Financial Wellness – with the South Bay Bogleheads



Treasury Securities: An OverviewJim CosgroveJuly 16, 2018The Fine Print: This presentation is solely for informational and educational purposes and is not a recommendation or solicitation to buy or sell any securities. Data was gathered from sources believed to be reliable but no guarantees of accuracy or completeness is made. The opinions are the presenter’s and do not necessarily represent the South Bay Bogleheads. Consult with qualified advisors or perform your own due diligence. The presenter maintains positions in some of the securities mentioned.Program OutlineIntroductionThe US Bond MarketUS Treasury SecuritiesTaxationAuctionsBonds, bond ETFs, bond funds?On-line resources2. The US Bond MarketSource: : US stock market cap = ~$30TAverage Dollar Value of Daily TradingStocks=$274 billionabout a quarter of totalUS Treasury Securities=$546 billionabout half of totalUS Bonds ex Treasury=$270 billionabout a quarter of totalTotal=$1,090 trillionSources:Securities Industry & Financial Markets Association Board Options Exchange. US Treasury SecuritiesBillsOften called T-bills or “short-term paper.”Issued in maturities of 4, 13, 26, and 52 weeks.. Yields are determined at auction; bills are sold at a discount from face value.NotesOften called T-notes or “intermediate bonds.”Issued in maturities of 2, 3, 5, 7, and 10 years. Yields are determined at auction; interest is paid every six months.BondsOften called T-bonds or “long bonds.”Maturities from more than 10 years up to 30 years.Yields are determined at auction; interest is paid every six months.FRNFloating Rate Notes Maturities of 2 years. Variable interest rate based on the 13-week T-bill.Yield spread set at monthly auctions; interest is paid every six months.TIPSTreasury Inflation Protected SecuritiesMaturities of 5, 10, and 30 years.Interest is fixed and paid every six months.Recent interest rates: 10-year in January = .50% 30-year in February = 1.00% 5-year in April = .625%Principal is adjusted every six months based on changes of the Consumer Price Index (CPI-U).Taxes on interest are due in the year received and on principal in the year it occurs.I-BondsI Savings BondsMaturities of 30 years; redeemable after 12 months with a 3-month interest penalty. No penalty after 5 years.A fixed interest rate is set at issue; additional variable interest is set each May and November.Current fixed rate = .3% + inflation (1.11% x 2) = 2.52%. (Roughly = 2-year Treasury.)Taxes on interest can be deferred until redemption; tax-free if for education.Maximum purchase of $10,000 per Social Security number per year.EE BondsSavings BondsMaturities of 30 years; redeemable after 12 months with a 3-month interest penalty. No penalty after 5 years.A fixed interest rate is set each May and November. The rate stays the same for the life of the bond. The current rate is .1%.Taxes on interest can be deferred until redemption.Maximum purchase of $10,000 per Social Security number per year.STRIPSZero-coupon bondsSeparate Trading of Registered Interest and Principal of SecuritiesNot sold by Treasury.A bond is sold at a discount without interest. Interest is added at maturity.. TaxationUS Treasury securities are taxable at the Federal level and tax-exempt at the State level.Taxation includes increases of principal for TIPS (Treasury Inflation Protected Securities)An education tax exclusion can be applied to I-Bonds and EE bonds. 5. AuctionsCompetitive biddersInstitutional investorsNon-competitive biddersIndividuals and small organizations$5 million limitAccept the high results of the competitive bidsAuctions in-depth here: Schedule from late April through October is here: IV. Example of an Auction Result . Bonds, bond ETFs, bond funds?What problem is needing to be solved?SLY = Safety…Liquidity…YieldUS TreasuresSafe and LiquidCapital preservation.Funding a known future liability.Held only in a taxable account; no IRA’s or other tax advantaged accounts.No commissions or fees.No selling.Good support.7. On-line ResourcesTreasury Direct in Bonds ................
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