Mechanics of Buying & Selling 5-Yr TIPS & Treasuries

[Admin/YBB]

With high inflation (CPI-U), it may be worthwhile to buy short-term/5-yr TIPS directly. Here are some basic and practical details.

5-yr TIPS are auctioned in April, June*, October, December*; those marked * are reopenings, not brand-new issues (see link for tentative schedule for 2022). Retail investors buy them noncompetitively in the multiples of $100s at Treasury Direct (TD; brokerages may have different multiples, say, $1,000s) up to $5 million. Basically, the auction determines a single clearing price relative to 100-par for all buyers, competitive (institutional, dealers) and noncompetitive (retail, institutional). All Treasuries have positive coupons, but TIPS have tiny/small coupons, and auction prices above par may easily lead to negative real rates.

Buying at Auction – You can do this via TD or brokerage account (and commission-free at major brokerages). Key dates are Announcement Date after which the buy orders can be entered up to the early morning on the Auction Date (but it is safer to enter buy orders the day before by midnight); Auction Date when the auction occurs in late mornings; Settlement/Issue Date when transactions are settled, and securities issued. Beware that money from your account will be gone on the morning of the Auction Date (not on the Settlement Date as is typical for normal brokerage transactions, and if money is not available, the order will be cancelled). One exception to this may be when you also have Treasuries in the same or greater amount(s) maturing in the auction week, and then your brokerage may indeed settle all Treasury events on the Settlement/Issue Date (but do check this in advance with your brokerage). It is convenient that Treasuries maturity dates coincide with the Settle/Issue dates for auctions during the auction week.

Buying/Selling in the Secondary Market – This can be done at any time at brokerages. Treasuries trade at tiny bid-ask spreads and major brokerages don’t charge commissions for trading Treasuries. If you hold Treasuries in your TD account, you have to transfer them out to your brokerage to sell them before maturity. TD accounts are just for buying at auctions and holding them to maturities.

Selling/Redeeming at Maturity – Your TD or brokerage account gets credited with the proceeds.

Taxes – Even though TIPS accumulate interest/coupon and inflation-adjustment and those are paid only at maturity, the IRS want to be paid annually. You will get 1099-INT for interest and 1099-OID for inflation-adjustment every year and those should be reported in your IRS 1040; Treasury securities are exempt from state and local taxes, so make appropriate adjustments to your State 1040.

Procedures are similar for other Treasury securities, e.g. for T-Bills (up to 1-Yr), T-Notes (1+ to 10 yrs), T-Bonds (10+ to 30 yrs). T-Bills don’t have coupons but are sold at discount to 100-par and mature at par (like Zero-coupon bonds).

Upcoming 5-Yr TIPS Announcement Date 4/14/22 (Thursday); Auction Date 4/21/22 (Thursday), Settlement/Issue Date 4/29/22 (Friday).

Upcoming 1-Yr T-Bill Announcement Date 4/14/22 (Thursday), Auction Date 4/19/22 (Tuesday), Settlement/Issue Date 4/21/22 (Thursday).

TIPS, General www.treasurydirect.gov/indiv/products/prod_tips_glance.htm
TIPS, Rates & Terms www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm
TIPS FAQs www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_faq.htm
Treasury Auction Schedule home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdf
Compare TIPS vs I-Bonds www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

NOTE. Treasury Direct (TD) has redesigned its website and old TD links don't work anymore. Here are some new links. 10/10/22
Home treasurydirect.gov/
Marketable Securities www.treasurydirect.gov/marketable-securities/
TIPS www.treasurydirect.gov/marketable-securities/tips/

[Admin/YBB]

Individual TIPS vs TIPS Funds

Individual TIPS (held to maturity) track CPI (unadjusted, but only adjusted is available at Stockcharts and it is close). But TIPS funds do their own thing.

LINK

[Admin/YBB]

Upcoming 5-Yr TIPS Auction
home.treasury.gov/system/files/221/TentativeAuctionScheduleQ22022.pdf

Announcement Date 6/16/22 (Thursday)
(Purchase at Brokerages or Treasury Direct from afternoon until the morning of the Auction Date)

Auction Date  6/23/22 (Thursday)

Settlement Date  6/30/22 (Thursday)


Edit/Add: Announcement, 6/16/22,  www.treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20220616_1.pdf

Edit/Add2: 5-yr, 0.125% coupon TIPS auction today, 6/23/22, was at real YTM of +0.362%. In the secondary market, the real yields (EOD) were a bit higher, +0.48% on 6/22/22 and 0.45% on 6/23/22, but one can buy only at "ask" (not "bid") and there may also be nominal fees.
www.treasurydirect.gov/instit/annceresult/press/preanre/2022/R_20220623_3.pdf

[Admin/YBB]

Buying Treasuries at Brokerages

Brokers reserve/earmark money in the account for Treasury purchases at AUCTIONS on the auction day but the transaction formally remains pending until the SETTLEMENT day. In general, T-Bills and T-Notes (with shorter maturities) have quicker settlements after their auctions, from a few days up to 1 week, but T-Notes (with longer maturities), T-Bonds and TIPS have settlements that may be 1-2 weeks after their auctions. So, while major brokers may claim that Treasury purchases at auctions are “commission-free” (Fidelity, Schwab, etc), they can utilize the FLOAT on the money from when its access is restricted to until the settlement date. These floats can be substantial in the aggregate for the brokers. To play it safe, have the money available in the brokerage account on the day of Treasury auction. This is unlike the trading of OEFs (T+1) and ETFs, CEFs, stocks (T+2) where the money is really due on the settlement day (T+1 or T+2 as indicated).

For trading Treasuries in the SECONDARY market through brokerages, there are tiny bid-ask spreads (retail customers sell at bids, buy at ask) and brokers can trade from their inventories, and there may also be nominal fees (but Treasuries trade commission-free at Fidelity and Schwab).

Treasuries bought at auctions through TREASURY DIRECT accounts (with electronic links to bank accounts) must be held to maturity and must be transferred to brokerage accounts to sell before maturity. So, as there are no commissions to buy them at auctions at major brokerages, it is easier and more convenient to hold them at brokerages to begin with. But some buy Treasuries at auctions through Treasury Direct and hold them to maturity to keep them all in one place along with any Savings Bonds (I-Bonds, EE-Bonds) that can be bought only at Treasury Direct.

[Admin/YBB]

There have been several recent articles in the media on disappointment with TIPS (funds) in the face of high inflation. The recommendation here has been to buy shorter-term (individual) TIPS and to hold them until maturity; they follow the $$CPI (less discount to par at purchase). Unfortunately, 5-yr is the shortest maturity for TIPS at Treasury auctions (at Treasury Direct or brokerages) and shorter maturities must be bought in the secondary market (at brokerages).

TIPS funds (Mutual Funds, ETFs) introduce other factors – rate effects via duration; non-maturity; annual distributions of inflation-adjustments (whether earned or not); confusing presentations of 30-day SEC yields (real only vs real + current CPI). Beware of this when reading media articles (Twitter, M*, MFO) about issues of TIPS funds. Negative media articles on TIPS funds:

Twitter LINK1

Twitter LINK2

M*  www.morningstar.com/articles/1106125/tips-can-help-with-inflation-but-are-you-courting-other-risk
   M* Related at Twitter LINK3  LINK4

MFO  www.mutualfundobserver.com/2022/08/i-wish-i-could-give-you-some-good-tips-on-beating-inflation/#more-17242

Note: Twitter links are created as hyperlinks because on copy-and-post of Twitter URLs at PB, the entire tweets opens up automatically.

[Admin/YBB]

Reopened Treasury Auctions

Many Treasury auctions issue new Treasuries (original issue). But there are several Treasury auctions with reopened older issues - these reopened issues have the same issue dates, CUSIP#, maturity dates, interest rates as the original, but new auctions are held for them. The auction announcement will indicate whether it is a reopened auction, but the general Treasury Auction Schedule doesn't indicate whether it is for original issue or reopening. There may be surprise/unscheduled reopenings of much older issues if the rate environment justifies it, e.g. an older 5-Yr T-Note may be reopened as 2-Yr T-Note, or the 2 CUSIP# may be merged after the auction.  For retail buyers, it doesn't matter much whether an auction is for new issue or reopened issue.

Reopenings increase the size/liquidity of some Treasury CUSIP#. Most reopenings are 1-2 months after, but TIPS may be reopened 2-6 months after.

In the following 2 examples, OI = Original Issue, R = Reissue.

5-Yr TIPS: April (OI), June (R), October (OI), December (R)

10-Yr T-Notes
   February (OI), March (R), April (R)
   May (OI), June (R), July (R)
   August (OI), September (R), October (R)
   November (OI), December (R), January R)

There are also reopenings for 2-Yr FRNs, 20-Yr & 30-Yr T-Bonds, 10-Yr & 30-Yr TIPS. But T-Bills and other T-Notes don't have reopenings.

Treasury Schedule of Auction Reopenings www.treasurydirect.gov/auctions/when-auctions-happen/schedule-auction-reopenings/

[Admin/YBB]

TIPS Total Returns

TIPS total returns (TR) can be complicated due to initial (Auction) premiums/discounts, semiannual compounding and 2-month lag in the use of CPI (unadjusted). TIPS index tables exist for each CUSIP that can be used for determining precise TRs.

But here is a simpler and approximate way to estimate TIPS TRs.

1. Use coupon to estimate that part of TR1 (cumulative).
2. Use FRED CPI (unadjusted) to find nearby CPI values and find inflation TR2.
3. Multiply to find approximate TR = TR1*TR2.

Example. 10-yr, 0.125% TIPS auctioned on 1/24/13, matured on 1/15/23.

10-yr TIPS Cpn 0.125%, 1/24/13
Tipswatch TR 29.1% (ann cum), 2.6% (cum ann)
Cpn for 10 yrs 1.01257
Nearby FRED CPI (unadj) 12/2012 229.601, 12/2022 296.797, for 10 yrs 1.29266
Rough TR = 1.30891, or 31.9% 30.9% (cum), 2.7% (ann), OK
Ignoring initial prem/dis, semiann compounding, 2-mo lag.

Twitter LINK
Tipswatch  tipswatch.com/2023/01/17/a-10-year-tips-matured-sunday-how-did-it-do-as-an-investment/
FRED CPI (unadjusted)  fred.stlouisfed.org/graph/?g=YRIg

While FRED data are readily available, $$CPI (adjusted) is also available at StockCharts. Unfortunately, only adjusted CPI is currently available, not unadjusted. It can also be used for approximate TR calculations. In fact, the TIPS coupons are quite small, and most of the returns are simply from CPI. While VERY approximate, a picture is worth 1000-words.
$$CPI  stockcharts.com/h-sc/ui?s=%24%24CPI&p=D&yr=1&mn=0&dy=0&id=p84797584922
Link VTIP, TIP, $$CPI

Image  i.ibb.co/h9LxXsd/Screenshot-2023-01-17-08-58-36.png

[Admin/YBB]

T-Bill CUSIP Numbers - Matching
www.mutualfundobserver.com/discuss/discussion/comment/167519/#Comment_167519

Because of 13-wk, 26-wk, 52-wk T-Bill issuances, some maturing dates for 13-wk T-Bills will coincide with those for 26-wk and 52-wk T-Bills. Similar for 26-wk and 52-wk T-Bills.

When the T-Bill maturity dates are the same, and the coupon rates are all 0% (because T-Bills are sold at discounts), Treasury uses the same CUSIP# for them. Treasury doesn't call these reopening, nor marks them as such in the Treasury Auction Schedule - in fact, Treasury says that T-Bills don't have reopening.

So, how does one figure out what is going on?

1. Matching T-Bill CUSIP# is one way but that is tedious, even with Treasury site CUSIP search. For example, a search on CUSIP# 912796ZD4 shows that related 13-wk, 26-wk, 52-wk have maturity dates of 11/30/23 (see this link by @msf).
www.treasurydirect.gov/auctions/auction-query/?cusip=912796ZD4

2. Comparing T-Bill Original Issue Dates with actual Issue Dates is another way, but that information is lost in the Treasury Auction Results data fields as there are other more important data for rates, spreads of bids, etc. However, the Treasury Auction Announcements have the Auction Date, Original Issue Date, actual Issue Date, and Maturity Date.

13-wk Auction Announcement for 8/28/23 (Maturity 11/30/23)
www.treasurydirect.gov/instit/annceresult/press/preanre/2023/A_20230824_3.pdf
(Note that Original Issue Date and actual Issue Date don't match)

52-wk Auction Announcement for 11/29/22 (Maturity 11/30/23)
treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20221123_3.pdf
(Note that Original Issue Date and actual Issue Date match)

One can also verify the CUSIP# in these 13-wk and 52-wk Auction Announcements match.

Edit/Add, 8/29/23. Because 13-wk and 26-wk T-Bills are issued every week, in a steady state, all 13-wk T-Bills share CUSIP# with 26-wk T-Bills.
Because 52-wk T-Bills are issues monthly, only 25% of 13-wk and 26-wk T-Bills share CUSIP# with 52-wk T-Bills.

[Admin/YBB]

T-Bills Rolls

In a cash-account (without margin), Fidelity didn't allow MANUAL ROLL for 3-mo T-Bill Auction on Monday when a 3-mo T-Bill was also maturing on the following Thursday; in theory, both could settle normally on Thursday. The message was that cash was need UPFRONT to the purchase. In such accounts, AUTO-ROLL may be useful to avoid 1-week roll gap - auto-roll can be cancelled at the time of roll or when selling early in the secondary market; auto-roll can be setup only at the time of purchase.

I haven't tested this with cash-accounts at Schwab (allows auto-roll) and Vanguard (no auto-roll yet).

In hindsight, all my Treasury purchases had been in accounts with margin (or with sufficient funds in the core account), and then this isn't an issue although (only) Fidelity has the practice of sending margin notices that may alarm some initially (I just ignore them).

Edit/Add 10/26/23. Fidelity auto-roll for 52-wk T-Bill had to be cancelled by phone; it wasn't possible to do online. It was Thursday of the week before 52-wk maturity and the next 52-wk Auction (Announcement date). But no auto-orders were generated for that upcoming 52-wk Auction (Auto-roll instruction had said that it could be cancelled by cancelling the auto-order). It may be that auto-roll kicks in AFTER the maturity, but then the next 52-wk Auction would be almost a month away. Some posts had mentioned that Schwab auto-roll also kicks in AFTER maturity (Big Bang LINK). This is to be further verified (and if so, it would reduce the utility of auto-roll).

Edit/Add 12/26/23. In a Fidelity account, the 3m auto-Roll kicked-in and generated a replacement order on 12/22/23 (Friday), but not during the Announcement Day of 12/21/23. It appears to be Cancellable. (In the auto-roll above, it was cancelled by phone ON the Announcement Date for the next roll). So, Fidelity auto-roll works as intended - it avoids 1-wk manual roll gap in non-margin accounts.
Announcement 12/21/23 (Thursday)
Auto-Roll order seen 12/22/23 (Friday)
Auction 12/26/23 (Tuesday; short Holiday week)
Settle 12/28/23 (Thursday)
Maturity 3/28/23 (Thursday)

[Admin/YBB]

5-Yr TIPS Auction, 10/19/23

Auction Date 10/19/23
Settlement Date 10/31/23 (for margin accounts; but money may be required upfront, or earlier than the settlement date, in regular and IRA accounts.)
Maturity Date 10/15/28

Expected 2.39% + Inflation seems better than nominal 5-yr Treasuries, 5-yr CDs, I-Bonds (5-yr hold required to avoid 3-mo interest penalty). Twitter LINK.

Announcement  treasurydirect.gov/instit/annceresult/press/preanre/2023/A_20231012_5.pdf
Auction Results, 10/19/23  treasurydirect.gov/instit/annceresult/press/preanre/2023/R_20231019_3.pdf
(5-yr TIPS, 10/19/23. 2.44% (real) YTM (2 3/8% coupon). So, 2.44% + inflation)