Treasury FRNs

yogibearbull

Treasury FRNs

There is growing interest in Treasury FRNs. These didn’t do much during the ZIRP, 2020-22, but have done well after 2022 as interest rates rose.

The 2-yr Treasury FRNs pay the yield of 3-mo T-Bills (reset weekly) plus spread (set at the Auction). The interest accrues daily but is paid quarterly. These require less frequent rolling than 3-mo T-Bills. Auctions (original issue or reopening) are monthly. Among the brokers, Schwab accepts online orders, but you will have to call Fidelity’s fixed-income desk to enter Auction or secondary market orders.

The next Treasury FRN Auction (reopening) is on Wednesday, 8/23/23.

The ETFs are TFLO, USFR; both have 15 bps ERs

These can be good supplements for T-Bills or money-market funds.

Don’t confuse these with regular FR/BL funds that are junk-rated/HY. In between are the investment-grade corporate floating-rate notes.

WABAC

Added USFR to our IRA's on June 1. Lots of peace of mind.

Haven't looked at higher rated corporate floaters. Not sure the water has finished receding. Might be more naked swimmers out there. YMMV

larryB

Thanks for this idea YBB. Why would Treasury FRNs be better than a Mm fund? And when the Fed pivots will these perhaps continue to have meaningful yield longer than MM funds? Thanks in advance for your reply.

yogibearbull

Current rates:

Government M-mkt funds (7-day yield) VMFXX 5.26%, SPAXX 4.97%, SNVXX 5.04%

3-mo T-Bills 5.56%, 8/17/23

FRN yield = T-Bill yield + spread (2023 range 12-20 bps).

So, one has to decide if extra 40-75 bps over m-mkt funds with FRNs makes sense. It depends on the amounts involved too. Real advantage over T-Bills is that FRNs are rolled over every 2 years, instead of every 3 months.

With FRN ETFs, decide if giving up 15 bps is worth it when the fund isn't really doing much work. I could go along with 5bps ER for such trivial work.

fundly

If you live in a high tax state it makes more sense to go with the etf's vs the mmkt funds as the former is 100% state tax free, where the govt mmkt's are not usually, because of their repo holdings. I use both the etf USFR and also S/T bills because of this issue. I found USFR, because of its size and the way they pay dividends easier to use than TFLO.

yogibearbull

@fundly, both TFLO and USFR pay monthly, so what difference you saw in their distribution methods?

fundly

@YBB. This is a personal issue where I have set up all my bills to be paid on the 1st of each month. USFR typically pays dividends around 5 days before the end of the month and I can use the dividends to pay bills on the 1st. TFLO pays dividends in the 1st week of the month so it doesnt work as well in my scheme of how I pay bills.

WABAC

USFR enjoys a slight advantage in returns over some periods of time.

People should take the time to compare TFLO and USFR with all available tools.

Sven

Concur that USFR is ahead of TFLO in 3 and 5 years performance in terms of Martin ratio while having similar risk (MAXDD %). Yields are 3.8 and 4.3%, respectively. Search is performed using MFO Premium.

Fidelity and Vanguard fund screening are limited that lacks detailed comparison as one would find in M* for individual funds. Guess there is no free lunch.

WABAC

You can snack here: https://www.etf.com/etfanalytics/etf-comparison/USFR-vs-TFLO

fundly

Per the Wisdom Tree site today. USFR 30 day sec yield 5.30% Distribution yield is 5.35%.This correlates with the dividends I get.

yogibearbull

Long-term performance of FRN ETFs is meaningless; during much of the ZIRP regime, they had negative spreads but spreads have been positive since mid-2022. FRNs have done well since 2022 because of the ZIRP regime being gone (first the expectations, then actual); the 3-yr or 5-yr views overlook these contemporary factors.

Look at StockCharts from 1/1/22 (I have also added an ultra-ST ICSH); USFR does have a small edge over TFLO (they track different indexes).
https://stockcharts.com/h-perf/ui?s=TFLO&compare=ICSH,USFR&id=p28096591213

Sven

Thank you for the info and links. Learning something new everyday. Gotta to love MFO!

rforno

I'm not a bonds person other than using t-bills for cash, but I think I'd rather keep rolling (or auto-rolling) shorter-term t-bills at this point. I suspect rates may not go much higher, at which point won't the 'floating' part of the rate in FRNs and related vehicles like USFR/TFLO will become 'sinking' and thus the income produced go down, right? IE, the time to really buy into these things has passed for now?

fundly

@rforno. As soon as the rates decrease I intend to sell USFR. Until then using this etf makes it easy to keep up with the rate increases with little effort. If the rates remain stable I see no reason not to buy at this time. I do not like auto rolling as I prefer to change each maturing bill into a duration I see fit at that time. Nonetheless I use both bills and USFR in the portfolio.

Sven

Don’t think rate hike has peaked and the FED starts to pause. Given the strong labor market, low unemployment rate and heathy consumer spending, inflation will remain above 2% FED target. Thus, there is a good likelihood of another round of rate hike is coming later this year.

When FED pivots and starts to cut rates, all bond instruments will be affected. At that point I will sell T bills and cash towards long term bonds as their bond price will appreciate.

yogibearbull

In investments, not everything is long-term. Some opportunities are just transient. From tipsters, these can be scams. But the FRNs indeed present a good/genuine transient opportunity now - UNTIL the rates start to go down (late-2024? 2025?).

I will be using BOTH FRN auctions and USFR. In fact, I will shift much of ICSH into USFR until the rate outlook changes.

I am STILL comparing the larger WisdomTree USFR (only 4 FRN holdings) with the smaller iShare TFLO (8 FRN holdings + tiny BlackRock m-mkt/cash). Strangely, both have comparable daily trading volumes (power of iShare/BlackRock marketing?). ETFdb indicates that TFLO follows a different index than what is indicated by iShare - this may be a recent change.

msf

Vanguard has an OEF/ETF comparison tool that gives similar performance and tax comparisons to the M* fund compare tool, though it lacks the risk (Sharpe ratio) and portfolio data (turnover, duration, etc.) comparisons of the M* tool.

https://personal.vanguard.com/us/faces/JSP/Funds/Compare/CompareEntryContent.jsp

Fidelity's OEF/ETF screener does a pretty decent job as well. It lacks MAXDD which is found on individual M* fund pages. The only risk ratio it shows is Sharpe ratio; likewise M* pages don't offer other ratios.

Fidelity screener comparison of USFR and TFLO
Fidelity screener results for ultra-ultra-short taxable bond funds/ETFs (0.02 year duration or less)

msf

WABAC said:

You can snack here: https://www.etf.com/etfanalytics/etf-comparison/USFR-vs-TFLO

Nice, though its duration numbers (5.10%, 5.20%) are something else (yield?)

WABAC

ETFdb indicates that TFLO follows a different index than what is indicated by iShare - this may be a recent change.

etfdb.com and etf.com both have the same wrong index for TFLO: the Markit iBoxx USD Liquid High Yield 0-5 Index.

yogibearbull

ETF.com duration numbers are NOT correct.

First, for securities that reset weekly, duration should be just 1 week.

Second, even if it calculated duration ignoring the weekly resets, a portfolio of 2-yr FRNs should have duration around 1 year. There is no way one can get 5.15%, 5.20%.

FD1000

Observations:
1) USFR have a bit better performance than TFLO for 6-12 months, but for 1-3 months they are really close...according to M* chart.
2) In the last 1-2 months VMFXX lags a bit. Stockchart shows that but it's difficult to know how accurate it is when we look at 0.45-0.49 per month. (https://schrts.co/Vzbmzihk)
3) These are very mild differences that may change after next week.

YBB: In investments, not everything is long-term
FD: love it.

WABAC

msf said:

WABAC said:

You can snack here: https://www.etf.com/etfanalytics/etf-comparison/USFR-vs-TFLO

Nice, though its duration numbers (5.10%, 5.20%) are something else (yield?)

At the page for TFLO they show its duration as -0.02. So yeah, there's a screwup there. M* says 0, or .24 "modified," for the duration. VettaFi says ultra short. And Ishares says .01. Too lazy to see what MFO premium shows.

I do see that TFLO is not fully invested, which might explain the minuscule performance differences.

Derf

@rforno : What brokerage are you using to roll treasuries & what term ?
Thanks , Derf

rforno

Derf said:

@rforno : What brokerage are you using to roll treasuries & what term ?
Thanks , Derf

Schwab.

I bought a 1-mo TBill at auction yesterday and it's set to auto-roll next month...first time I've done it at auction and also auto-roll, so I'm curious how it all plays out.

Other Tbills I manually roll myself if I'm not otherwise using the money ... I've been mainly sticking with 1-mo TBills just for flexibility.

Again, I'm not a bond person. I just hate giving Schwab .34ER for a MMF and then worry about buying/selling their fund each time I want to make a stock transaction. (Yeah, there are other ETFs available, I know...)

Derf

@rforno : Thanks for the reply. Exactly why I asked . Isn't the money for matured T-bill headed to bank & then back into T-bill on auction day? I'm guessing , that's why I questioned what you're doing .With one month roll, 12* 3 =36 (?) days of low interest.
Let me know how things workout.

Never to old to learn, Derf

yogibearbull

Actually, with both manual purchases and auto-roll, T-Bill purchases are coordinated with maturing T-Bills so that the money remains in T-Bills CONTINUOUSLY.

For example, 13-wk and 26-wk auctions are on Monday, and brokers may block the money needed for purchase on Monday afternoon, but the settlement isn't until Thursday and can be covered by maturing T-Bills on Thursday. Only Fido starts sending margin notices but those can be ignored - for once.

FD1000

rforno said:

Derf said:

@rforno : What brokerage are you using to roll treasuries & what term ?
Thanks , Derf

Schwab.

I bought a 1-mo TBill at auction yesterday and it's set to auto-roll next month...first time I've done it at auction and also auto-roll, so I'm curious how it all plays out.

Other Tbills I manually roll myself if I'm not otherwise using the money ... I've been mainly sticking with 1-mo TBills just for flexibility.

Again, I'm not a bond person. I just hate giving Schwab .34ER for a MMF and then worry about buying/selling their fund each time I want to make a stock transaction. (Yeah, there are other ETFs available, I know...)

Each time you buy a stock you will have to sell your 1-mo Tbill just as you need to sell Schwab MM.
Is it easier than trading MM? No, a lot harder.
Are you going to get a good price? no way to know

Is selling/buying Schwab MM annoying? absolutely, but I got used to it. I trade in/out of my funds and trade the opposite using my MM.

Looking at treasuries at Schwab with a maturity of 9/15 to 9/30 and I see YTM of 4.09 to 5.066. I will stick with my Schwab Treasury Obligations Money Fund – Ultra Shares (SCOXX) that pay "only" 5.2%. If you don't have the min, you can use SNOXX at 5.05%

msf

Last year, SCOXX / SNOXX was only 18.8% state tax exempt (and 0% exempt in Calif., N.Y., and Conn.)
https://www.schwabassetmanagement.com/resource/2022-supplementary-tax-information.

Even in Georgia, with its 5.75% state income tax, after you chop off 5.75% x 5.2% x (1 - 18.8%) or 0.24% for state tax, one is left with less than a 5% return. Own Treasuries and the full yield is state tax exempt.

FD1000

(https://www.audits2.ga.gov/reports/summaries/retirement-income-exclusion/)

Published: February 3, 2023.. QUOTE: "In 1981, Georgia enacted an income tax exclusion for retirement income received by taxpayers aged 62 years and over. Currently, taxpayers aged 65 and over may exclude up to $65,000, while those 62 to 64 (as well as those permanently and totally disabled) may exclude up to $35,000. The exclusion applies to retirement income such as capital gains, interest, and pensions, as well as up to $4,000 of earned income. Limits apply to individual taxpayers, so a married couple filing jointly may exclude twice the given limit. The exclusion is intended to induce retirees to live in Georgia and provide a boost to economic growth."

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Even if the difference is 0.2-0.4% annually why bother? I look for an easy way to trade without any hurdles. MM is a great holding place until the next trade and when I'm in, I invest at 99+%.
Most of our money is in IRAs (Roth+Rollover) anyway.

msf

a married couple filing jointly may exclude twice the given limit.
This makes it sound as if a couple gets a combined exclusion that's double the individual exclusion. That's not quite accurate.

The exclusion is available for the taxpayer and his/her spouse; however, each must qualify on a separate basis.

From instructions for GA state income tax Schedule 1 subtractions.
https://dor.georgia.gov/document/document/2022-it-511-individual-income-tax-booklet/download

More importantly, the Feb 3, 2023 report puts this tax break in perspective by identifying the taxpayers targeted for this benefit:"PUBLIC BENEFIT  The exclusion provides relief to lower-income retiree households..."

No matter. There are lots of people who don't benefit from this break - because they're not lower income, or because they're not over age 62 (retired or not), or maybe they don't live in Georgia all the time if at all.

Even if the difference is 0.2-0.4% annually why bother?
Good question. Why bother making a point of such a small difference?

Looking at treasuries at Schwab with a maturity of 9/15 to 9/30 and I see YTM of 4.09 to 5.066. I will stick with my Schwab Treasury Obligations Money Fund – Ultra Shares (SCOXX) that pay "only" 5.2%