Fixed income

[gayl]

I'm relatively new to the concept of fixed income so I'm asking a dumb question. I have only 1 CA tax free one now.

Question: if I have 45k to stick into fixed income within an IRA, what should I look at?

 

[COcheesehead]

What are your goals?
Do you need liquidity?
How safe do you want it to be?
Do you need the income?

 

[gayl]

Goals: capital preservation?
Liquidity: not necessary
Safety: yeah, I'm slowly (underline that) moving from 90/10 equity to 70/30 mix
Income: I'll eventually need to take RMD as required by IRS but current pension meets expenses, will also get SSA as I'm not under WEP/WPO

 

[TwoByFour]

Are you accumulating or retired? Makes a difference, I believe. And if accumulating, how close to retiring?

Fixed income while accumulating is mostly about sleeping well at night since equities historically have done much better than bonds as far as creating wealth.

Fixed income once retired is more about wealth preservation and possibly income.

If all you want is pure wealth preservation, US Treasuries, either in a bond fund, or just bonds, cannot be beat for safety. In order to avoid inflation risk, I recommend shorter maturity bonds or funds, like 5-years or less (I go for 2-3 years).

If you want income, high quality munis or corporates are going to be better than US Treasuries. But I would still keep the maturity low.

If what you want to do is just sleep better at night, get a good total bond market fund like AGG or BND.

 

[COcheesehead]

I would personally take that 45k and make a sweet little 4 year bond ladder. No NAV erosion in a rising rate environment. That might be overly complicated though, so look at a good multi sector bond fund like PTIAX. Currently yields just below 5%.

 

[mrfeh]

I'm relatively new to the concept of fixed income so I'm asking a dumb question. I have only 1 CA tax free one now.

Question: if I have 45k to stick into fixed income within an IRA, what should I look at?

Total bond fund.

 

[wolf]

Currently, Fed, is raising interest rates. Avoid bond funds. Principle drops as rates rise.
I avoid individual bonds. For me, difficult to purchase. Not sure of "real" price.

Cd's are simple, Insured, and not affected by rising interest rates. Can be purchased within an IRA.

RMD. You mentioned this. Most CD's, allow you to take out some principle for RMD
with no early withdrawal penalty.

If you purchase individual bonds, and need RMD, you may have to sell the
bond. Gain/Loss. Interest rate "loss" if high paying bond.

 

[foxfirev5]

Currently, Fed, is raising interest rates. Avoid bond funds. Principle drops as rates rise.
I avoid individual bonds. For me, difficult to purchase. Not sure of "real" price.

Cd's are simple, Insured, and not affected by rising interest rates. Can be purchased within an IRA.

RMD. You mentioned this. Most CD's, allow you to take out some principle for RMD
with no early withdrawal penalty.

If you purchase individual bonds, and need RMD, you may have to sell the
bond. Gain/Loss. Interest rate "loss" if high paying bond.

Agreed. Furthermore if you properly ladder your CD's you can account for RMD's as well. IMHO CD's are the best fixed income option for individual investors at this time. Higher yields than treasuries from 2 years out. And the spread between high quality corporates and CD's is not much.

 

[COcheesehead]

Currently, Fed, is raising interest rates. Avoid bond funds. Principle drops as rates rise.
I avoid individual bonds. For me, difficult to purchase. Not sure of "real" price.

Cd's are simple, Insured, and not affected by rising interest rates. Can be purchased within an IRA.

RMD. You mentioned this. Most CD's, allow you to take out some principle for RMD
with no early withdrawal penalty.

If you purchase individual bonds, and need RMD, you may have to sell the
bond. Gain/Loss. Interest rate "loss" if high paying bond.

If you are a Fidelity customer they have some super easy to use tools to purchase individual bonds. You pick a yield, a quality level and a duration and you buy it.

 

[mrfeh]

Currently, Fed, is raising interest rates.

The market knows this. It is priced in.

Assuming an efficient market, bond fund NAVs are just as likely to increase as decrease.

 

[COcheesehead]

The market knows this. It is priced in.

Assuming an efficient market, bond fund NAVs are just as likely to increase as decrease.

How do you explain the punch to the face with bond NAV's earlier this month? The yield spike caught everyone by surprise and was the start of this current correction.

 

[mrfeh]

How do you explain the punch to the face with bond NAV's earlier this month? The yield spike caught everyone by surprise and was the start of this current correction.

I didn't say NAVs don't change. I said they are as likely to increase as decrease, countering the fallacy that "bond fund NAVs are sure to decrease because the Fed is raising rates".

 

[TwoByFour]

The market knows this. It is priced in.

Assuming an efficient market, bond fund NAVs are just as likely to increase as decrease.

Bond prices are determined as much by demand as they are by changes in yield. The two are of course directly related - if demand for bonds decreases, the price falls and the yield rises. The Fed only directly affects the yield of the left most point on the yield curve. It takes a while for that to move up to say, 10-year yields.

The market knows where inflation is headed, and that is priced in. The market may not know where demand is headed. Since so many US Treasuries are owned by foreigners, demand gets wrapped up in strength of the dollar, trade imbalances, etc.

 

[mrfeh]

Bond prices are determined as much by demand as they are by changes in yield. The two are of course directly related - if demand for bonds decreases, the price falls and the yield rises. The Fed only directly affects the yield of the left most point on the yield curve. It takes a while for that to move up to say, 10-year yields.

The market knows where inflation is headed, and that is priced in. The market may not know where demand is headed. Since so many US Treasuries are owned by foreigners, demand gets wrapped up in strength of the dollar, trade imbalances, etc.

Of course, there are many factors. Again, if one believes in an efficient market, all factors have been taken into account.

If one is so positive that NAVs will be going down, then I suggest they short bond funds with everything they have. It should be easy money, right?

 

[gayl]

Ok. I don't need the RMD (pension w/ COLA) but IRS will want their cut. So I'm thinking of CD ladder as I might need more info before bonds? (Did I say I'm a newbie only holding 75k CDs + 50k PWZ) Does 12 month sound about right? According to Schwab online tool I really should be 40% fixed income but that sounds SO conservative to me

 

[TwoByFour]

If one is so positive that NAVs will be going down, then I suggest they short bond funds with everything they have. It should be easy money, right?

Who is positive about bond prices (or yield) going one way or another? In any event, I have no idea where yields are going, it does not affect my investment plan whatever they do.

 

[gayl]

And now you know why I stuck to 90/10 perhaps too long .... and you guys understand fixed investing

 

[COcheesehead]

I take what the market giveth. Today I snagged a high investment grade, 2 year muni, 5% coupon yielding just over 4%.