bond funds or CDs/Treasuries

[medved]

For a number of years, the fixed income side of my portfolio has been mostly invested in high quality, relatively short term bond funds -- a mix of US corporate, global, muni, and TIPs. But I feel like I am not being compensated well for the risk in the bond funds. That risk is low, but the returns have also very been low -- and in some funds, for some periods of time, negative. So I am in the process of moving the fixed income side of the portfolio toward CDs and treasuries (more CDs). I feel like if this side of the portfolio can generate 2.5% to 3% returns (these days; it will obviously vary) with essentially zero risk, it is doing its job. The main goal on this side is capital preservation. Of course, I am happy to take what return is available, but don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return.

I am interested in any comments you all might have about my idea of moving the fixed income side away from bond funds and toward relatively short term CDs and treasuries. Thanks.

 

[njhowie]

I am a very big proponent of directly owning CDs, Treasuries, and municipal bonds - and never the funds.

When you buy the securities directly, you know everything the moment you buy - you know the exact amount and dates you will receive interest payments, and you know the exact date you will get 100% of your principal back. When you invest in a fund, there is no guarantee of anything.

2.5% to 3.0% today is completely risk free. As I posted on the CD and MM thread, you can get 2.5% today with East Boston Savings Bank in their high yield savings account - available online to everyone, for $5k to $1 million fully insured. That is money that you have full access to and not locked up like a CD, treasury, or other fixed income instrument. You can get 2.95% in two year CDs today, and it's extremely likely that will move to 3.0% by month end.

 

[pb4uski]

Other than some PenFed 5-year, 3% CDs that will mature in December my entire domestic bond allocation is currently parked in Vanguard Prime MM, which has a 2.17% APY.... the yield curve is so flat nothing looks particularly compelling to me right now.

For CD's the 2-year seems to be the sweet spot at ~2.95% (vs 2.55% for the 1-year and 3.10% for the 3-year) but with VMMXX at 2.17% and a view that rates will be increasing I'm loathe to pull the trigger right now so I'll monitor this thread with a lot of interest.

 

[Dtail]

For a number of years, the fixed income side of my portfolio has been mostly invested in high quality, relatively short term bond funds -- a mix of US corporate, global, muni, and TIPs. But I feel like I am not being compensated well for the risk in the bond funds. That risk is low, but the returns have also very been low -- and in some funds, for some periods of time, negative. So I am in the process of moving the fixed income side of the portfolio toward CDs and treasuries (more CDs). I feel like if this side of the portfolio can generate 2.5% to 3% returns (these days; it will obviously vary) with essentially zero risk, it is doing its job. The main goal on this side is capital preservation. Of course, I am happy to take what return is available, but don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return.

I am interested in any comments you all might have about my idea of moving the fixed income side away from bond funds and toward relatively short term CDs and treasuries. Thanks.

Still learning about investing, but did move my bond fund portfolio (only represented ~10% of total portfolio) to CD's for the exact reasons you mentioned above. I live in a no state tax state, so haven't gone to the Treasury side.
Not sure I would swear off bond funds forever, but in a clearly rising interest rate environment, not for me now. Yes, I do realize the opportunity costs,plus the bond funds reinvesting at the ever increasing rates.

 

[Dtail]

Other than some PenFed 5-year, 3% CDs that will mature in December my entire domestic bond allocation is currently parked in Vanguard Prime MM, which has a 2.17% APY.... the yield curve is so flat nothing looks particularly compelling to me right now.

For CD's the 2-year seems to be the sweet spot at ~2.95% (vs 2.55% for the 1-year and 3.10% for the 3-year) but with VMMXX at 2.17% and a view that rates will be increasing I'm loathe to pull the trigger right now so I'll monitor this thread with a lot of interest.

Still working on my 2 year CD Ladder, so will continue building in Nov; otherwise would do the same as you except in Fidelity's version.

 

[OldShooter]

... don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return. ...

+1

The only place where professional bond fund management makes sense to me is in junk, international, and emerging markets. But increasing risk and volatility in the "safe" side of the portfolio seems counterproductive. So ... no need for bond funds.

I am a very big proponent of directly owning CDs, Treasuries, and municipal bonds - and never the funds. ...

+1

Further, I just own them in our Schwab accounts. I have no urge to hassle with transferring funds back and forth to/from banks to chase a few basis points of yield, so when the solution is CDs, it is also brokered CDs. Govvies are also bought through Schwab, mostly on the auctions. KISS.

Funny story: My uncle died years ago, before online anything. He also loved to chase yield. His executor literally had to contact every bank and S&L in town to find out if Uncle Pat had any CDs there.

 

[Fedup]

I have brokered CDs with varied duration, 1,2, and 3 year at most. But I have very small bond portfolio. I lost a bunch this year buying BND. I never like bond funds either. So I’m not going to repeat that mistake until FED is done raising rates. The rest of my cash is in Vanguard MMM.

 

[gwraigty]

Most of our fixed income holdings (non-401k) are in individual bonds, with just a little in bond funds/ETFs. I don't automatically reinvest the income from the funds, so the price movement doesn't bother me. It does frustrate me that the 401k income has to be reinvested in shares of the same fund.

Without checking rates, I'd say that if your short-term bond funds aren't paying significantly more yield than short-term CDs or other stable value investment options, go for the stable value. Brokered CDs make it easy.

 

[Another Reader]

All I am buying on Tuesday is four week treasuries. I expect rates to continue rising and to continue to buy short term treasuries only. The bets I placed on 6, 9, and 12 month CD's in the spring are not playing out as well as I hoped because of how fast the rise has been.

ETA: Shoulda listened to Audrey and bought Ally no-penalty CD's back then...

 

[COcheesehead]

The only bond funds I own are high yield ARTFX and bank loan SPFPX both up 3-4% YTD, everything else is laddered in muni’s or corporates. Too much risk otherwise in a rising rate environment.

 

[audreyh1]

I'm OK with the bond funds. I'm holding them long enough where they will catch up. As stocks climb and bonds languish (well, mine are barely underwater anyway) I add more to them because of rebalancing.

I do own some CDs, Ibonds, treasuries etc., but that's for the cash component of my portfolio. Otherwise I have short-term and intermediate term bond funds.

 

[gcgang]

A five year ladder, CDs or Treasuries depending on your state tax situation, should be the core (probably 75%) of Fixed Income, IMHO.

 

[mrfeh]

For longer term (5+ years) needs, total bond is, IMO, still your best bet, and should be the cornerstone of your FI investments.

For less than 5 years, I suggest CDs, short term bond funds, and I Bonds. Buy whatever is most attractive at the moment.

 

[BeachOrCity]

+1

The only place where professional bond fund management makes sense to me is in junk, international, and emerging markets. But increasing risk and volatility in the "safe" side of the portfolio seems counterproductive. So ... no need for bond funds.

+1

Further, I just own them in our Schwab accounts. I have no urge to hassle with transferring funds back and forth to/from banks to chase a few basis points of yield, so when the solution is CDs, it is also brokered CDs. Govvies are also bought through Schwab, mostly on the auctions. KISS.

Funny story: My uncle died years ago, before online anything. He also loved to chase yield. His executor literally had to contact every bank and S&L in town to find out if Uncle Pat had any CDs there.

Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.

 

[njhowie]

Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.

If you buy a CD, you should be prepared to hold to maturity. If the first thing you're thinking about in purchasing a CD is withdrawing early, then maybe you should really be considering a savings or money market account.

 

[gerntz]

State-specific muni bonds and funds for us.

 

[pb4uski]

Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.

True, but the market discount may not be much different from the early withdrawal penalty.

For example, let's take a 5 year CD with a coupon rate of 3%... a $10.000 deposit would pay $11,593 in 5 years [$10,000*(1+3%)^5].

Fast forward a year.... and rates have increased to 3.5%.... the account balance would be $10,300 [$10,000*(1+3%)^1] but the fair value (what you could sell it for) would be $10,102 [$11,593/(1+3.5%)^4] ... an implicit penalty of $198 vs $150 if the EWP is a half of a year of interest.

 

[audreyh1]

True, but the market discount may not be much different from the early withdrawal penalty.

For example, let's take a 5 year CD with a coupon rate of 3%... a $10.000 deposit would pay $11,593 in 5 years [$10,000*(1+3%)^5].

Fast forward a year.... and rates have increased to 3.5%.... the account balance would be $10,300 [$10,000*(1+3%)^1] but the fair value (what you could sell it for) would be $10,102 [$11,593/(1+3.5%)^4] ... an implicit penalty of $198 vs $150 if the EWP is a half of a year of interest.

You also pay a commission to sell your CD, and how liquid is it - do you get the “market value”?

 

[pb4uski]

I have 25 commission free trades a year but you are right that if you need to pay commission then that needs to be considered.... I would think that the markets are plenty liquid enough.

My point was that depending on how much interest rates rise that the change in value may not be that different from the early withdrawal penalty... in fact, if the increase was slight or even a decrease then it might be lower than the early withdrawal penalty or even a benefit.

 

[marko]

Still holding bond funds bought 15+ years ago.

TR Price RPSIX paying 3.77% and their high yield PRHYX paying 5.77%. All together they comprise only about 15% of my portfolio.

They've drifted down from ~5% and 8% respectively but still send me a nice paycheck every month. I expect with higher interest rates they'll now drift back up.

Waaaay back I was in CD's when they were paying 15% but haven't had any in 20 years or more.

 

[audreyh1]

I have 25 commission free trades a year but you are right that if you need to pay commission then that needs to be considered.... I would think that the markets are plenty liquid enough.

Smaller denomination CDs - not so sure how liquid the secondary market is to find someone to take it off your hands unless at a nice discount for them. Or you might have a long wait. My understanding is that the secondary market for selling CDs is limited.

Basically - it’s a big unknown when you buy the CD, whereas the early withdrawal penalty is known when you buy the CD.

 

[Fedup]

This is why I think of brokered CDs as bonds, it varies with interest rate. So far, I bought it before several rate raises and it doesn’t look too bad. I’m sure I can hold on.

 

[njhowie]

I have 25 commission free trades a year but you are right that if you need to pay commission then that needs to be considered.... I would think that the markets are plenty liquid enough.

Your 25 commission free trades are likely limited to "equities" and CDs are not included in that.

 

[pb4uski]

Perhaps, I've never bought CDs in that account.

 

[JoeWras]

Someone mentioned 4 week T-Bills. Recent auction results are eye popping for such a short term!