3- And 6-Month Treasury Bills Auction To Record Investment Rates Today Of 4.802% And 5.030%

rockies | Feb 13, 2023 | 295 posts since 2018

3- and 6-Month Treasury bills hit new highs in today's Treasury auction with investment rates of 4.802% and 5.030%, respectively.

To put this in perspective, I will use RichardW's format from his now famous post entitled "Comparing The Tax-Equivalent Yields Of A 6-Month T-Bill And A 6-Month CD As Of 1/5/2023" which can be found at:

https://www.depositaccounts.com/community/misc/51048-comparing-taxequivalent-yields-6month-tbill-6mo...

According to the Taxable-Equivalent Yield Calculator available at Fidelity, if your principal state of residence is California, and your estimated taxable income is $59,000, and your federal tax filing status is single, the 6-month T-bill at 5.03% has a tax-equivalent yield of a 6-month CD at 5.79%. Changing the estimated taxable income to $118,000 and the federal tax filing status to married filing jointly produces the same tax-equivalent yield of a 5.79%. If you change the state to New York and leave all the other variables the same, the 6-month T-bill at 5.03% has a tax-equivalent yield of a 6-month CD at 5.52%. Repeating this procedure for Nebraska generates a result of 5.59%. For Missouri the result is 5.48%.

All of these results neglect local income tax, and assume that the Treasury Bill and the comparable CD are held in a taxable deposit account. The Taxable-Equivalent Yield Calculator available at Fidelity (https://digital.fidelity.com/prgw/digital/taxyieldcalc/) expresses yield as the effective annual rate of return in percent.

P.S. By the way, I should disclose that I am RichardW's number one fan!

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RichardW | Feb 14, 2023 | 821 posts since 2019

Thanks rockies!! These auction results are even more impressive if you are comparing the tax-equivalent yield of a 6-month CD which lists its rate in APY (Annual Percentage Yield) and employs daily compounding. Normally, this is the situation for most direct bank CDs. When recently researching a question which another DA reader, CDCA, asked me, I discovered that the Fidelity calculator bases its calculation regarding tax-equivalent yield results of CDs on semi-annual compounding. I’ll elaborate more about this in a second comment, but for now, here are the results regarding a 6-month CD which lists its rate in APY and utilizes daily compounding: if your principle state of residence is California, and your estimated taxable income is $59,000, and your federal tax filing status is single, the 6-month T-bill at 5.03% has a tax-equivalent yield of a 6-month CD with daily compounding at 5.88%. Changing the estimated taxable income to $118,000 and the federal tax filing status to married filing jointly produces the same tax-equivalent yield of 5.88%. If you change the state to New York and leave all the other variables the same, the 6-month T-bill at 5.03% has a tax-equivalent yield of a 6-month CD with daily compounding at 5.60%. Repeating this procedure for Nebraska generates a result of 5.66%. For Missouri the result is 5.55%.

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RichardW | Feb 14, 2023 | 821 posts since 2019

I discovered that the Fidelity calculator bases its calculation regarding tax-equivalent yield results of CDs on semi-annual compounding when I viewed the equation which Fidelity utilizes: “CD Bond Yield = (((Corporate Bond Yield / 2) + 1)² ) – 1” To observe this equation: select “Learn more” at the top of this webpage: https://digital.fidelity.com/prgw/digital/taxyieldcalc/ and scroll down until you see “How Tax Equivalent Yields Are Calculated.”

The interest rate which corporate bonds, treasury (bonds, notes, or bills), out-of-state municipal bonds, and in-state municipal bonds typically list does not include compounding and is referred to as the nominal interest rate. CDs are a different story. The interest rate which direct bank CDs typically list, APY (annual percentage yield), does include compounding. Unfortunately, the compounding frequency which direct bank CDs utilize varies. Some direct bank CDs use daily compounding, some use monthly compounding, while others utilize yet another compounding frequency. To complicate matters further, the interest rate which brokered CDs typically list is the nominal interest rate and does not include any compounding. When expressing the “one” interest rate of CDs, Fidelity selected a compromise in their calculator, they selected a semi-annual compounding. This is an interest value midway between the daily compounding value used by some direct bank CDs and the no compounding value which is typically used by brokered CDs. Fidelity’s selection of “one size fits all” is not perfect, but it appears to be an appropriate compromise.

To express an interest rate which includes compounding, the expression APY (annual percentage yield) is employed. Here is the equation which allows conversion from nominal interest rate to APY: APY = (((r/n) + 1)^n) – 1 Where r = nominal interest rate, n = compounding frequency (for example: n = 365 indicates daily compounding, n = 12 indicates monthly compounding, and n = 2 signifies semi-annual compounding), and "^n" indicates the mathematical operation of raising to the nth power.

So, to express APY with semi-annual compounding, we utilize the following equation: APY = (((r/2) + 1)^2) – 1 Note that this equation has the same format as the equation listed in my first sentence of this comment.
Note that since the interest rate which both corporate bonds and brokered CDs typically utilize does not include compounding and is referred to as the nominal interest rate, the tax-equivalent yield listed on the Fidelity calculator of a corporate bond is the same value as the tax-equivalent yield of a brokered CD.

If you wanted to calculate the APY of a CD which employs daily compounding, a valid equation to convert nominal interest rate to APY with daily compounding is: APY = (((r/365) + 1)^365) – 1 If you despise non-linear equations, you could also use one of the many nominal interest rate or APR to APY calculators available online. Using this equation to calculate the tax-equivalent yield of a 6-month CD with daily compounding compared to the 6-month T-bill at 5.03% for the California result which I provided in my earlier comment produces: (((0.0571/365) + 1)^365) – 1 = 0.0588 = 5.88% Note that this yield agrees with the result listed in my first comment. Also note that, r, the nominal interest rate utilized in this equation is the tax-equivalent yield (5.71%) listed on the Fidelity calculator of the corresponding corporate bond, which has the same value as the tax-equivalent yield of a brokered CD.

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Evil_Capitalist | Feb 15, 2023 | 157 posts since 2022

Things are definitely looking up in the short term product market, including these short term T-Bills. I got in on the action through Fidelity with some 26 weeks at the 5.03 coupon rate. I see it is down to 5.02 this week.

It is really encouraging to see rates picking up again after a pretty depressing and boring December and January. Still nothing out there to challenge my 4.95% APY 3 year call protected CD from UBS that I managed to snag at the peak in mid-November.

Hoping to see some movement in that area next. I would like to secure at least one more long term CD at or higher than my UBS CD.

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