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Has anyone else moved from bonds to CDs.
Old 05-10-2016, 06:05 PM   #1
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Has anyone else moved from bonds to CDs.

Not completely... just partially or mostly?

Here's my situation. I had a pretty decent stock/bond target and was moving toward to "near 0 maintenance" investment strategy but I just had this block on buying bond ETFs.

So here's what I did. I took 50% of my "fixed income" block and built a CD ladder at Ally that gets about 1.6%/yr. This is roughly the return of BNDX's dividends and about 1% under BND but I'm just having a hard tine seeing those funds go up substantially and I can imagine a reasonable drop if interest rates climb.

The CDs just seem like they more accurately reflect the risk/reward profile in that part of the portfolio? What do you guys think?

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Old 05-10-2016, 07:06 PM   #2
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BNDX is international bond ETF. Quite a different thing from CDs denominated in US dollars.

Total Bond Market ETF BND is currently yielding 2.06%.
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Old 05-10-2016, 07:17 PM   #3
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Somewhat. I did move a portion of my bond allocation to some 3%/5 year PenFed CDs a few years ago. Other than that PenFed special though, CD returns are not sufficiently attractive to me to bother to have different accounts at different banks.

For bonds, I prefer the Guggenheim or iBond target maturity bond funds... they pay a little more than bank CDs of similar maturity, have moderate credit risk and no interest rate risk when held to maturity and I can hold them in my Vanguard brokerage account and avoid account proliferation.

However, if PenFed ever offers another special then i'm in.
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Old 05-10-2016, 07:18 PM   #4
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Quote:
Originally Posted by pb4uski View Post
Somewhat. I did move a portion of my bond allocation to some 3%/5 year PenFed CDs a few years ago. Other than that PenFed special though, CD returns are not sufficiently attractive to me to bother to have different accounts at different banks.
^ What he said.
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Old 05-10-2016, 07:27 PM   #5
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Moved a portion to take advantage of the 3-year 3% CD at NWFCU last year. Otherwise, current rates are disappointing.


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Has anyone else moved from bonds to CDs.
Old 05-10-2016, 07:59 PM   #6
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Has anyone else moved from bonds to CDs.

Pretty much moved 100% to credit union CDs w/ 3-5% yields (started early) for the same reasons you cited. I have been very diligent looking for deals and don't mind being spread out over several credit unions. CD ladder is pretty much set for now but I dread having to reinvest next yr at ~2%. I may consider a deferred annuity when the time comes. One of my credit unions has an add-on feature available for a limited period of time each year so I'll likely keep at least a bit in their longest term CD to take advantage. I don't hesitate to call and ask for unpublished rates either since I had some success with that.

When I decided to use CDs for my bond allocation, I arbitrarily picked a 2 yr timeline to distinguish between cash and bonds for purposes of asset allocation. CDs maturing< 2 yrs count as cash but > 2yrs counts as a bond.
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Old 05-10-2016, 11:32 PM   #7
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I retired two years ago and have very little in bonds. I have invested my fixed income mostly in CDs for 3, 5 and 7 years at 3% and some shorter term with lower interest.

My thinking was with bonds paying so little, I can get 3% and still get decent return even if I bail on the CDs with EWPs between 90 and 180 days. So far, no reason to bail.

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Old 05-11-2016, 06:32 AM   #8
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I've moved pretty much everything I can to bank CDs from bonds. For me it's overwhelmingly obvious that they are mispriced securities.

CD's have U.S. government default risk but yield 60% more than 5-year treasury bonds.

In addition to offering above market yields, many CD's also have a low-cost interest rate put option. If interest rates rise, I can break the CD and reinvest at higher rates for a 1% fee. 5 year treasury bonds, meanwhile, lose about 4% for every 100bp increase in rates.

And if rates fall, I'll still earn 60% more over the life of the security than I would have had I owned the treasury bond to maturity.

As a side note, because of the low-cost put option I don't generally bother building CD ladders. A 2% 5 year CD with a 1% breakage fee becomes a 1% 1 year, a 1.5% 2 year, a 1.7% 3 year, or a 1.8% 4 year any time at my option. All of those potential yields are higher than the ones offered for equivalent maturity CDs, so I just stick with the 5 year.
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Old 05-11-2016, 06:36 AM   #9
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80% equities, still.
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Old 05-11-2016, 06:58 AM   #10
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I am 40% in individual muni bonds varying in maturity, state and credit. As maturing bonds roll over I have been replacing them. Because of the low rates I have mostly been buying 2030-2032 bonds with a 2023-2025 call yielding between 3.1% and 3.3% to the call. The tax free nature of the bonds is still beneficial to me. I almost always hold until maturity. I also have CDs in various local banks (and Synchrony Bank) paying 1.25 for a 1 year and 1.40 for a 2 year.
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Old 05-11-2016, 07:05 AM   #11
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Originally Posted by phil1ben View Post
I am 40% in individual muni bonds varying in maturity, state and credit. As maturing bonds roll over I have been replacing them. Because of the low rates I have mostly been buying 2030-2032 bonds with a 2023-2025 call yielding between 3.1% and 3.3% to the call. The tax free nature of the bonds is still beneficial to me. I almost always hold until maturity. I also have CDs in various local banks (and Synchrony Bank) paying 1.25 for a 1 year and 1.40 for a 2 year.
Take a look at the "Yield to Worst" on those bonds too. If rates rise those bonds will probably not be called meaning your 7-10 year bonds become 15-16 year ones. If the bonds are trading at a discount that will cut the yield quite a bit. Also, you'll double the maturity and their sensitivity to interest rates.

3% tax free sounds very nice, though. I'd also check credit risk on those.
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Old 05-11-2016, 07:07 AM   #12
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Of my fixed income securities..........

90% CD's
10% Bond etf's
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Old 05-11-2016, 08:51 AM   #13
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I've moved pretty much everything I can to bank CDs from bonds. For me it's overwhelmingly obvious that they are mispriced securities.

CD's have U.S. government default risk but yield 60% more than 5-year treasury bonds.

In addition to offering above market yields, many CD's also have a low-cost interest rate put option. If interest rates rise, I can break the CD and reinvest at higher rates for a 1% fee. 5 year treasury bonds, meanwhile, lose about 4% for every 100bp increase in rates.

And if rates fall, I'll still earn 60% more over the life of the security than I would have had I owned the treasury bond to maturity.
Pretty much this. I have no bonds, only CDs and high yield savings accounts.

One of the few advantages of being a retail investor.
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Old 05-11-2016, 09:32 AM   #14
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I have slowly been increasing my split to 70% stocks and 30% Fixed Income. I don't hold any individual bonds, but that is primarily because my investment amounts are still quite small. About 90% of my fixed income is just in brokerage CDs, again since my amounts are small it doesn't really make sense for me to split the funds up across different banks, directly.

Bonds can provide tax advantages so just make sure you are comparing your Tax Equivalent yields and also do your due diligence as Gone4Good mentioned on the Bonds.

cd :O)
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Old 05-11-2016, 09:38 AM   #15
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We have a short-term bucket (money that may be needed in 3 years or less). In this bucket we have I Bonds, CDs and short-term bonds (VFSUX).

Over the last couple years, any money put into this bucket has been in CDs. I'll buy whatever is most attractive at the time of purchase.

The bulk of the fixed income in our portfolio (not the short-term bucket) is still total bond.
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Old 05-11-2016, 09:42 AM   #16
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I moved most bond holdings to 5 years CDs because of FEDs statement about imminent rates hike what could affect negatively most bonds.
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Old 05-11-2016, 11:45 AM   #17
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Originally Posted by pb4uski View Post
Somewhat. I did move a portion of my bond allocation to some 3%/5 year PenFed CDs a few years ago. Other than that PenFed special though, CD returns are not sufficiently attractive to me to bother to have different accounts at different banks.

(...)

However, if PenFed ever offers another special then i'm in.
+1

I moved a portion of my bond allocation to long term CDs back in 2010/2011, when decent yields on CDs could still be had.

But I still have plenty invested in bond funds, especially in our IRAs. We do not plan to touch our IRAs until we are at least 60 years old, which is 18 years away or about 3 times the average duration of our bond funds.
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Old 05-11-2016, 01:36 PM   #18
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Besides Ally, where do you go for best FDIC CD rates?

Same thing for savings. I'm getting 0.85% at Ally. Any other FDIC savings worthwhile (although scraping for basis points seems kind of lame)?
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Old 05-11-2016, 02:01 PM   #19
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Besides Ally, where do you go for best FDIC CD rates?

Same thing for savings. I'm getting 0.85% at Ally. Any other FDIC savings worthwhile (although scraping for basis points seems kind of lame)?

A good resource is https://www.depositaccounts.com
Note that higher yields may come with membership restrictions or minimum balance or usage requirements. Credit unions have an equivalent deposit insurance by NCUA.


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Old 05-11-2016, 03:53 PM   #20
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I have no CD's as I have not found any rates that are better than investment grade bonds.
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