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Bond fund vs. money market for medium-term svgs?
Old 01-11-2020, 10:06 AM   #1
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Bond fund vs. money market for medium-term svgs?

For the sake of discussion, I would like to leave "asset allocation" out of this question.

I need to park money for some future (3 months to 1 year) large expenses. Some of this is ongoing savings, so it's not like we have a big lump sum to put in a high-yield CD.

I have two choices: money market funds or bond funds. We pay the same 24% on income either way. (Any longer than 1 year, and we'd put the $$ in a stock index fund).

All that said, I'd rather put the money in the VG Total Bond fund than in a money market mutual fund. The bond fund's capital gain tends to be very small, so there should not be much tax on sale of shares. Meanwhile we would be earning more income on our deposit. 2.26% vs. 1.54% per yesterday's listings.

Any reason this would be the wrong decision?
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Old 01-11-2020, 10:18 AM   #2
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... Any reason this would be the wrong decision?
Maybe. What will happen to your principal balance if interest rates rise?

We have our near-in-needs bucket in SWVXX because it's convenient at Schwab. I have not shopped around to squeeze the last basis point out of the yield, though. YMMV.
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Old 01-11-2020, 10:54 AM   #3
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I have money I may need in the next 1-3 years in CD's and money funds. With bond rates at historic lows, I think it is more likely that they will rise and bring down the price of bonds overall. Maybe a Short Term bond fund will do OK.

FWIW, I have been wrong on interest rates for over a decade. As one who once refinanced to get my mortgage rate down to 7.75% I am in awe of today's low rates.
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Old 01-11-2020, 10:55 AM   #4
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Have you considered an Ultra short bond fund ?
VUBFX has a 30 day of 1.99% and the duration of less than a year would keep the downside interest rate risk pretty low.
You have a bet to make. If interest rates go down or remain steady, the bond fund is the best bet, if rates go up the MM is the better bet. Which do you believe will happen?
Personally, anything needed in less than 6 months I'd leave in MM unless it's a huge sum
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Old 01-11-2020, 11:01 AM   #5
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FWIW, I have money I may need in the next 1-3 years in CD's and money funds. With bond rates at historic lows, I think it is more likely that they will rise and bring down the price of bonds overall. Maybe a Short Term bond fund will do OK.
I've recently had a reason to move some money that was in a money market fund around and decided to go with a short term (1-3 year) bond fund. That reflects the expected need for the money, may have some risk but I'm guessing it'll be minimal.
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Old 01-11-2020, 11:45 AM   #6
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Any reason this would be the wrong decision?
Yes - because you've indicated that the money is needed for a large expense. At the same time, by putting it in a bond fund, you are investing, opening yourself up to the risk of losing money while it is sitting there. You are chasing yield and taking risk for that opportunity. The money market fund has zero risk. You know you will get your money back and some amount of interest. With the bond fund, it could easily fall 5% in value over the coming 12 months and even with the ~2% yield, you may well have less when you withdraw the money.
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Old 01-11-2020, 11:50 AM   #7
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Yes - because you've indicated that the money is needed for a large expense. At the same time, by putting it in a bond fund, you are investing, opening yourself up to the risk of losing money while it is sitting there. You are chasing yield and taking risk for that opportunity. The money market fund has zero risk. You know you will get your money back and some amount of interest. With the bond fund, it could easily fall 5% in value over the coming 12 months and even with the ~2% yield, you may well have less when you withdraw the money.
+1, saved me the time to type pretty much the same post. I suppose it depends on how much of a necessity it is. If it's for a new car but you could go another year pretty easily, I might shoot for a better return with a little risk.
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Old 01-11-2020, 02:14 PM   #8
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Originally Posted by Amethyst View Post
For the sake of discussion, I would like to leave "asset allocation" out of this question.

I need to park money for some future (3 months to 1 year) large expenses. Some of this is ongoing savings, so it's not like we have a big lump sum to put in a high-yield CD.

I have two choices: money market funds or bond funds. We pay the same 24% on income either way. (Any longer than 1 year, and we'd put the $$ in a stock index fund).

All that said, I'd rather put the money in the VG Total Bond fund than in a money market mutual fund. The bond fund's capital gain tends to be very small, so there should not be much tax on sale of shares. Meanwhile we would be earning more income on our deposit. 2.26% vs. 1.54% per yesterday's listings.

Any reason this would be the wrong decision?
If it’s money I expect to use within a year, especially of within 3 months, I put it in high yield savings or a no penalty CD or money market.

I would absolutely NOT put it in a bond fund.
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Old 01-11-2020, 06:49 PM   #9
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OK, the votes are going in the MM direction...I didn't think of it as a poll but maybe I should have :-)

I'll check the CD/MM thread for no-penalty CDs. I had one at ALLY, but their customer service turned so awful on me that I withdrew it. It's a long story, which I will get around to telling one day. Let's just say that the phrase "May I put you on a brief 3-5 minute hold while I..." is now in my nightmares.
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Old 01-11-2020, 07:20 PM   #10
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With Total Bond you are exposing your principal to interest rate risk, so for 3-12 month money I don't think that is a good choice. I would go with either VMMXX (Vanguard Prime MM fund... current SEC yield is 1.69%) or a high-yield online savings account like Discover Bank (1.7%).
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Old 01-11-2020, 07:29 PM   #11
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With Total Bond you are exposing your principal to interest rate risk, so for 3-12 month money I don't think that is a good choice. I would go with either VMMXX (Vanguard Prime MM fund... current SEC yield is 1.69%) or a high-yield online savings account like Discover Bank (1.7%).
Yeah, IMO the time horizon is too short to chase yield at the expense of preservation of capital.
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Old 01-11-2020, 07:50 PM   #12
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Synchrony is paying 1.8% in high yield. Others are paying more.
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Old 01-11-2020, 10:47 PM   #13
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From the CD rate thread:

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Originally Posted by Sojourner View Post
Patriot Bank is offering a 2.26% APR on new online money market accounts. $100 minimum deposit (no maximum that I could find), and rate is guaranteed through June 2020.

https://www.doctorofcredit.com/patri...rough-6-30-20/

Probably only worth doing if you have a substantial amount of cash to invest that isn't already earning a decent rate (like Ally's 1.6%).
Might be a good option for the OP.
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Old 01-12-2020, 07:37 AM   #14
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Originally Posted by Amethyst View Post
For the sake of discussion, I would like to leave "asset allocation" out of this question.

I need to park money for some future (3 months to 1 year) large expenses. Some of this is ongoing savings, so it's not like we have a big lump sum to put in a high-yield CD.

I have two choices: money market funds or bond funds. We pay the same 24% on income either way. (Any longer than 1 year, and we'd put the $$ in a stock index fund).

All that said, I'd rather put the money in the VG Total Bond fund than in a money market mutual fund. The bond fund's capital gain tends to be very small, so there should not be much tax on sale of shares. Meanwhile we would be earning more income on our deposit. 2.26% vs. 1.54% per yesterday's listings.

Any reason this would be the wrong decision?
I have the same discussion with myself from time to time. The ultra safe answer is MMF or CD. The riskier answer is Bond fund of some duration. As framed, you suggest this risk gets an additional 1 pct. The extra amount you gain will be weighted by the amount invested, so that must become part of your answer.

We're using Discover Bank and Schwab MMF in the situation you mentioned.
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Old 01-12-2020, 07:39 AM   #15
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For such a short time frame, money market.
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Old 01-12-2020, 08:23 AM   #16
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HSBC direct is advertising 2.05% online savings account rate.. I do not have any personal experience though.
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Old 01-12-2020, 10:58 AM   #17
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One thing I always wonder about these discussions of yield differences, basis points, etc. is "Do these small differences really matter?" Talking basis points it a bit abstract. Ten basis points on $100K for a year is $100 and taxable. I'm sure we all have different thresholds but mine would be a lot higher than that before I'd shop the market, find the best rate, open an account, and move money.
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Old 01-12-2020, 11:23 AM   #18
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As much as I like bond funds, I think your time horizon is too short (and bond fund prices are on the high side) to consider them for your purpose.
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Old 01-12-2020, 04:20 PM   #19
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If the annual growth rate for BND will surely go down even if interest rates tick up, then why not put money in money mkt funds for the foreseeable future. The articles are indicating the interest rates will not fall but rise a little. It would seem logical to avoid bond funds for the near term, no?
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Old 01-12-2020, 04:46 PM   #20
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If the annual growth rate for BND will surely go down even if interest rates tick up, then why not put money in money mkt funds for the foreseeable future. The articles are indicating the interest rates will not fall but rise a little. It would seem logical to avoid bond funds for the near term, no?
Nobody knows nuthin'.

Regardless, for such a short time frame, there is no point in the additional risk of a bond fund.
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