Bonds/Fixed Income and Asset Location

[Chuckanut]

I have been trying to build my 5-year (6 figure) CD ladder with only 5 rungs, but hesitate on the 3rd rung when I see 3 year rates at 5.1% and hope for higher rates.

Bond ladders are designed to deal with the kind of uncertainty you describe.

IMO, bond/CD ladders are the best way for me to maximize my return while keeping risks low. I may not hit the highest yield but I won't be stuck with a lot of cash earning 2.35% if rates decline over the next few years. And if they go up I reinvest at higher rates. My goal is to maximize the number of dollars I earn while keeping risks low.

My 2 cents. YMMV.

 

[Healthy Lifestyle]

Thanks all for the insight and like the idea of thinking about my average ladder return over time/duration.

 

[Family]

I don't know if we have seen the highs or not. But this talking head on youtube thinks we have not seen the peak yet. Her reasons sound reasonable.

Good video & thank you for sharing!

I just read this contrary report from Schwab which states treasuries, bonds, & Munis may have just peaked & so now is a good time to buy and extend duration.

Hence, the need to dollar cost average when setting up your ladder which should then regularly throw off dry powder for the next unknow good deal hopefully

I am currently buying some munis for my taxable ladder, but high quality and extended duration have a touch less yield than comparable taxable (at my tax rate). I'm looking for state issued GO Munis (not local) in states that have significant growth in population (just sleep a bit better with these).

 

[jldavid47]

I don't know if we have seen the highs or not. But this talking head on youtube thinks we have not seen the peak

Reasons 4 and 5 are especially important to long-term yields as they assess the demand side of the equation. Quantitative tightening isn't ending any time soon.

If you want to follow along on what the Fed is doing WRT QT you can do so here:

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

In terms of securities holdings you can interactively choose just that part of the fed balance sheet by clicking on the stuff you don't want to see below the graph. The Fed's security holdings peaked about 18 months ago at $8,505,586,000,000 and as Powell has stated have declined about $1T since then. The latest week showed total securities holdings of $7,412,483,000,000. That is still very high. During the QE program of the 2010s they never got much over $4.25T.

Another reason she might consider adding is that the average interest cycle once the trend changes is 22-27 years (see https://advisor.visualcapitalist.com/us-interest-rates/ ). This does not mean longer dated Treasuries are going back to 15-16%. The next peak is likely to be much lower. What it does mean is that we are probably in for a choppy rise in rates into the mid-to-late late 2040s and what we have seen the past couple of weeks is merely a short-term retracement in rates. I don't know that for sure but that's my sense of what is going on.

So what's a treasury/CD investor to do? Laddering, or just spreading out maturities (diversifying over time, if you will) seem wise since nobody knows for sure what will happen. Personally, I'm buying new issues between 8 weeks and 3 years for the most part, occasionally going longer. I buy in small chunks - about 2% of my fixed income allocation each time - so that if I'm "wrong" on any one issue it's no big deal. YMMV.