . I have that set up as my main entrance for TD info now.
In fact, browsing and searching on the Institutional side for information somehow seems more fruitful for me than on the 'Individual' side. As one would expect that all of the info on the Treasury Direct site to be accessible from anywhere on the site, I am at a loss to explain my subjective impression. YMMV.
The Institutional side of TD might be useful for ThursdaysChild as they work on the FAQ for TD.
mariojm
Senior Member - 2K
posted: Aug. 24, 2006 @ 10:37p
1ofushere, interesting suggestion about the title. I like the idea of including "investment" although I'd like to keep "bonds" also in the sense that these are debt instruments issued for a specific length of time for a specific rate. If anything I might change the "bonds" in the title to "debt instruments" or "securities" but it would probably cause more confusion than now. Agree with you that these need to be distinguished from Treasury bonds, which are also "bonds" but specific bonds. Wish the Treasury would call them T-dogs, T-bucks, T-stars, or something like that. Certaintly they have enough imagination to come up with a "zero percent certificate of indebtedness..."
It does appear that so far there hasn't been much interest in this thread - also not particularly much in the TIPS thread - at least as compared to the T-bills thread. Maybe people are just tired of seeing mariojm as OP with "Treasury" in the thread title. (How about I also start a T-bonds thread? ) Or perhaps I do need to improve this thread and the TIPS thread more, or make them more visible? We know from the two savings bonds threads that there's a good savings bond crowd at FWF, and from the CD thread that people are interested in longer-term CDs, and I think any of those investment styles could also benefit from learning about TIPS and T-notes.
Thanks for pointing out the info in TD, we really ought to encourage the use of its information portal, now that they organized it much better. Agree that it's strange that all this is "institutional" info. Not sure I like the green tab ... "discount rate" for the T-bills? (ThursdaysChild might disagree...)
EDIT: how's the title now?
1ofushere
Senior Member
posted: Aug. 25, 2006 @ 12:08a
mariojm,
I believe the new title is a more apt description. I like it with the expanded text, so when a FE'er who is not savvy to the world of Treasuries, see's just that description in the multitude of single line forum titles, maybe, a spark of interest will be ignited.
As for your comment re: the apparent lack of interest in this thread so far, . . . , it's been up for just about 24 hours now judging from your first post time. That is a very brief period it seems to me for folks to discover it. Although I do not know the usage patterns, I expect many FW members may just be checking in on the forums they have used in the past and are not necessarily looking for new forums all of the time. I have not found a place on FW where they post a rolling list of any new topics/forums for easy review, say new within the past few days. I just did a search on FW using the word 'investments' in the finance category, - a typical term for a broad search I think, and this thread comes up 13th in the list of the first page - not too bad.
As having discovered FW by virtue of a search on Google using some financial terms, and finding the T-bill thread, I can personally vouch for the significance of search engines in attracting new visitors to FW and threads. And, it takes time for pages to be 'out there' and picked up by the search engine crawlers. So, I would not lose 'heart' at this point in the life of this thread. Give it some time.
As for TIPS - I believe they are much more esoteric instruments to fully understand than T-Bills, T-notes and bonds especially when including the tax facts.
Lastly, re: seeing your name as OP - honestly, I expect your name in that OP role for a financial thread is indeed a definite plus, not a turnoff.
mariojm
Senior Member - 2K
posted: Aug. 25, 2006 @ 12:39a
1ofushere, thanks for the encouragement. With my limited experience so far as OP of a few threads, my impression has been that it is "hit" or "miss" right from the start. If you hit it big time from the start, you'll get lots of exposure, and the thread makes it onto the list of 5 finance threads on the FW Forums main page for a couple of days, which gives more exposure, and it'll make it onto the FW 'Today' page with 'hot threads' list, which gives yet more exposure, which encourages lots of posts, which puts the thread near the top of threads in the FW Finance listing of threads, and also near the top for those searching by "view per day" and "highest rating." The many hits leads to high ranking in search engines, which produces yet more hits, and on and on and on. It's a self-perpetuating phenomenon. Essentially, I think with the T-bill thread I just got extremely lucky to have posted the right thing at the right time (in fact I was surprised it wasn't negged into oblivion, I could have sworn I thought all FWers knew about T-bills already).
So, on the other hand, if you "miss" the thread to take off initially, it'll get lost amongst the many new threads, many who may have been interested will never notice it, and it'll have too few hits to be in a significant spot for search engines. So the TIPS thread, this thread, and my long forgotten Teamgeist Ball thread (soccer, anyone? ) have been very humbling experiences for me and shown me how difficult it really is to get the word out on something.
I'm sure some experienced FWers can speak to this much better than I can.
But you might be right, perhaps eventually people will notice ... maybe I need to be more patient and wait for searchers and googlers!
ThursdaysChild
Missed.
posted: Aug. 27, 2006 @ 7:22p
I just took a closer look at the Auction Announcement for the 2- and 5-year Treasury Notes that will be sold this coming week and was surprised to see that the 2-year Notes will be auctioned on Tuesday (the 29th) and the 5-year Notes auctioned on Wednesday (the 30th), although both will be issued on Thursday (the 31st). You can read the announcement here.
ThursdaysChild
Missed.
posted: Aug. 27, 2006 @ 7:37p
mariojm said: Essentially a few times a year, the Treasury reopens an auction .... Do any of you know why the Treasury does this, reopen previous auctions? As 1ofushere pointed out, the Institutional section of the TreasuryDirect site has lots of good info, including a section on reopenings (Institutional -> Auction Fundamentals -> How Treasury Auctions Work -> Treasury Reopenings. Although the site describes how reopenings work, it doesn't really say why...
"In a security reopening, the U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate as the original security, but with a different issue date and usually a different purchase price.
Security Details The maturity date of the reopening is the same as the maturity date of the original issue. The coupon rate of the reopening is the same as the coupon rate of the original issue. The price of the reopened security could be greater than, less than, or equal to the price of the original issue. If the price determined at the reopening exceeds the par value of the security, the purchaser will owe a premium. Sometimes with a reopened security, the purchaser will have to pay accrued interest. If this is the case, the interest is paid back and included with the first semiannual interest payment."
ThursdaysChild
Missed.
posted: Aug. 28, 2006 @ 7:39p
The regular closing times for the 2-Year Note Auction on Tuesday, 08/29/06 are:
12:00 Noon Eastern Daylight Saving Time for Noncompetitive Tenders 1:00 PM Eastern Daylight Saving Time for Competitive Tenders
This message is an automated mailing from the Bureau of the Public Debt on the following mailing list:
Government Securities Mailing Lists: Auction Announcement Press Releases
To sign up for mailing lists, visit our mailing list page at:
I'm a little worried that the 2 and 5 year will come in somewhat low at this week's auctions. Within the last two months, it seems like there's been a strong shift of sentiment from trying to slow down an economy to avoiding a recession, and T-note rates dropped a lot in anticipation of rate cuts in 2007.
A couple months ago I had thought of exactly this play, to buy notes (or ETFs investing in notes) when the economic outlook was still good, kind of with a contrarian point of view. Then, wait until rate cuts and see your notes appreciate in value (probably more applicable for a 5-year than 2 year), and sell the note in 2007. Or, equivalently, keep earning a high rate while other, newly issued bonds all earn a low rate.
What I didn't anticipate was that (1) rate hikes would stop "so soon" and (2) even in the weeks before the Fed paused, the market already priced in the pause, and most of the rate cuts that are likely to follow in 2007. I think that by now, most of the shift of sentiment is already priced in, so buying notes at this point would not allow for a lot of upside gain (unless the economy gets a lot worse than expected). I still think the bond market is actually overreacting and we may not be done with fighting inflation just yet; and perhaps in coming months, we might see T-note rates go higher again. *just my speculation/wishful thinking, have no data to support which way rates might go*
Thanks for bringing this investment option into more light Mariojm.
I was also looking at those rates and comparing in the 2-5 yr time horizon how they compared to CD rates which for 2-5 year terms can be found fairly easily in the 5.5-5.80% range currently.
Risk-wise, unless you're investing more than $100k (even then there are allowances for more), most CDs are issued by FDIC banks so I naively think of it as about the same risk as government bonds.
Yield-wise, most people probably live in areas where their state tax+local rate isn't much more than 10% (that may vary depending on income but trying to simplify things). Cutting that 5.5-5.8% rate by 10% roughly lands in the same area or slightly above the auction yield you provided.
Liquidity-wise, CDs have penalties, on these terms, usually about 6-months worth of interest but at least they can be redeemed before term. As far as I understand, the T-notes would be much less liquid no (unless you used EFTs I guess)?
So am I missing something or it seems a bit like a wash vs CDs on the short end of the maturity range (2-5 years) in terms of strategic use, risk and returns with possibly a difference in liquidity?
Finally, what are the rational for locking in interest rates for extended periods of time considering the usual cycles in interest rates? I mean, even if the odds of rates going down in the short term are reasonably high, what are the prospect for those rates going back up within a time frame of say 5 years based on historic trends of the bonds? In essence, within the 2-10 year investment term, what makes more sense to you?
FWIW, my angle on that is investing for an emergency fund so arguably my personal emphasis on liquidity may be higher than the scope of the T-notes here. But I'm still interested in having opinions on T-notes vs CD on the 2-5 yr term.
hiddendragon999
Senior Member
posted: Aug. 28, 2006 @ 10:09p
T-notes have greater liquidity than bank CD's. Notes can be sold on the debt markets without penalty. This liquidity can give you capital gains/losses depending on the market rate vs. purchase rate minus $45 per bond commission.
Everyone has their own interest rate forecast, thus making a market for debt. Nobody, including the Fed, knows with certainty the direction or extent of future interest rate movements. However, this Fed does tend to behave in certain patterns in reaction to economic situations. In the past, the Fed has moved in one direction until economic imbalances turned, paused, then turned to address the consequences. No pause has lasted greater than one period, although there are many instances where the Fed paused then went 50 or 75 bps the next meeting to catch-up. There is a first for everything, so the Fed may indeed pause, pause, pause, then raise. I doubt it, and the odds are against it. The bond market agrees. However, this rate cycle will be muted by the factors which inflation hawks are promoting. I doubt purchases of the long bonds will yield any significant capital gains. 2 years may be best.
hiddendragon999 said: T-notes have greater liquidity than bank CD's. Notes can be sold on the debt markets without penalty. This liquidity can give you capital gains/losses depending on the market rate vs. purchase rate minus $45 per bond commission.
Thanks for the clarification. So I guess the "penalty" for selling them early is only $45/bond plus/minus some fluctuation of the market rate vs the purchase rate. That does sound liquid enough.
mariojm
Senior Member - 2K
posted: Aug. 29, 2006 @ 10:57a
Market yields on 2-yr notes are up today ahead of the release of the recent fed meeting notes, which comes after the auction. There was also a lower than expected consumer confidence report today, which may work the opposite way on yields. I hope this helped someone 3 minutes before auction close!
Yield has dropped 17 bps from last month's auction, but is noticably up from recent market yields. Yields had been as low as 4.86% last week, so this is about 6 bps improvement in recent days.
mariojm said: Thanks for all the great info, ThursdaysChild!
I'm a little worried that the 2 and 5 year will come in somewhat low at this week's auctions. Within the last two months, it seems like there's been a strong shift of sentiment from trying to slow down an economy to avoiding a recession, and T-note rates dropped a lot in anticipation of rate cuts in 2007.
A couple months ago I had thought of exactly this play, to buy notes (or ETFs investing in notes) when the economic outlook was still good, kind of with a contrarian point of view. Then, wait until rate cuts and see your notes appreciate in value (probably more applicable for a 5-year than 2 year), and sell the note in 2007. Or, equivalently, keep earning a high rate while other, newly issued bonds all earn a low rate.
What I didn't anticipate was that (1) rate hikes would stop "so soon" and (2) even in the weeks before the Fed paused, the market already priced in the pause, and most of the rate cuts that are likely to follow in 2007. I think that by now, most of the shift of sentiment is already priced in, so buying notes at this point would not allow for a lot of upside gain (unless the economy gets a lot worse than expected). I still think the bond market is actually overreacting and we may not be done with fighting inflation just yet; and perhaps in coming months, we might see T-note rates go higher again. *just my speculation/wishful thinking, have no data to support which way rates might go*
Not to be a cynic, but according to some schools of thought, the "market" prices in all available information - usually much more information than you or I know (unless you're some kind of broker or insider). In other words, some believe that it's impossible to get a "good deal" on an "undervalued" stock or a bond that's paying a rate that's "too high." As soon as (or usually before) you know the information, it's already been priced into the stock or bond. It's like the Vegas betting line on sports - everyone thinks they can beat it, but almost noone can (even "experts")... and it's the most reliable indicator of the outcome of games.
Again, I'm not trying to be negative... this same thought is sometimes frustrating to me when I think I know what direction rates or the economy or the housing market or the stock market are going to go. I think it's good to keep in mind, however, so none of us get too cocky thinking that we can time the market or beat the market or that we know something that "the market" (millions of very well-educated, connected, and informed people) doesn't.
I think a lot of people made a lot of money (and probably subsequently lost it back) by being lucky, or at the right place at the right time (see: the stock market bubble, the housing bubble). These people, of course, think that they made a smart, well-informed choice and that they were just smarter than "the market" - not that they were just lucky and caught a wave at the right time.
(As you can probably tell, I'm a fan of index fund investing, not day-trading.)
Back to the point of the thread: is it possible for us to strategize to reliably "beat" the market-set rates on T-bills or T-notes or CDs? To pick a "better deal" by picking a 6-mo over a 2-year or vice versa? We all have our opinions on where rates will go - and we may be right or wrong - but it seems that EVERY market-set rate is by definition a fair rate, arrived at by people with the full state of knowledge at that time. In other words, you never see a "deal" on a T-bill rate in the FW Deal forums. Perhaps the better approach is buying the time horizon that works for your liquidity/income needs and being secure knowing that you received a fair market rate based on all info known or knowable at the time?
mariojm
Senior Member - 2K
posted: Aug. 29, 2006 @ 8:35p
You've made a fair argument/point, AlwaysWrite, and I don't consider it cynical or negative at all. In fact, it's what the yield curve is based on ... assumptions about the future based on all available information. Arguably, there's a lot to be learned for making good investment decisions, by reviewing such things as the yield curve. Someone skilled in reading it could see when people expect a recession or rate cuts to occur, and place their bets in the stock market accordingly. One element that makes markets inefficient is the human element, and it seems like these days worries, speculation, etc. generally cause a lot of volatility in the stock and bond markets. Most people probably don't spend as much time as we do reviewing bond analyses, and bond fund managers who do this for a job may be constrained otherwise not to shift their investment strategy dramatically, so I think it's quite possible we do have a little edge.
Having said all that, I don't count on us having an edge. As I always said, I have "beliefs" and "speculation" as to where the economy is going. For instance, I don't think inflation is well contained. Do I have any proof? No. What's priced into the market is that inflation is contained (from recent CPI numbers, other economic reports, etc) but this philosophy might shift if next time core CPI comes in at 0.4%, just as it shifted when we suddenly saw unexpected quick slowndown and lower inflation numbers the last 2 months and caused note yields to drop 0.4%-0.5%. But herein lies "proof" that what's priced into the market is not necessarily "right" or "true," it's just the best available information. In fact, it's not even that. It's the combination of many individual beliefs where the economy is going. For instance, half of the people might think rates will go up, the other half rates will go down; in aggregate, the yield curve might be "flat" but it doesn't mean people expect rates to stay the same.
Speculation with T-notes doesn't seem to me all that bad. I look at these as CDs with upside potential. You have to be sure you like the yield you're getting when you purchase the note (very much like a CD, although you can't "break" your T-note and get the principal back before maturity). Should the yield curve shift upward ... hold on to the note till maturity and be happy with your yield. Should the yield curve shift downward ... you may consider selling early and cash in on the appreciation.
I definitely agree that T-bills (and, similarly, CDs) are a "safe" form of "gambling," i.e., investing. There is always risk - including stashing money under your mattress, because inflation will likely cost you money. Even in "safe" investments, you are taking the chance that you underperform inflation, or that you lock in a rate and then it goes up... not to mention the "opportunity cost": what if you had invested that money in stocks or housing, etc. instead?
That's why I think the key is finding your level of risk tolerance, and your current liquidity needs, then you play the numbers and sit back instead of "timing" the market and second-guessing yourself. So, if you're happy with 6% and can lock in a 5-year CD or T-bill at that rate, go for it and be happy. Like you said, if rates go down, you win (getting a higher rate than is available or selling for a profit). If rates go up, consider it "breaking even" - you got what you bargained for, 6% for 5 years.
That being said, I'm happy with 5.15% liquid savings accounts, and with 6% 9-mo CDs, and both fit my time horizon (will probably buy a house in about a year - hoping for a big crash before then). If rates go up, my savings accounts go up and my CDs look like less of a deal, but I still get my 6% risk-free. If rates go down, I'll be glad I locked in for at least 9 mo.
Happily for me, I forsee a larger housing crash than most anticipate, but sadly I see it leading to a recession and stock marget plunge or just languishing. Since I would like to start investing some money long-term, I have mixed feelings about buying index funds now, but I've pretty much resolved to not try to time the market and that getting in as early as possible is statistically the best strategy.
ThursdaysChild
Missed.
posted: Sep. 11, 2006 @ 4:42p
The regular closing times for the 9-Year 11-Month Note Auction on Tuesday, 09/12/06 are:
12:00 Noon Eastern Daylight Saving Time for Noncompetitive Tenders 1:00 PM Eastern Daylight Saving Time for Competitive Tenders
This message is an automated mailing from the Bureau of the Public Debt on the following mailing list:
Government Securities Mailing Lists: Auction Announcement Press Releases
mariojm
Senior Member - 2K
posted: Sep. 12, 2006 @ 7:52p
Thanks, ThursdaysChild! The 9-year 11-month must be a reopening of last month's 10-year issue. I wonder what the purpose of that is, 1 month later. Seems the Treasury has been doing this with all the recent 10-year auctions.
The yield on the 9-yr 11-month at 4.810% came in 12 bps below last month's 10-year yield, but still a few bps above the current 10-year maturity on the yield curve.
To put it in perspective, when comparing to real yields: real yield on the 10 yr has actually been up 12 bps since last month, and 10-yr "inflation expectations" (i.e. difference from 10-yr yield to 10-yr real yield) is down 19 bps.
ThursdaysChild
Missed.
posted: Sep. 22, 2006 @ 11:54a
Isn't this a better thread for discussing government agency debt securities, rather than the TBill thread? (a modest proposal)
mariojm
Senior Member - 2K
posted: Sep. 22, 2006 @ 12:27p
ThursdaysChild said: Isn't this a better thread for discussing government agency debt securities, rather than the TBill thread? (a modest proposal)
It's a great idea but as I see it, there are two separate issues: the time frame and the fact that they are "agency." Agree with you that it's turned into a mixed discussion of shorter and longer issues in the T-bill thread, and they are not really "bills" in the sense that some of them are short term, but not zero-coupon like bills. I guess the only advantage of discussing them in the T-bill thread is the larger readership that it has enjoyed thus far.
The more I think about this, the more I conclude that Agency bonds really do deserve their own thread. So many good points about them have already been made in the T-bill thread, that they should be captured somewhere in a targeted discussion.
Who do you nominate as OP, ThursdaysChild? Do I see a volunteer? I'd start the discussion if people like, but I've started quite a few of these now so my own bias might be driving the discussion too much. I'm ready to retire as bond thread OP and pass the torch to some fresh new FW blood with different ideas and lots of enthusiasm!
1ofushere
Senior Member
posted: Sep. 23, 2006 @ 2:57p
mariojm said: ThursdaysChild said: Isn't this a better thread for discussing government agency debt securities, rather than the TBill thread? (a modest proposal) (snip)
The more I think about this, the more I conclude that Agency bonds really do deserve their own thread. So many good points about them have already been made in the T-bill thread, that they should be captured somewhere in a targeted discussion.
(snip)
I believe that ThursdaysChild's and mariojm's points are worth some additional consideration.
For just a few moments, let's examine this current thread title -
" . . . : strategies for 2 to 10 year government debt investments"
And thinking about the several discussions of "agency" investments in the
"Treasury Bills: Rate Tracking, Discussion, and FAQs (4.83%, 5.03%, 5.18% APY)" thread. Would any of those FW contributions re: agency invenstments be Off Topic in this "2 - 10 yr." thread?
When comparing the 2-10 yr portion of the federal investment market available to consumer folks, and not withstanding my comments made in the Tbill thread on Sep/20/2006 10:38 PM, there are several commonalities between the Treasuries and the Agency investments.
- both are usually considered AAA rated paper
- a few of the common agency bonds offer the same potential state income tax benefits as Treasurys
- given the "maturities" involved, many of both treasury and agency bonds will be traded (acquired by FW readers) in the secondary market
- the secondary market for bonds including US Government issues, has in my opinion, really 'opened up' to small investors with the advent of lower-cost on-line brokers
- Resources used for research and acquisition of the 2 year and beyond federal bonds is for the most part, common
- Both types of these federal investments have some unique characteristics which could well be identified in the current '2 to 10 yr' thread, offering some real educational value to FW members new to this investment arena
- Based on the responses on the TBill thread, there is significant depth of experience and knowledge available, and willingly shared re: the agency issues
- The auction method of acquisition for Treasury bonds has a counterpart with direct agency offerings at par . . .
Except the first two words of the current title of this thread - "Treasury Notes", the rest of the thread title covers the combination of both Treasuries and Agencies. I realize that the current '2 to 10 yr' thread might have had an original intent of Treasuries acquired by auction, but for the purpose of this discussion, it may not need to be that 'narrow' a scope. There is a secondary market for most of the federal paper, and this includes both Treasuries and Agency bonds accessible to small individual investors. Is there a significant 'burden' if the this current thread would be broadened to include both methods of acquisition? And both types of government debt investments?
Yes, if "broadening" the current thread to include the Agencies, one might just take another small step and change to '10 yr' to beyond. As in, "2 yrs and beyond". And, with a small adjustment, perhaps '1 yr and beyond'.
Given the affinity between the Treasury and Agency issues, and has already been seen in the TBill thread, it is natural to compare the returns for both types of investment. I believe a single topic thread covering both types of investments would offer substantial benefit to the FW financial thread participants.
mariojm said, "The more I think about this, the more I conclude that Agency bonds really do deserve their own thread. So many good points about them have already been made in the T-bill thread, that they should be captured somewhere in a targeted discussion."
Again, for the sake of discussion, I believe we do have such a place for this "targeted discussion".
Given the many similarities between Treasury and Agency, and being able to discuss the nuances among both in -> ONE <- topic thread, the gathering the input for both types of investments might enhance the collective 'readership' and participation over time.
Yes, the title of the thread could make it clear for the 'not so into federal investments' types - for example,
Investment strategies for 1 yr and beyond US government Treasury and Agency debt
And thinking of the multiplicity of search engines out there, one might modify the opening to read "Investment strategies and resources for . . . " to help folks find the thread.
'nuff.
All of the above is meant to be a stimulant for thoughts and discussion.
And Thanks to mariojm and ThursdaysChild for getting us to this point.
For me, just because mariojm contributed to the Finance Topic in FW by creating the current thread does not equate to a personal responsiblity to be 'all things to all people' who use this thread, much less, an "expert" on the topic. The FW community (as in us) continues to have our collective responsibility for positive input if we wish the thread to prosper.
mariojm
Senior Member - 2K
posted: Sep. 23, 2006 @ 7:39p
1ofushere,
you've raised some good points how and why this thread might be expandable to a T-note thread. I think it just so happend that T-note yields started going south when we started this thread so not many people were very interested in 4.8% (now closer to 4.5%) multi-year yields, probably rightfully so, and the somewhat higher yields of Agency bonds would reenergize the discussion. I do want to point out that Agency paper is also available for much shorter term than 2 yrs, with similar characteristics to T-bills (although they have coupons), and initially I had envisioned this particular thread to be a multi-year bond discussion, and a discussion on how multi-year bonds could be "played" to have a gain in value from changing interest rates.
I guess it boils down to, if we want the bond discussion to be more centralized in a few threads, or if we want different threads for different topics. Those of us who like to discuss all different bond types and time frames (looks like there's quite a few of us) would benefit from keeping it to a few threads; those who might only be interested in a specific topic might not find what they want so easily. Also, if we change the focus of this thread at this point, many FWers will never know because the thread has been existing for a while now and wouldn't show up as any of the hot or new topics anymore if someone just browsed the finance forum. (and it doesn't help that the thread ratings were all killed) Therefore I still think on balance, a new Agency thread would be helpful to the FW community.
Because the Agency issues are similar to the treasury bills/notes, I suggest that we keep the current two threads. Short-term (< 1 year) discussion in the t-bills thread; longer term in this thread. If a new thread is started on Agency issues, people will ask all the time in that thread "how does it compare to the 6-month bill?" or "how does it compare to the 5-year note coming up next month?". When I consider investing in these bonds, maturity is the 1st question I think about. Do I want to roll over short-term bonds or lock in for a bit longer? The slight difference in credit quality is a non-issue. The means of acquisition (broker vs TD) is secondary as well.
mariojm
Senior Member - 2K
posted: Sep. 24, 2006 @ 3:17a
tb00957 said: Because the Agency issues are similar to the treasury bills/notes, I suggest that we keep the current two threads. Short-term (< 1 year) discussion in the t-bills thread; longer term in this thread. If a new thread is started on Agency issues, people will ask all the time in that thread "how does it compare to the 6-month bill?" or "how does it compare to the 5-year note coming up next month?". When I consider investing in these bonds, maturity is the 1st question I think about. Do I want to roll over short-term bonds or lock in for a bit longer? The slight difference in credit quality is a non-issue. The means of acquisition (broker vs TD) is secondary as well.
Good argument for keeping the current thread structure, too. I agree, so far, short term Agency bonds have fairly seamlessly fit into the T-bill thread, and the major item that would distinguish them is the small credit risk. However, ultimately we have to be sure to be able to cater to all crowds, the more advanced folks (who look at Treasury, Agency, corporate, ...) and the newer folks (who are familiar with savings accounts and CDs, and new to bonds). I don't think we can accomodate another FAQ or more rate history data in the T-bill thread for Agency, it would clutter too much. That may be ok, but if we start getting many repeated questions on "what's Agency" "which Agencies are available" "which broker do I purchase from" "what about the fees" etc. then we'll know it's time for a separate thread explaining the details in an organized fashion. Thanks for your input!
1ofushere
Senior Member
posted: Sep. 24, 2006 @ 7:32p
I agree with tb00957's suggestion.
In his response to tb00957's suggestion, mariojm said,
"However, ultimately we have to be sure to be able to cater to all crowds, the more advanced folks (who look at Treasury, Agency, corporate, ...) and the newer folks (who are familiar with savings accounts and CDs, and new to bonds). I don't think we can accommodate another FAQ or more rate history data in the T-bill thread for Agency, it would clutter too much. That may be ok, but if we start getting many repeated questions on "what's Agency" "which Agencies are available" "which broker do I purchase from" "what about the fees" etc. then we'll know it's time for a separate thread explaining the details in an organized fashion. Thanks for your input!"
. . .
Perhaps we have a mind-set thing going here. I don't see why any of the 1 yr+ federal paper issues, including Treasuries, Agency, GSE's need to be thought of as part of the less than 1 yr TBill APY thread, nor its FAQ. Mariojm created this "longer term" thread and although it is related to the TBill APY thread, to my thinking, it is independent of it. It is not a sub-set of the TBill APY thread. Yes, of course, there are common elements.
It seems to me that over time, we - with FW contributors, can create a FAQ for this "federal 1+ yr" thread which would deal with the very issues mariojm raised above. Those are valid questions which the FW financial topic audience could be expected to be interested in. And some tips and excellent contributions have already been made on the topic, albeit, not in this thread.
I suggest there is no need for a FAQ for this thread which requires any regular rate/yield reporting, nor any other regular 'necessity' which turns the FAQ and thread into a high maintenance one. Yields for the long federal issues can be captured from readily available sources which the FAQ could well identify, just as mariojm has done so well from time to time in the TBill APY thread. Soliciting 'Tips' and 'experiences' from this thread's readers over time might well offer 'new to the longer term federal investments' FW readers both an education, and some specific money saving tips for investing. Entering into the world of federal long term issues is not easy, and in the not so far past, was the almost exclusive realm of paid brokers, with very comfortable commissions and minimum transaction limits to make it worth their while. However, now small investors without mega accounts can participate in this investment sector with more ease, and less cost. I guess we have to Thank Mr. Gore for his invention of the internet . . .
Not to be trite, but we all begin our investing experiences 'at the beginning', and this thread could well be that into beginning for many FW members.
Mariojm is the OP here, and I am certainly not trying to intrude on the OP's ability to keep the thread evolving in the manner of the OP's choice.
Maybe I'm just "missing" the subtleties, but I am not seeing any big "problems" with this thread's FAQ dealing with the limited world of 1+ yr federal paper investments, with many hooks into the fine work in the FAQ and Wiki of the TBills APY thread.
Of course, if mariojm prefers a fresh start with a new OP on a new thread, then so be it.
1ofushere
Senior Member
posted: Sep. 25, 2006 @ 5:46p
Given the shape of the Treasuries Yield curve now as can be seen here on Vanguard, there might not be a whole lot of FW financial types interested in this Announcement of 2 and 5 yr T-Notes auction.
ThursdaysChild
Missed.
posted: Sep. 25, 2006 @ 7:53p
1ofushere said: Given the shape of the Treasuries Yield curve now as can be seen here on Vanguard, there might not be a whole lot of FW financial types interested in this Announcement of 2 and 5 yr T-Notes auction.My computer will not download Micromedia Flash, so I cannot see the charts. Is there a simple chart or other example of the yield curve so I can see why the Notes might not be worthwhile?
1ofushere
Senior Member
posted: Sep. 26, 2006 @ 1:19a
Strange that Flash is needed for that particular page as it doesn't seem to have any of the typical Flash 'co-motion' - just a static page with some charts. But, I'm no expert with Flash - I try to avoid it as much as possible.
Perhaps this page will be easier - it's the chart version of the graph page -
Thanks for watching the auction, 1ofushere - I'm assuming few people would be interested in investing at those rates, but what options would we have to bet again them? I.e. "short" bonds?
From what I read and gather across blogs and my own data collection, I interpret the bond market yields as being lower than economic data would suggest. The Chmn. of FRB Dallas gave an interesting talk the other day about the details of recent inflation numbers - you know, the 0.2% core CPI for July and 0.2% for August which supposedly was interpreted as being in the comfort zone of the Fed - it turns out these values were actually 0.19% for July and 0.24% for August, respectively, or compounded over a year, 2.3% annualized for July and 2.9% annualized for August! So inflation is not exactly slowing down yet ... today's new housing numbers were up, too, so the economy might not be slowing down either.
Skipping 207 Messages...
kjgco
Senior Member - 1K
posted: Dec. 1, 2009 @ 10:13a
Now that the author of the acrossthecurve.com blog has returned to corporate America, does anyone have any suggestions for replacement reading? I've enjoyed John Jansen's commentary for the last year or so, and will miss his postings and insights.
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