New Fixed Income Investment Question

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moguls

Recycles dryer sheets
Joined
Oct 5, 2002
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Where are the folks on this board investing new moneys for the fixed income portion of your portfolios?

I have some CDs maturing and I'm trying to decide where to reinvest. Putting it into equities would create an imbalance in my portfolio. I think interest rates have no where to go but up, so I'm a little leary of adding it to one of my bond funds. Reinvesting in CDs is not attractive either.
 
I'm facing this too.

Anyone holding bonds instead of bond funds? That is, hold some portion of the fixed income portfolio in bonds with the intent to hold to maturity?

I invested in bond funds so I don't have to make decisions about trading, trying to guess which way the rates are going in a given time frame. But if rates go up, would those bond funds (VWIUX and VCADX) plunge in value?
 
On Friday, I rebalanced from a foreign fund (up 22% since July) into a total market bond index fund.
 
I highly recommend reading this: Individual Bonds vs a Bond Fund - Bogleheads

If you have a date certain future liability then individual bonds that mature at that time make sense. If you are planning on buy and hold a fund or bond ladder (with equal avg duration) behave similarly.

I just used a maturing CD to purchase I-bonds and my most recent investing dollars are going to TIP's as that is my lagging asset currently. Trying to time the bond market is even harder than the equity market so don't even try. If you are really nervous about it stick to short duration, high quality. This too will pass...

DD

Just saw LOL's post - I too have purchases TBM recently as that is the only decent bond offering in my 403b.
 
Even though interest rates have no where to go but up, you might look at what bond yields in Japan have done in the last 15 years since their bond yields had no where to go but up.
 
moguls said:
Where are the folks on this board investing new moneys for the fixed income portion of your portfolios?
Click to expand...
PenFed. Our primary purpose for the fixed-income portion is to have the money available when we need it. (Losing a little to inflation every day is just bonus.) PenFed has generally had the best combination of insured CDs and yields, although Navy Federal Credit Union has occasionally been competitive.

moguls said:
Putting it into equities would create an imbalance in my portfolio. I think interest rates have no where to go but up, so I'm a little leary of adding it to one of my bond funds. Reinvesting in CDs is not attractive either.
Click to expand...
The buzzphrase for what you're doing is "chasing yield". You've already decided that you don't want to mess with your asset allocation (probably a wise decision) so why take more risk with money that you've deemed needs to be absolutely safe?

The next agonizing choice would be deciding whether to go short or long, yet if you stay short it could be a couple years before the Fed has enough economic activity to justify raising rates. What if today's rates are as good as it's going to get before 2013?

Last year when our final 6.25% CD matured, we agonized over the difference in rates between three-year and five-year CDs. We finally decided to continue with a five-year ladder. The yield is a little higher, the early-redemption penalties are the same, and we don't have to become flawless market timers. When rates go up, our ladder's rates will follow. In the meantime we have a slightly higher yield than if we'd stayed short, and the money's available if we need it (for a small early-redemption penalty).

I think the real benefit of having risk-free liquid assets is that when you need them you can get them right away and pay cash for a discount, or at least avoid having to pay credit-card interest rates. The discount (or the lack of credit-card debt) is the reward for putting up with all those years of low CD yields. Another "reward" would be not having to sell bonds or equities at a time when their share prices have been hammered.
 
I am in the same boat. I hold some bond funds, mostly CEFs that trade at fat discounts to NAV. I sold a bunch of appreciated corporate bonds and redeployed the procees into CDs and debt payoff. Other than that, I have allowed my equity allocation to drift higher a bit, but there is a limit. At some point I will probably just sit in cash (high yield savings account).
 
CD's with low early withdrawal penalties seem like the best fixed income option in town. 5-yr CDs yield more than twice what similar maturity treasuries yield for essentially identical credit risk. If rates go up, they have a duration of nearly zero, so swapping in to higher yielding market rates costs very little. If rates go down, you still earn twice as much on a held-to-maturity basis. Win-win, even if at today's rates you're not "winning" a lot.
 
I am investing in CDs mainly. I was using USAA until recently, but PenFed CD rates are now more attractive. Including the 10-year PenFed CDs I reserved for January, my CD portfolio will yield about 4.6% until at least 2017 (I bought all my CDs over the last 10 months). I also bought some i-bonds last week. Other than that, options are limited.
 
PenFed is for federal employees?

You guys open multiple accounts at FDIC limits each?
 
Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
 
I stick about a third in the VG ST bond Index fund and the rest in a local savings account (until PMMF rates get back to normal). I have never been a big CD fan because I don't want to have to give up part of my interest due to early W/D. I know that I am probably losing a bit of interest in the short run not dipping into CDs but I prefer the flexibility I have now.
 
Mostly in STIG. Selling TIPS on the short end. Holding Tips on the long end (but don't know how much longer I will hold at sub 1% real yields).
 
explanade said:
Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
Click to expand...

2% may not be exciting, but go look at what your alternative is for similar maturity in the treasury market.

Typical withdrawal penalty for up to 5 year CDs is 6 months' worth of interest. If the penalty is higher, go elsewhere. Personally, I am happy to take the longest duration CD I can get for the same penalty, so long as the rate is higher than a shorter term CD.
 
Given that there are plenty of "good" stocks with yields higher than bond yields, I view bonds as unattractive in their own right with the prinicple reason for holding bonds being diversification rather than absolute return. That said, I primarily use them as a means of investing in currencies - I currently hold small amounts of NZD, USD and RMB denominated bonds. (The USD bonds were purchased several years ago.)
 
explanade said:
Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
Click to expand...

Ally Bank's early withdrawal penalty is 2 month's interest. So a 2.5% 5-yr cd cost's 42 bp to break. Even if interest rates skyrocket in the next twelve months, I'm out of the CD at a 2% gain, versus big losses on any bond fund or ~1% in an online cash account. If interest rates don't sky rocket, I'm still getting an above treasury market yield for the next five years. Sure, riskier fixed income products may have better yields (although Vanguards ST High Grade bond fund is only yielding 1.7% these days and has a much higher duration than a 42bp break fee) but if rates don't start moving up, I'd worry about credit spreads blowing out again.
 
That sounds too good to be true.

So you could have earned interest for say 20 months and then you decide to early withdraw and you only give up 2 months of interest?
 
At PenFed, if you keep the money invested 1-2 years, a 5-year CD will yield more even after paying the early withdrawal penalties than the 1-2 year CDs. If you keep the money invested 3+ years, the 7-year CD will yield more even after paying the early withdrawal penalties than the 3-5 year CDs. So I buy mostly long term CDs right now. I can lock in a great, long term yield in case interest rates stay low for the foreseeable future and I can still make more money than with short term CDs if I have to withdraw my funds early.
 
What is the PenFed penalty? All I see is this verbiage:

"Disclosures

Note that a penalty will be imposed for early withdrawal from certificates. This fee could reduce your earnings."
 
I found this very timely blog entry about early withdraw penalties. There's a possibility that some institutions reserve the right to refuse early withdraw or change their early withdraw penalties during the term of a long-term CD.

But there's a very handy table showing the yield AFTER early withdraw at various points of a 5-year Ally Bank CD versus a 7-year PenFed CD.

Long-Term CD Rates and Early Withdrawal Penalties - Updates and Concerns
 
moguls said:
Where are the folks on this board investing new moneys for the fixed income portion of your portfolios?
Click to expand...
I have NO clue about reseraching or buying individual issue bonds, and I really don't want to manage the CD ladder thing.
Money market needs no explanation right now. I do keep a small amount in VYFXX for low price tag emergencies.
I built up a nice stake in VWAHX over a decade, and finally achieved VWALX eligibility :D. I chose this one because it is a national muni fund (i.e. geographic diversification), and I do not mind paying Vanguard to think for me.
Other fixed income (and balanced) mutual funds include VMLTX, VBIAX, VWINX psssst ;), DODBX and DODIX.
 
There is no VYFXX.

And a lot of those other funds are not fixed-income.
 
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