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.
Comments
Haven't looked at higher rated corporate floaters. Not sure the water has finished receding. Might be more naked swimmers out there. YMMV
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.
People should take the time to compare TFLO and USFR with all available tools.
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.
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
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.
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.
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)
etfdb.com and etf.com both have the same wrong index for TFLO: the Markit iBoxx USD Liquid High Yield 0-5 Index.
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%.
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.
I do see that TFLO is not fully invested, which might explain the minuscule performance differences.
Thanks , Derf
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...)
Let me know how things workout.
Never to old to learn, Derf
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.
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%
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.
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.
This makes it sound as if a couple gets a combined exclusion that's double the individual exclusion. That's not quite accurate. 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?