Treasury Bills, Notes, and Bonds Discussion 2024+

[Gumby]

....
Can I just sell VMFXX and purchase VUSXX with no problems in my Vanguard brokerage account??

That's exactly what I did this past January.

To clarify, for tax year 2023, only 80.06% of the dividend from VUSXX was free of state taxes in all states. None of the dividends from VFMXX were exempt from state tax in CT, CA or NY. 49.37% of the VMFXX dividends were exempt in the other 47 states.

 

[Lsbcal]

Yes, it is easy. I just purchased the VUSXX using all the VMFXX in our taxable account. I'm in CA so this helps a bit.

 

[Lsbcal]

When I look at the portfolio composition of VUSXX it is 98.8% Treasuries. The other 1.2% is "US Government Obldgations".

So is that 80% mentioned above going to vary a lot? Will this year be more like 100% state tax free?

VG data page: Vanguard Mutual Fund Profile | Vanguard

 

[MarieIG]

Thank you for informing me that VUSXX is/will be state tax free since I live in the state of NJ. Presently I am in VMFXX which does not meet the 50% test.
Can I just sell VMFXX and purchase VUSXX with no problems in my Vanguard brokerage account??

I have had no issues at Vanguard selling one money market fund and purchasing another.

 

[Gumby]

When I look at the portfolio composition of VUSXX it is 98.8% Treasuries. The other 1.2% is "US Government Obldgations".

So is that 80% mentioned above going to vary a lot? Will this year be more like 100% state tax free?

VG data page: Vanguard Mutual Fund Profile | Vanguard

As you can see in the page you cited, they have a combination of direct government obligations (which must be at least 80%) and repurchase agreements collateralized by government instruments. My understanding is that the income from repurchase agreements does not qualify as "income from US government obligations" for the purpose of avoiding state tax, because the overnight interest is actually paid by a private party.

 

[Lsbcal]

As you can see in the page you cited, they have a combination of direct government obligations (which must be at least 80%) and repurchase agreements collateralized by government instruments. My understanding is that the income from repurchase agreements does not qualify as "income from US government obligations" for the purpose of avoiding state tax, because the overnight interest is actually paid by a private party.

So if it says "repurchase agreement" then that is state taxable but "US Government Obligations" and "U.S. Treasury Bills" are free of state taxes? In the case of VUSXX then 100% is not state taxable because there are no repo's and right now for VMFXX 59% is not state taxable (40.8% is repurchase agreements).

I don't know where where this 50% rule is stated. Looking briefly at the prospectus did not help here. ChatGPT seems to say that the 50% rule is necessary to deduct US Treasuries but you would still apply a proportionate number to the state tax free amount. So if you had 98.8% in US Treasuries that is the proportion free of state tax. The tool also included the US Govt. Obligations as state tax free so with VUSXX one is in good shape (assuming the current allocations hold for the year).

 

[Gumby]

So if it says "repurchase agreement" then that is state taxable but "US Government Obligations" and "U.S. Treasury Bills" are free of state taxes? In the case of VUSXX then 100% is not state taxable because there are no repo's and right now for VMFXX 59% is not state taxable (40.8% is repurchase agreements).

I don't know where where this 50% rule is stated. Looking briefly at the prospectus did not help here. ChatGPT seems to say that the 50% rule is necessary to deduct US Treasuries but you would still apply a proportionate number to the state tax free amount. So if you had 98.8% in US Treasuries that is the proportion free of state tax. The tool also included the US Govt. Obligations as state tax free so with VUSXX one is in good shape (assuming the current allocations hold for the year).

That's not what Vanguard is saying. They are saying that in VUSXX they have 99.5% consisting of government obligations AND repurchase agreements. They DO NOT say that 100% of their holdings are direct government obligations. They say that the direct government obligations will always be at least 80%.

This Vanguard note is important "Important Note: Income generated from investments in repurchase agreements with the federal reserve are generally subject to state and local income taxes."

You need to look in your own state's tax laws to discover that the federal income is only exempt if the fund had greater than 50% direct federal obligations. I know how to find it in CT. I don't for California or NY

 

[Graybeard]

Which is why I buy T bills in my taxable account now. Last year I had a lot in the settlement fund and the interest was a lot and CT took a bite so I minimize what I have in VMFXX (sf) and VUSXX (Treas MM).

 

[Lsbcal]

As you can see in the page you cited, they have a combination of direct government obligations (which must be at least 80%) and repurchase agreements collateralized by government instruments. My understanding is that the income from repurchase agreements does not qualify as "income from US government obligations" for the purpose of avoiding state tax, because the overnight interest is actually paid by a private party.

Here is what VUSXX shows under portfolio composition as of 5/31/24:

So at least right now it appears to be 100% direct government obligations.

Am I missing something?

 

[Gumby]

Here is what VUSXX shows under portfolio composition as of 5/31/24:


View attachment 51288
So at least right now it appears to be 100% direct government obligations.

Am I missing something?

There is a difference between what they hold and where the income comes from.

This is how a repurchase agreement works (from Investopedia)

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. For a repo, a dealer sells government securities to an investor, usually overnight, and buys them back the following day at a slightly higher price. The small price difference is an implicit overnight interest rate.

Repurchase Agreement (Repo): Definition, Examples, and Risks

A repurchase agreement is a form of short-term borrowing for dealers in government securities.

www.investopedia.com

Note that the "investor" here is Vanguard.

That income received the next day because the dealer buys back at a higher price does not come directly from the federal government. It is paid by the dealer. So it is not exempt from state tax.

You really need to wait until the end of the year to know how much of the dividends paid out by VUSXX came from the government directly as interest, and how much came from dealers via repurchase agreements. Vanguard tells you every year what that percentage is.

 

[Lsbcal]

Gumby, if correct then one cannot know what the tax situation of VUSXX is until after the fact.

But then why are repros specifically spelled out for VMFXX and are absent for VUSXX (see above)? Here is VMFXX exposure with repro's specifically identified:

 

[Gumby]

Gumby, if correct then one cannot know what the tax situation of VUSXX is until after the fact.

But then why are repros specifically spelled out for VMFXX and are absent for VUSXX (see above)? Here is VMFXX exposure with repro's specifically identified:


View attachment 51289

I don't know the answer to that. Maybe VUSXX is not using repurchase agreements at the moment, but I wouldn't assume that or that it will not change. For VUSXX, VMFXX and any other fund using repurchase agreements, you will never know the precise percentage of state exempt income until the end of the year. And that number will change from year to year. But I am confident that VUSXX will more likely meet the 50% test than VMFXX.

 

[Lsbcal]

From the 2023 tax fund info you originally supplied Gumby in that VG link, I need to go with Tbills to make this 100% transparent. Thanks again for an interesting discussion. I am a little rusty on the tax implications as most of our investments are in retirement accounts.

 

[audreyh1]

Am I right about the motivation to purchase Tbills rather then go with a federal money market fund is the slightly better rate one gets for locking up the money over a short period of time? I think both are free of state tax.

I see the current Tbill quote on the secondary market for Oct 1 maturity is 5.384% and VMFXX has a SEC yield of 5.28% (ER=0.11%). So the ER is the rate difference.

It’s the rate lock-in versus a MM fund as well as the slightly higher rates at present.

I live in a no tax state so that benefit doesn’t apply to me but I can see how it can really help some.

The Fidelity MM funds don't yield quite as high as the Vanguard ones for me so the spread is also wider. The government MM Funds are yielding around 5% or just under. The Premium MM fund is yielding around 5.15% but that holds a lot of commercial paper so not as high credit quality as the government MM funds.

 

[Lsbcal]

Unfortunately California is in the Treasury "proportionality" category (not the over 50% category, or no tax category). So in 2023 if I held VUSXX I'd get only 80% of the interest state tax free. I'll just go with Tbills which are a little more effort.

 

[audreyh1]

We have T-bills at Fidelity on autoroll which once set up means no effort on my part unless I want to make a change.

 

[JoeWras]

Unfortunately California is in the Treasury "proportionality" category (not the over 50% category, or no tax category). So in 2023 if I held VUSXX I'd get only 80% of the interest state tax free. I'll just go with Tbills which are a little more effort.

I thought this proportional rule applied to all states. The 50% you-are-out-of-luck-bud thing is just an add-on in some states.

No?

 

[Lsbcal]

I’m pretty sure about California but one should check for their state. ChatGBT is one source of information.

 

[Gumby]

I thought this proportional rule applied to all states. The 50% you-are-out-of-luck-bud thing is just an add-on in some states.

No?

I believe you are correct. And I think those add on states are NY, CT and CA.

 

[audreyh1]

This week’s T-bill auction results:

Bills CMB CUSIP Issue Date High Rate Investment Rate Price per $100 4-Week No 912797KQ9 06/25/2024 5.230% 5.324% $99.593222 8-Week No 912797KY2 06/25/2024 5.260% 5.377% $99.181778 13-Week No 912797KL0 06/20/2024 5.250% 5.395% $98.672917 17-Week No 912797LU9 06/25/2024 5.220% 5.385% $98.274500 26-Week No 912797LQ8 06/20/2024 5.150% 5.361% $97.396389

 

[Another Reader]

Thanks, Audrey. Dropped a bit, not liking the trend...

 

[JoeWras]

I've been dipping my toe in some notes for the ladder. This week, decided to go in a bit deeper and am in on the 2, 5 and 7 yr. auction. Not a ton of cash, but a few rungs on the ladder none the less.

 

[Lsbcal]

I didn't have any 2026 TIPS so bought some this week at 2.7%.

 

[Healthy Lifestyle]

I am a new Fidelity account holder and fixed income investor. I purchased my first large 8 week Treasury bill today. I had the option to select Auto Roll but held off for now as it is a new option for me.
Are most fixed income investors selecting Fidelity's Auto Roll option for now?
Does Auto Roll only work for the Treasury bill purchase or also the CD's that I hold in the account?
How large of purchase would you make in these Treasuries at one time?

 

[JoeWras]

Auto-roll is strictly up to you. I don't use it much because I tend to change durations as I have been slowly going longer.

At auction, you can buy 1 bill at $1000, or 1000 for a million bucks. Up to you. Over on bogleheads, people humble brag about putting a half million in an 8 week bill all the time. To each their own. (And on Treasury Direct, which I do not recommend, you can go as low at $100.)

I'm usually more in the $10k range. It is all up to you. There is no FDIC insurance so no need to worry about a ceiling. But you should worry about having too many eggs in one type of basket, as always.