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T-bonds as futures margin
- Thread starter sasha1
- Start date
Sasha,
Ask your futures broker what their instructions are for purchasing t-bills to be held as margin in your account. Each firm has a different procedure. Usually what you do is fill out a form indicating which T-Bills you want to purchase. You wire them the money to purchase the T-Bills and they purchase it for you. The minimum purchase size for T-Bills is $10k, then they increments of $5k. You can purchase expiration times of 90 days, 6 months, or a year. I always go with 90 days b/c I treat T-Bills same as cash and may want to move it around.
Not all firms accept T-Bills as margin, and many firms require you to purchase the T-Bills through them, although some have a process to allow you to transfer existing T-Bills that have not matured.
Firms usually only accept a % of T-Bills value, such as 95%. This is b/c T-Bills are sold at a discount to face value.
Also, some firms will charge you a fee (like $30-50) to purchase the T-Bills, and a fee if you sell prior to maturity. T-Bill rollover is usually no cost.
Btw, I'm not sure if you meant to say "t-bills" instead of "t-bonds" but only Treasury Bills are accepted as margin because of the short expiration time. Some firms do accept Bonds, Notes, and other securities but it's rare with any discount broker that they will do this, and you usually have to open a very large account and get a discount to fair market value of your Bonds as margin. In many cases you're better off just selling your Bonds and buying T-Bills if your only risk capital is tied up in Bonds or Notes.
Hope that helps.
Ask your futures broker what their instructions are for purchasing t-bills to be held as margin in your account. Each firm has a different procedure. Usually what you do is fill out a form indicating which T-Bills you want to purchase. You wire them the money to purchase the T-Bills and they purchase it for you. The minimum purchase size for T-Bills is $10k, then they increments of $5k. You can purchase expiration times of 90 days, 6 months, or a year. I always go with 90 days b/c I treat T-Bills same as cash and may want to move it around.
Not all firms accept T-Bills as margin, and many firms require you to purchase the T-Bills through them, although some have a process to allow you to transfer existing T-Bills that have not matured.
Firms usually only accept a % of T-Bills value, such as 95%. This is b/c T-Bills are sold at a discount to face value.
Also, some firms will charge you a fee (like $30-50) to purchase the T-Bills, and a fee if you sell prior to maturity. T-Bill rollover is usually no cost.
Btw, I'm not sure if you meant to say "t-bills" instead of "t-bonds" but only Treasury Bills are accepted as margin because of the short expiration time. Some firms do accept Bonds, Notes, and other securities but it's rare with any discount broker that they will do this, and you usually have to open a very large account and get a discount to fair market value of your Bonds as margin. In many cases you're better off just selling your Bonds and buying T-Bills if your only risk capital is tied up in Bonds or Notes.
Hope that helps.
dottom,
Thanks for your reply. I think I am even more confused now, than before. I spoke to this broker today and they told me that t-bonds are ok. They did not say what maturity or anything like that. The only thing they said is that I have to keep enough cash in the account to allow for negative movements against my margin, otherwise they would have to break up the bond and that would require extra cost. They did not mention anything about t-bills.
Could you please explain to me the difference? Also, why does it matter what maturity you have (you mentioned 90 days)? Couldn't you just sell the bond/bill regardless in case your margin was low?
Do t-bonds also trade at a discount to face value?
Many thanks,
Sasha.
Thanks for your reply. I think I am even more confused now, than before. I spoke to this broker today and they told me that t-bonds are ok. They did not say what maturity or anything like that. The only thing they said is that I have to keep enough cash in the account to allow for negative movements against my margin, otherwise they would have to break up the bond and that would require extra cost. They did not mention anything about t-bills.
Could you please explain to me the difference? Also, why does it matter what maturity you have (you mentioned 90 days)? Couldn't you just sell the bond/bill regardless in case your margin was low?
Do t-bonds also trade at a discount to face value?
Many thanks,
Sasha.
The difference between t-bills/notes/bonds is the maturity period, the frequency in which they are offered for sale, and of course their interest rate. Bonds have 30-year terms (no longer available), Notes are offered in 10, 5, and 2-year terms, and Bills are offered in 52, 26, and 13-week terms.
The difference between a 13-week T-Bill vs. a 52-week T-Bill is the interest rate. Generally speaking the longer the term, the higher the interest rate that you lock in. The disadvantage, of course, is that you are locked in for that period.
Yes, you can liquidate any Bill/Note/Bond early. There is a bidding process and centralized marketplace where these are sold on the secondary market. You will get close to what the interest accrued has been, but there is a fee that applies. It's not that expensive if you sell directly ($34). If you go through your futures broker they may charge anywhere from $35-$100. (Consider if you had bought a T-Bill for $9750 with face value of $10,000 - if you liquidate after 1 month you may get ~$9780 for it buy pay liquidation fee. Also, some brokers will rollover your T-Bills for no cost whereas if you liquidate and buy new T-Bills at later date you pay more fees. )
The beauty of a T-Bill/Note/Bond is that it is a 100% electronic instrument that can be bought/sold/transfered at any time. It is not like a savings Bond which is a paper asset specifically in someone's name.
Only T-Bills are sold at discount, Bonds and Notes are not. T-Bills are preferred over Notes & Bonds because being short-term they are much more liquid, meaning you'll get closer to the true value of interest accrued if you have to liquidate prior to maturity. Interest on Notes and Bonds are also paid semi-annually, so you have a skewed curve every 6-months on valuation of Notes and Bonds on the secondary market.
My guess is that your broker was assuming you meant "T-Bill" although some brokers due accept "T-Bonds". They usually have a % of how much of your Bond they will accept as margin.
The difference between a 13-week T-Bill vs. a 52-week T-Bill is the interest rate. Generally speaking the longer the term, the higher the interest rate that you lock in. The disadvantage, of course, is that you are locked in for that period.
Yes, you can liquidate any Bill/Note/Bond early. There is a bidding process and centralized marketplace where these are sold on the secondary market. You will get close to what the interest accrued has been, but there is a fee that applies. It's not that expensive if you sell directly ($34). If you go through your futures broker they may charge anywhere from $35-$100. (Consider if you had bought a T-Bill for $9750 with face value of $10,000 - if you liquidate after 1 month you may get ~$9780 for it buy pay liquidation fee. Also, some brokers will rollover your T-Bills for no cost whereas if you liquidate and buy new T-Bills at later date you pay more fees. )
The beauty of a T-Bill/Note/Bond is that it is a 100% electronic instrument that can be bought/sold/transfered at any time. It is not like a savings Bond which is a paper asset specifically in someone's name.
Only T-Bills are sold at discount, Bonds and Notes are not. T-Bills are preferred over Notes & Bonds because being short-term they are much more liquid, meaning you'll get closer to the true value of interest accrued if you have to liquidate prior to maturity. Interest on Notes and Bonds are also paid semi-annually, so you have a skewed curve every 6-months on valuation of Notes and Bonds on the secondary market.
My guess is that your broker was assuming you meant "T-Bill" although some brokers due accept "T-Bonds". They usually have a % of how much of your Bond they will accept as margin.
Originally posted by sasha1
Great, this makes a lot more sense now. BTW, what is the current yield on the 90 bills? Also, do you receive interest at the end of the 90 period? Once the bill expires, do you get your cash credited back to you?
You get all interest + what you initially paid for the bill/note/bond at maturity. All bills/notes/bonds are sold at auction, so the actual rate varies, but you can get a very close guage of current rates by looking at the secondary market.
Here are current rates:
3-month, 1.76
6-month, 1.91
1-year, 2.41
2-year, 3.34
3-year, 3.89
5-year, 4.55
7-year, 4.97
10-year, 5.13
20-year, 5.80
dottom,
I couldn't find any online brokers who accept t-bonds for margin may be you can be so kind to share with me some of the brokers who you know.In general it is a good idea to be able to keep your bonds and use them as a margin.I guess if you want to keep them at cash value you can hedge them with futures.Thank you.
I couldn't find any online brokers who accept t-bonds for margin may be you can be so kind to share with me some of the brokers who you know.In general it is a good idea to be able to keep your bonds and use them as a margin.I guess if you want to keep them at cash value you can hedge them with futures.Thank you.
Actually, I have another question: if a 13 week t-bill yields only 1.76% and you only get credited for 95% of the face value of the bill, does it make sense to go to all the trouble (with commissions and all), unless you have a substantial amount of money as your initial margin?
Also, why wouldn't you buy a longer-term bond (with a much higher yield) and just trade out of it (paying commissions to broker) as necessary? Presumably the higher yield should more than compensate for your commission expenses?
Also, why wouldn't you buy a longer-term bond (with a much higher yield) and just trade out of it (paying commissions to broker) as necessary? Presumably the higher yield should more than compensate for your commission expenses?
Originally posted by lpo
I couldn't find any online brokers who accept t-bonds for margin may be you can be so kind to share with me some of the brokers who you know.In general it is a good idea to be able to keep your bonds and use them as a margin.I guess if you want to keep them at cash value you can hedge them with futures.Thank you.
lpo,
As I said, I think sasha's broker thought sasha said "t-bills" rather than "t-bonds". You won't find any brokers that advertise that they accept bonds or notes, but some do. Just ask them. Most discount brokers, if they accept t-bills at all, only deal in t-bills because it's easier - there's a t-bill auction every week. Some require that all t-bills have to be purchased through them (and may charge a fee), rather than transfered. You'll have a better chance that full service brokers will accept t-bonds and t-notes for margin, but then you're paying more commissions as well.
Actually, I have another question: if a 13 week t-bill yields only 1.76% and you only get credited for 95% of the face value of the bill, does it make sense to go to all the trouble (with commissions and all), unless you have a substantial amount of money as your initial margin?
You are correct - unless you can open a decent sized account, say at least $30k, it's not worth using t-bills because you not only have to overcome fees for purchase & sale of t-bills. Not to mention that some brokerages only give you 90% instead of 95%.
Also, why wouldn't you buy a longer-term bond (with a much higher yield) and just trade out of it (paying commissions to broker) as necessary? Presumably the higher yield should more than compensate for your commission expenses?
You might want to keep the cash around for liquidity reasons. You also want to look at the short-term interest yield curve. If the curve is moving down (say the Fed is raising interest rates), you'll be better off sticking with short-term rates. The reverse is true if the Fed is lowering rates.
Also, note that some brokers will only allow you to use 4-week, 9-week, or 26-week t-bills and NOT the 52-week t-bills. Or they will accept 12-month t-bills if you also have some shorter-term bills, or some % of cash vs. bills. Each broker has different requirements, you just have to ask. The overall goal of brokers with regards to performance-bond margin is to have cash available when you lose money and they have to debit your account.
I forsee in the near future online brokers will let you have one account to trade several different types of securities such as stocks, options, futures, currencies, and bonds all from one account. The last time I asked IB said that they were working on it, but don't know the timeframe.
You are correct - unless you can open a decent sized account, say at least $30k, it's not worth using t-bills because you not only have to overcome fees for purchase & sale of t-bills. Not to mention that some brokerages only give you 90% instead of 95%.
Also, why wouldn't you buy a longer-term bond (with a much higher yield) and just trade out of it (paying commissions to broker) as necessary? Presumably the higher yield should more than compensate for your commission expenses?
You might want to keep the cash around for liquidity reasons. You also want to look at the short-term interest yield curve. If the curve is moving down (say the Fed is raising interest rates), you'll be better off sticking with short-term rates. The reverse is true if the Fed is lowering rates.
Also, note that some brokers will only allow you to use 4-week, 9-week, or 26-week t-bills and NOT the 52-week t-bills. Or they will accept 12-month t-bills if you also have some shorter-term bills, or some % of cash vs. bills. Each broker has different requirements, you just have to ask. The overall goal of brokers with regards to performance-bond margin is to have cash available when you lose money and they have to debit your account.
I forsee in the near future online brokers will let you have one account to trade several different types of securities such as stocks, options, futures, currencies, and bonds all from one account. The last time I asked IB said that they were working on it, but don't know the timeframe.