I just noticed at treasury direct that my pending automatic reinvestment of a 5 year bond at the end of this month was set to become 7 year.
I wanted 5 year again, so I cancelled the automatic reinvestment and switched it to purchase of a new 5 year bond.
This post is partially a warning for others. I caught this mostly by accident. Is this kind of thing common knowledge (among those with TD accounts) that I just missed? Or is it a stupid booby trap for investors?
It results from the combination of two somewhat sensible rules with a third very stupid design:
1) If a 5y bond auction results in the same interest rate as the 7y that had been issued 2 years earlier, they cancel the cusip of the 5y and issue those under the same cusip as the older 7y (because they have the same remaining payments and maturity).
2) An automatic reinvestment gets the same term as the original issue of its cusip, not the term of the reissue of that cusip that you actually bought. You are treated as if you had bought an existing bond in the third party market, rather than a new bond.
3) The whole time you hold that 5y bond that shares its cusip with a 7y bond, it is listed in your inventory as a 5y bond with that issue date, even though it is really a 7y bond with an issue date 2 years before you bought it. So when you enable the automatic reinvestment, it tells you that you are reinvesting a 5y bond and gives you no hint that doing so converts it to 7y.
Submitted September 21, 2018 at 10:14AM by jsf67 https://ift.tt/2puNSKp
