10 Year TIP Auction/Fidelity Response on Odd Lot Trading/Sold Tennessee Municipal Bond Fund/

Updated 4/9/2010: I summarize what the NYSE ARCA said about the fill of STDPRB discussed in Item # 3 below in NYSE ARCA Responds to My Inquiry About Odd Lot Fills

1. 10 Year TIP Auction: The Treasury auctioned the 10 Year TIP yesterday. This was a reopening of a prior issue that had 9 years and 9 months remaining in its term with a coupon of 1 3/8%. The auction resulted in a price to yield of 1.709% on that coupon. www.treasurydirect.gov .pdf The real yield (the coupon) is at least moving in the right direction. Before participating in a ten year auction in my Roth, I would want a coupon yield of over 2%, and possibly a better price on breakeven (meaning a lower estimate baked into the price than what I would expect as the annual average rate over the next 10 years). The current breakeven, roughly calculated on the 10 year TIP is 2.38, which is close to my current estimate of 2.5.

I calculated the current breakeven by subtracting the coupon yield shown for the 10 year TIP (1.59%) at yesterday's closing prices from the nominal yield of the 10 year treasury (3.97%), with both data points taken from Bloomberg.com: Government Bonds. The breakeven point would be the market's current forecast of the average ten year inflation rate. Inflation would have to rise on average more than that amount for the investor to be better off buying the 10 year TIP over the 10 year non-inflation protected security. I would not be buying either, since I expect both the real and nominal yields to be rising, and the prices of seasoned issues to continue their decline. /Sold All Shares TIP ETF/Started Hedge for Corporate Bonds Bill Tedford's Inflation Prediction & His Sell of TIPsHowever, since I can purchase the 10 year TIP at auction at no cost and hold the security until maturity in a retirement account, I do not face that kind of interest rate risk which would be present holding a TIP ETF or mutual fund which has no maturity date. Advantages and Disadvantages of Treasury Inflation Protected Securities: And the TIP does have value to me as a non-correlated asset class of particular value in a retirement account. Treasury Inflation Protected Securities as a Non-Correlated Asset

Last year I did participate in a ten year TIP auction when the coupon rate was 1.92%: Item # 4 10 Year TIP Auction

The 10 year TIP, the one which was reopened yesterday, was auctioned 3 months ago with a 1 3/8% coupon, For new buyers of that seasoned issue yesterday, that coupon had become 1.709%. The TIP ETF closed yesterday at $102.71. On January 5, 2010, adjusted for subsequent distributions, the TIP ETF closed at $103.86: TIP: Historical Prices On 12/2/09, the adjusted close was $105.19. On a price adjusted basis, the TIP ETF has declined 2.36% since 12/2/09. The 7 to 10 year treasury ETF (IEF),which I compare from time to time with the IShares TIP, has fallen 3.19% during that same time adjusted for distributions. IEF: Historical Prices The Fed's date on the 10 year CMT was at 3.32% on 12/2/09 and at 3.96% on 4/2/2010: www.federalreserve.gov If investors want more yield for the 10 year non-inflation protected security, then I would expect them to want more yield from the comparable TIP too. That desire for more yield will cause those seasoned issues sold at lower yields to fall in price and too rise in yield. As inflation concerns mount, I would anticipate investors to demand more of a coupon yield from TIPs to compensate them for that actual and/or perceived risk.

2. Australia Rate Hike: While our Federal Reserve has been continuing its Jihad against savers and responsible Americans by keeping the federal funds rate near zero, the Australian central bank has repeatedly raised its benchmark rate over the past several months in 1/4% increments. Today, the Reserve Bank of Australia raised its policy cash rate a 1/4% to 4.25%. RBA: Media Release-Statement by Glenn Stevens, Governor: Monetary Policy Decision Both the Australian and Canadian dollars have been gaining ground against the greenback recently, as the Euro has declined in value.

3. FIDELITY ON ODD LOT ORDERS: I mentioned in a prior post that Fidelity had cancelled the odd lot fill by Knight Trading of a market order for 50 shares of STDPRB at $18.85. Fidelity Corrects Odd Lot Trade on STDPRB Round lots were then trading at or below $18.50. Fidelity explained in an email received today that the change in the fill was an accommodation by Knight Trading to me, rather than an adjustment made as part of Fidelity's interpretation of any requirement under Rule 124 (C) of the NYSE rules. It is Fidelity's position that Knight was under no obligation to fill the order at the round lot OFFER price:

"At the time that Fidelity accepted your order, 3:50 p.m. ET on March 26, 2010, the National Best Bid Offer (NBBO) Ask of $18.50 existed on ARCA. ARCA, as an Electronic Communication Network (ECN) does not recognize the odd-lot execution rules to which you referred. These rules are only binding on trades completed on the NYSE. While your order is not due a price improvement, in recognition of the disruption this matter caused, Knight Capital Group provided an accommodation by adjusting the price you paid from $18.85 per share to $18.50 per share.

Unless otherwise directed, Fidelity will route an order to an automated trading desk which looks for the NBBO. Our order-routing policies are designed to result in transaction processing that is favorable to you and considers many factors including the liquidity offered and the potential for price improvement."

I was under the impression that ARCA was part of the NYSE, NYSE Group, Inc. > Products & Services > NYSE Arca Equities I do not have time now to research whether or not NYSE RULE 124 (C) DOES NOT APPLY TO NYSE ARCA, but I thought this was sufficiently important to at least make an inquiry directly to the NYSE which I did early this morning as follows without mentioning names and I quoted the relevant part of Fidelity's response in this inquiry:

"I entered an odd lot market order to buy an actively traded NYSE listed issue, then trading at between 18.45 to 18.49, and the order was filled at 18.85. I complained that the fill was a violation of NYSE Rule 124 (C). The broker replied that this rule did not apply to the NYSE ARCA, as an electronic exchange, which had 18.50 posted as the National best offer. This is part of their response to me: "the National Best Bid Offer (NBBO) Ask of $18.50 existed on ARCA. ARCA, as an Electronic Communication Network (ECN) does not recognize the odd-lot execution rules to which you referred. These rules are only binding on trades completed on the NYSE" My inquiry is whether the NYSE Rule 124 (C) applies to NYSE ARCA trades." This inquiry was sent directly to the NYSE.

I also do not know whether Knight compensates firms for order flow to it. I really do not have the inclination to pursue this matter further. Why? It is clear to me that the policy being followed is not NYSE Rule 124(C) even if the order is routed to NYSE ARCA.

It is clear to me that the policy is to allow matching of odd lot market orders with other odd lots, rather than the round lot pricing, and the only reason for a change on this one trade was the stink that I caused on the issue. Theoretically, once the tie to pricing of round lots is broken, and this is possible according to the statements made in this Fidelity email, any fill of an odd lot order that matches with the best odd lot offer (or bid as the case may be), no matter how ridiculous and unfair, would be a legal trade according to Fidelity.

Readers of this post know that I make a large number of odd lot trades. While all of my problems on fills in this area have been solely with Fidelity via Knight so far, it is conceivable that it may arise in the future with other brokers that I use. I can only say now that all of my problems have been with Fidelity, and then only when the trade is routed to Knight Trading rather than any other market maker. As I recall the trading on STDPRB was active on the day that I placed my trade, with a lot of round lot fills before and after my order in the $18.45 to $18.49 range when Knight filled my odd lot market order at $18.85.

At a minimum, the response given by Fidelity today raises the same issues about how much confidence is possible when an investor clicks that order button for odd lots.

4. Sold All Shares in a Tennessee Municipal Bond Fund: I made a mistake in buying the DuPree Tennessee Tax Free Income fund (TNTIX) via Fidelity that charged a $75 online commission, since this particular fund was not part of its NTF network. I would have been better off just buying shares directly from the fund, which would have allowed me to add to the holdings without incurring additional fees. So, eventually, I will take those funds out of my brokerage account and invest them directly with DuPree, one of the few firms that offer a municipal bond for Tennessee. However, this does not explain why I elected to sell those shares now. I am becoming increasingly concerned about the potential onset of a bear market for bonds, and I have a profit in these shares now.

Bonds are trading up today in price, down in yield.