Bond Laddering

[settam]

Met with our Fido rep about revising our investing strategy. He advised trying bond laddering. Was not pushy, just educating us. It looks like a sure thing, as long as the companies don't go bankrupt. We are thinking of doing a 5 year ladder, each rung having $20k. DW and I are 68 and retired. We have a portfolio of 60% bond funds and 40% stocks. Looking for thoughts.

 

[sengsational]

I'd do that long before I'd put the 100K in a bond fund, that's for sure! Did the rep mention you can buy TIPS directly from the US Treasury?

 

[MichaelB]

Is the $20K that matures each year to be reinvested or finance the yearly budget? A ladder makes more sense when the part that matures is consumed rather than rolled over.

 

[audreyh1]

Make sure the bonds are paying more than the equivalent duration CDs.

 

[pb4uski]

+1 with looking at CDs as well. For the first rung (one-year) online savings accounts are paying about the same as one-year corporates and have no credit risk.

One alternative to consider given the amounts involved would be target-maturity corporate bond funds from Guggenheim or BlackRock. However, beware that returns in the terminal year are depressed as the fund collects cash as bonds mature and then pay it out at year end... I plan to sell about a year before that terminal dividend to avoid the yield hit.

I assume that you do not have a 401k or 403b with a good stable value fund.

 

[nun]

I assume that you do not have a 401k or 403b with a good stable value fund.

........or access to TIAA-Traditional.

 

[Totoro]

Another +1 for CDs.

Diversified bonds or bonds from AAA companies often pay less than CDs, and CDs are insured (at least mine are) up to $100k.

 

[Mr._Graybeard]

Muni yields are often on a par with taxable bonds right now, making the federal tax exemption a free bonus. Governments also tend to be more transparent than corporations. And, if a city, school district or hospital is in financial trouble, news media somewhere has likely reported on it.

Just watch for the yield to worst in addition to yield to maturity as well as provisions for extraordinary calls. A large majority of the bonds I've purchased in the last three years have been called early when the time came.

 

[settam]

I don't understand why "A ladder makes more sense when the part that matures is consumed rather than rolled over."

 

[MichaelB]

I don't understand why "A ladder makes more sense when the part that matures is consumed rather than rolled over."

The market value of bonds and bond funds varies in response to interest rates. If your fixed income allocation is in bond funds or long term individual bonds but you need to cash out on a regular basis, the market value of those bonds may decline at the time you are selling, and you lose money. You can minimize this risk by purchasing bonds that mature around the dates you need the cash.

 

[phil1ben]

Micheal B isn't that the point of laddering. You buy bonds for each step in the ladder that mature periodically so you are not subject to price fluctuations as rates moves. The "plan" is to only obtain principal at maturity of each bond.

The earlier point is that CD rates often exceed the return on very short term bonds under 2 years. I am now seeing 1.25% 12 month CDs at Synchrony Bank. Hard to find a one year bond paying that rate.

 

[haha]

I'd do that long before I'd put the 100K in a bond fund, that's for sure! Did the rep mention you can buy TIPS directly from the US Treasury?

You can also buy new issue TIPS free through your Fidelity Account.

Ha

 

[Chuckanut]

Here'a a bond that will make an interesting step on the bond ladder.

Rare Manuscript At Yale Is A 367-Year Old Bond Still Paying Interest – Consumerist

 

[samclem]

It looks like a sure thing, as long as the companies don't go bankrupt.

Ifyou want to reduce the default risk, you could buy Guggenheim Bulletshares or other bond funds that mature in a target year. That way there's no interest rate risk (just like with a single bond) and default risk is spread among a lot of different companies. The disadvantage is that you pay an expense ratio for the fund.
+1 to the recommendation of checking CD rates first. They are more secure and might even pay more.

 

[Rosie]

I was considering a bond ladder but I ultimately decided on a CD ladder as a safe place to put cash to cover our basic yearly living expenses.

I'm in the process of setting up a 3-year CD ladder at CIT Bank. These are their "RampUp" CDs which allow a single rate adjustment during the CD term. The CIT RampUp CDs have a $25K minimum for the 1, 2 and 3-year CDs (currently 1.25, 1.45 and 1.50% APY) and $50K min for the 4 year CD (currently 1.82% APY). Their savings account is currently 1.05% APY.

I like the fact that I'll have the option to increase the rate during the CD term, up to almost twice the current rate. The early withdrawal penalties are 3 months interest for the 1 yr CD, 6 mos interest for the 2 and 3 yr CDs, and 12 mos interest for > 3 yr CDs.

 

[samclem]

I like the fact that I'll have the option to increase the rate during the CD term, up to almost twice the current rate.

It might work that way, but don't hold your breath. I think these "ratchet your rate up" products are marketing to get folks to pile in, then they just freeze the rate for those particular terms CDs after people are aboard. If interest rates go up, they don't raise the rates and continue to make more money as current account holders hang on in hopes that they might. If they need to get more customers, they can offer offer higher rates--on CDs with different terms (e.g. 18 month, 24 month CDs, etc). The "ratchet up" provision only applies to CDs of the same term.

I have no evidence that they'll do this, but I know that Ally 4 year "Raise your rate" CDs my MIL bought 3 years ago, which used to be the among the best interest rates available, have not increased while other 4 year CDs have gone up by about 0.5%. Think about it from their perspective--they (Ally or CIT Bank) have got a tremendous disincentive to raise their rates once they've got you aboard--it's just too expensive. At this point, I would just shop for a high rate/low surrender penalty at an FDIC-insured institution and place a very low value on any promised future opportunity to increase the rate to something better.

 

[Rosie]

Good point. To be honest, the rate-raise option wasn't the deciding factor. The current CD rates are among the highest currently available, and I'm not putting all that much money in. It's a good a place as any to park 3 years' living expenses.

 

[Totoro]

Here'a a bond that will make an interesting step on the bond ladder.

Rare Manuscript At Yale Is A 367-Year Old Bond Still Paying Interest – Consumerist

Amazing!

Although at 2.5% yield I'm not surprised it wasn't bought back by the issuer

 

[RobLJ]

The comment on CDs is worth considering. I've posted on this before, but the Guggenheim Bullet shares allow laddering, since these are shares of a bond fund that mature in a specified year. At the end, the money is returned. Minimizes some of the company risk of individual bonds.
For a couple years, I'm drawing from a 403b that doesn't allow ETFs. When I'm 59, I'll probably roll the Fidelity brokerage to an IRA and move from the bond mutual to Bullet shares and closed-end bond funds. I could do this now but wouldn't be able to draw from the bond funds in the IRA.

 

[daylatedollarshort]

We have both TIPS and CD ladders. We buy TIPS from the Treasury through our Fidelity account, usually some at every auction. We hold to maturity and replace at market rates, getting a rolling average yield.

 

[aja8888]

We have both TIPS and CD ladders. We buy TIPS from the Treasury through our Fidelity account, usually some at every auction. We hold to maturity and replace at market rates, getting a rolling average yield.

How have the Tips done over the last few years?

 

[daylatedollarshort]

How have the Tips done over the last few years?

Like other fixed income, yields have been low on TIPS these past few years compared to their historical averages. The current rates are here:

United States Government Bonds - Bloomberg

Here is a historical graph of the ten year yields:

https://research.stlouisfed.org//fred2/graph/?id=WFII10,

 

[aja8888]

Like other fixed income, yields have been low on TIPS these past few years compared to their historical averages. The current rates are here:

United States Government Bonds - Bloomberg

Here is a historical graph of the ten year yields:

https://research.stlouisfed.org//fred2/graph/?id=WFII10,

Thanks, may be easier to buy into the Vanguard TIPS fund. Although with low yields like they are (maybe going up if inflation comes back), CDs or Guggenheim short term bond funds may be just as good or better.

Can't get hurt with TIPS though especially at rock bottom yields.

 

[ETFs_Rule]

Met with our Fido rep about revising our investing strategy. He advised trying bond laddering. Was not pushy, just educating us. It looks like a sure thing, as long as the companies don't go bankrupt. We are thinking of doing a 5 year ladder, each rung having $20k. DW and I are 68 and retired. We have a portfolio of 60% bond funds and 40% stocks. Looking for thoughts.

Why do advisers try to make things so complicated? So that you will continue to have to use THEM as your adviser (back door commissions)!

Bond laddering? You can achieve the same thing with a bond index fund. So simple.

He was not pushy. Yeah, it's called passive aggressive. Apparently it worked because you are ready to follow his advice.

 

[daylatedollarshort]

Thanks, may be easier to buy into the Vanguard TIPS fund. Although with low yields like they are (maybe going up if inflation comes back), CDs or Guggenheim short term bond funds may be just as good or better.

Can't get hurt with TIPS though especially at rock bottom yields.

I know the bond funds vs. ladders strategies each have their pros and cons, but we're mostly into the Anette Thau / bond funds never mature camp. So we have ladders, look at getting our principal back at maturity and a rolling average of rates and a known in advance real rate of return.

I haven't looked at the Guggenheim yields in awhile but the last time I did I thought the TIPS yields, adding in the inflation factor, and low risk / government issued made the TIPS for our goals come out ahead. But I will take another look in today's rate environment at the Guggenheim funds. We have some 401K money with limited investment choices I need to reallocate.