Thinking about bonds and bond funds

[Brat]

We moved from Vanguard back to Fidelity recently. Now I want to invest cash in our accounts in interest-bearing bonds/notes/bond fund. Sorting through Fidelity's bond fund offerings I found OPTAX and OPCAX A class both offered load and transaction free. They are muni bond funds, the latter invests in California municipals, the other municipals nationwide.

Thoughts friends . . . .

 

[braumeister]

M* says OPTAX has a 4.75% load and 1.04% ER.
That doesn't scare you off?

 

[Brat]

If I had to pay that load I would scratch them but Fidelity is offering them load-free. What is "ER"?

 

[brewer12345]

Didn't look at OPCAX as think single state muni funds are not a great idea. OPTAX has a bunch of fairly junky looking stuff (tobacco bonds, sewer districts, etc.) and more duration than I would be comfy with. You might get past all of that depending on your goals and risk tolerance, but the giant expense ratio kills it for me.

 

[Brat]

Thanks. Bonds with high returns are usually junk level.

Maybe I should be happy with modest returns on quality offerings.

 

[braumeister]

Maybe I should be happy with modest returns on quality offerings.

Careful!
Talk like that could get you banished to the Bogleheads forum.

 

[audreyh1]

We moved from Vanguard back to Fidelity recently. Now I want to invest cash in our accounts in interest-bearing bonds/notes/bond fund. Sorting through Fidelity's bond fund offerings I found OPTAX and OPCAX A class both offered load and transaction free. They are muni bond funds, the latter invests in California municipals, the other municipals nationwide.

Thoughts friends . . . .

Why wouldn’t you use Fidelity’s no load muni bond funds? They have several durations to choose from and their bond fund team is well respected.

They may have California specific offerings, not sure. I know they do have a California muni money market fund.

 

[OldShooter]

Have you done the math to see if the after-tax yield of conventional bonds is more than the yield of equivalently-risky munis? It seems to be common that people let the tax tail wag the total return dog and pay for the joy of not paying taxes by taking inferior after-tax yields. (And, of course, it's crazy to buy munis into tax-sheltered accounts.)

You're not in CA, so there is no reason to buy CA munis. Further, CA is in big financial trouble, as is IL. I would avoid their bonds for that reason alone.

Compare your net after tax yields to what you could get with various flavors of Treasuries, which are almost certainly free of state income tax. Also, if you have enough money to diversify your purchases ($100K?) you can look at high-grade corporates, too. The Fido bond desk should be able to help you think through the various alternatives and the tax tradeoffs.

 

[38Chevy454]

ER = expense ratio


I understand the desire for the higher return potential. But if you live in OR, and considering muni bonds, why not OR state bonds where you might get a state tax break? Many states exempt their state bonds from taxable income in that state, I am not familiar with OR tax rules. That tax exempt status is what attracts many to muni bonds.


I would also be wary of the load fee. Make sure you understand what fees are involved.

 

[Brat]

OR doesn't have many bond offerings and we suffer the same issues as other states... making underfunded retirement committments to public employees.

I don't let income tax make my investment decisions, just looking for a decent return. I just tried Fidelity's bond ladder tool, interesting. It recommended a ladder of inflation-protected Fed bonds. Limiting it to 2019 actually gave the best return.

 

[OldShooter]

... It recommended a ladder of inflation-protected Fed bonds. Limiting it to 2019 actually gave the best return.

DW and I are big proponents of TIPS. Real interest rates are not great but the inflation protection is bulletproof. It's the only kind of long-term fixed income security that we hold. Inflation, IMO, is the retirees' biggest risk.

One thing to be aware of is that the annual increase in TIPS value due to inflation is taxable income despite the fact that you don't get any cash. So hold them in a tax sheltered account or plan to use other funds to pay the tax. Not a big deal but something to be aware of.

 

[brewer12345]

In your shoes I would be looking hard at 5 year tips and treasury floaters, ideally bought commission free at auction. I would also probably look at cds. Perhaps corporate floaters as well, such as FLRN.

 

[youbet]

Inflation, IMO, is the retirees' biggest risk.

That would be my opinion too.

A chunk of our day-to-day expenses are met by a non-cola'd pension I receive from MegaCorp. In the 12+ years since I FIRE'd, inflation has taken a toll despite relatively low inflation rates during that time. We count on portfolio earnings in excess of inflation to keep us whole.

 

[Brat]

At our age 5 years is about as far as I want to go out.

 

[retired1]

I own ORNAX & OPCAX both directly from Oppenheimer. I've had them for a quite a long time. ORNAX has been a consistently great monthly paying fund. I've been very happy with it even though it has a pretty high expense ratio. It has proven to me as as solid & reliable fund since so I've stuck with it. No complaints.

 

[corn18]

I use FTABX in my taxable account. But I am a boglehead so I don't look too far past expense ratios and tax efficiency when picking funds.

 

[VanWinkle]

Thanks. Bonds with high returns are usually junk level.

Maybe I should be happy with modest returns on quality offerings.

Take your risk on the equity side, not with junk bonds. If you want more

return, increase your % of assets in equities, but keep your bond assets

in quality. Or even better, be happy with returns that meet you goals.

Bragging on Bond returns is not worth the risk for me.