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New Fixed Income Investment Question
Old 10-31-2010, 10:35 AM   #1
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New Fixed Income Investment Question

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.
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Old 10-31-2010, 10:44 AM   #2
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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?
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Old 10-31-2010, 11:05 AM   #3
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On Friday, I rebalanced from a foreign fund (up 22% since July) into a total market bond index fund.
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Old 10-31-2010, 11:05 AM   #4
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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...

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Just saw LOL's post - I too have purchases TBM recently as that is the only decent bond offering in my 403b.
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Old 10-31-2010, 11:15 AM   #5
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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.
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Old 10-31-2010, 11:43 AM   #6
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Where are the folks on this board investing new moneys for the fixed income portion of your portfolios?
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.

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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.
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.
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Old 10-31-2010, 11:47 AM   #7
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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).
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Old 10-31-2010, 02:37 PM   #8
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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.
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Old 10-31-2010, 03:08 PM   #9
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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.
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Old 10-31-2010, 03:50 PM   #10
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PenFed is for federal employees?

You guys open multiple accounts at FDIC limits each?
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Old 10-31-2010, 04:05 PM   #11
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PenFed is for federal employees?
PenFed is for everyone:
https://www.penfed.org/howToJoin/overview.asp
See options #8 & #9 if you don't meet any of the other criteria.

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You guys open multiple accounts at FDIC limits each?
Well, that $250K limit hasn't exactly cropped up but yeah, we could do that.
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Old 10-31-2010, 04:26 PM   #12
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Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
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Old 10-31-2010, 04:45 PM   #13
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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.
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Old 10-31-2010, 04:53 PM   #14
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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).
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Old 10-31-2010, 05:02 PM   #15
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Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
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.
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Old 10-31-2010, 06:28 PM   #16
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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.)
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Old 10-31-2010, 09:02 PM   #17
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Hmm, so 3-year CDs to get 2% rates.

Seems a long time.

What is a good benchmark for a low early withdrawl penalty?
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.
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Old 10-31-2010, 09:19 PM   #18
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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?
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Old 10-31-2010, 11:03 PM   #19
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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.
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Old 11-01-2010, 11:00 AM   #20
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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?

We will only charge a fee if you make a withdrawal before the CD matures. For all CDs, the early withdrawal fee equals 60 days' interest.
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