A bond experiment

Investing Strategies Bonds & Fixed Income Investments
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@Arindam mentioned in an earlier post -

I too happen to have a large amount of cash sitting in a brokerage sweep money market fund. I noticed that the yield has dropped from about 4% to 3.31% recently. That’s quite a drop, and with the sums involved makes quite a difference. So I’ve been buying CDs opportunistically as I see ones with slightly higher rates (3.75% - 3.85%). I used to buy all the T-bills regularly, but their yields have dropped below the CD yields so I’ve mostly switched to CDs. But for the actual cash just sitting there, I wondered if there was an easy way to get a better yield. As an experiment, I placed bids on a bunch of very short-term treasury instruments at yields that I want (around 4%), but not a single one ever executed. Until today!

Today, one of my bids caught an ask, and in theory I will receive about a 4% yield between now and 2/28 on a large chunk of cash. It has to be a large chunk because my brokerage adds a markup that makes purchases not worth doing in small chunks. I am now the proud owner of 9128286F2 at the purchase price of 99.936. It is a 2.5% bond maturing 2/28/26. To me, that’s as good as cash for this particular chunk of money. If I am calculating correctly, the accrued interest is $11.395, so each one costs me $999.36+$11.395, or $1010.755, and the YTM comes to 3.93%. Since 3.93% is significantly better than 3.31%, it’s worth doing. I’ll know for sure in about 2 1/2 weeks. I am assuming that per bond on 2/28 I will receive $1000 principal payment plus $1000 * 2.5% * (1/2 year) = $12.50, for a total of $1012.50.

Does this look to be correct?

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Mark,

The diff between CDs and Treasuries is their tax treatment at the state level.

I live in Oregon, and my marginal, state tax-rate is 9%. Therefore, if a T-bill pays 3.7% or so, as has now become the case, then a CD would have to offer me 4.07%. There’s nothing on the market that does so, never mind having to pay a broker a markup or commish.

Also, there is the matter of ‘issuer risk’. For sure, our dear government isn’t the best of creditors, and everyone knows its debt isn’t triple-AAA. But the Treasury Department does a superb job of selling debt, and the $100 increments make it easy to slosh extra cash into and out of a Treasury Direct account.

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Mark,

Now that the market has closed and I’ve gotten in a bike ride, I went back and re-read your opening post more carefully.

Kudos to you for low-balling the ‘ask’ by placing aggressive ‘bids’. Also, your math looks good. The note pays semi-annually. Therefore the year-faction that creates the accrued-interest is roughly 0.454795. Multiply that times the 2.5 coupon, and the accrued-interest would be close to $11.37. So your number of $11.38 looks good.

Your earned interest will be the year fraction from the last coupon payment minus the year fraction you didn’t own the bond, or 0.04521 times the coupon, or $1.13. To that needs to be added your discounted purchase-price, or $0.64 cents. Those two numbers need to be added and then divided by the purchase-price.

For the sake of making things seem better than they might be, let’s not back in the purchased accrued-interest. Therefore, $1.77 divided by 999.36 will result in a gain of 1.77% gain for the 17-day holding period, or (roughly)10 basis points per day. For 365-day holding-period, that would offer a gain of 3.8%/yr.

You’re math and bond savvy, and I’ll trust that your calculation of 3.93% is closer the facts than my calcs and is what you were hoping to achieve. But I’d still question whether you want to mess with buying CDs or treasuries in the secondary market rather opting for the ease of buying them in the primary market and then focusing on bonds that are fairly close by in maturity, but offer much more yield.

In any case, use several brokers to shop the bond market, which isn’t a single market but a network of dealers to whom the various brokers have differing relationships, plus their own in-house inventories they market. Thus, prices can vary widely, as will the depth of the offering queues.

Post script:

Take a look at Fido’s online YTM calculator. It reports the exact YTM you did.

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Yep. I live in Florida where there is no state income tax, so for me new issue CDs (FDIC insured ones only) and T-bills are mostly interchangeable. However, I have been able to buy any [new issue] T-bill I please in any quantity, but I’ve found various CDs that can’t be purchased in quantity. For example, a few days ago, there was one that only had $5k left for sale. And just yesterday, between the time I searched and the time I clicked “buy”, just minutes at most, whatever quantity remained of a particular CD was already sold. That never happens with T-bills.

Right now I consider the issuer risk of all the banks I buy CDs from to be minimal. Since I only buy FDIC insured ones, if a bank goes bust one night, all their deposits, including CDs, will be transferred to another bank overnight. And as far as I am aware, they are all paid out as usual including both principal and interest. Heck, many CDs have a tiny added benefit in that many of the contracts have a clause that upon death they pay out the entire period of interest immediately. Obviously not a benefit for us, but perhaps for our heirs. :rofl: [this last part, while true, is just me joking around]

When my bid is accepted too quickly, I always wonder if I should have bid a tenth of a basis point lower. In this case, as I recall, I bid two tenths lower than the lowest ask. Interestingly, today that same bond has a lowest ask 4 tenths higher. So I’m satisfied that I got a “good price”.

It is indeed easier, and more straightforward, to buy T-bills and CDs in the primary market (new issue). However, I’ll explain my thought process - this is cash that is sitting in preparation for a large purchase sometime in the next few months, it’s a large amount, so even if I find a nice CD, say 3.8%, I am limited to $250k due to the FDIC coverage limit. T-bills are yielding about 3.7% right now (the bids each week vary of course, but that’s been the trend) so CDs at 3.75% or 3.8% are clearly better. But I was searching for something closer to 4%, and that’s why I went looking for “bond stubs” (what I call older treasury debt that is near maturity) to see what kind of price I could get. But mainly I did it as an experiment just to see how it works, and if it works.

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Mark,

Your thoughtfulness is impressive. Best wishes with the project.

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If I remember (and if I can find this post again), I will update with the results on the 28th when the bonds mature.

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Current 1 month T-bill rate is 4.37

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I have an account with treasury direct and you can link it to your bank, so purchases and maturity are automatically debited and credited; Also you can setup automatic re-investments.

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Also, I buy T-bills from my fidelity account directly by participating in auctions and there is no commission for that. Check your brokerage. Most allow you to buy directly. You typically get better rates and better tax treatment.

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@Kingran I bought THOSE exact T-bills …in February of 2025, about a year ago. The problem is that TODAY the T-bill rates are lower.

I regularly buy T-bills both at TreasuryDirect and at various brokerages, including Fidelity. But the point is that right now, CDs have a slightly higher yield than T-bills. And the experiment I described above has a slightly higher yield than the CDs.

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You mentioned your CD’s are yielding less than 4%.. then how come they are better than T-bills?

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It’s very interesting to follow such short duration bonds. You can see the price rise higher and higher each day as it approaches 100.00 on maturity day. Today the best ask is 99.958 (likely from the same seller that I bought from, I can tell by their minimum quantity).

Because T-bills are yielding around 3.6% - 3.7% now (Feb 2026). I’ve been getting CDs at 3.75% and 3.8% this week (for example DS12D3826 at 3.8% which is equivalent to the 26-week T-bill at 3.61%).

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sorry, my earlier post was 2025 rates… here is the current rate

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My experiment is coming to a close. Today the bond is trading at 99.997 and will mature tomorrow at 100. I assume the interest and the principal will be deposited into my account over the weekend. Then I can calculate my return to see if it was worth it. And when I say “worth it”, I mean if it earned more than my usual T-bills, and recently CDs.

As an aside, buying T-bills is super easy and have regular dates, but buying CDs requires sifting though a whole long list of them to find the ones that have the best yields at approximately the dats desires. Instead of spending 3 to 5 minutes a week buying T-bills, I have to spend 10 to 15 minutes a week buying CDs. But I think that extra time is worth getting an additional 0.1-0.2% yield.

NOTE: I already did the calculation, but I will do it again with the actual numbers (and those actual numbers may be the same as the ones I used 2 weeks ago.)

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The experiment is now over. The actual numbers have posted on my brokerage account. However there is some confusion about dates that I don’t yet understand, or that may be resolved on the next business day (Monday). My brokerage listed 2-March as the date the principal and interest will be credited, but the bond actually matured today. The question is - do I lose 1 or 2 days of interest, or does the money begin earning interest today on 28-Feb (in the brokerage sweep account)? And it makes a difference because it is a large sum of money.

Final numbers are:
Experiment - IRR of 3.77%
Alternative - daily average yield of 3.315% (half the period at 3.32% and half the period at 3.31%), not sure what the IRR calculation looks like.

I consider this to be a successful experiment and I would like to repeat it. BUT, I can’t find any more bonds with a very short-term remaining at attractive rates. I wonder why these suddenly became available on 2/11 and nothing similar since? Maybe this is the kind of thing that can only be done at certain times of year depending on which kinds of bonds happen to be near maturity?

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Does your account’s cash balance include the proceeds from the maturing bond and its final interest payment? The day it shows up there will most likely be the day it starts accruing interest as cash instead of as a bond.

The broker where I have my bond ladder generally credits me during overnight processing after the first market day inclusive of the interest payment day or the maturity day.

In other words, any maturing bonds or bond interest with a scheduled date of February 28, March 1, or March 2, 2026 will likely show up in my account with a payment date of Monday, March 2, 2026, with the actual cash balance increasing by that payment amount during the overnight processing between March 2 and March 3.

Note that I’ve had a few cases where the payment was credited a few days later than expected. When I called my broker to ask, they claimed they post the payments on the day they receive them, and sometimes there’s a delay. They didn’t seem worried about it and indicated that a delay in payment processing was both normal and not a default.

Regards,

-Chuck

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It does not. But that may be because they don’t show updated numbers until the next business day. This is a US Treasury Bond that matured on 2/28, and was paid on 2/28. The question is - for 2/28 and for 3/1 do I receive interest on that money or does my broker receive interest on it?