Nowhere to put short term money these days

[perinova]

Well yes since short term instruments CD and bonds return about 0% , longer term istruments will tank at the slight increase in interest rate, it seems i might as well leave the money in checking account. I am thinking I may need the money in about Three years time.
Or... Would it be crazy to put the money into a High Yield Bond fund. They are not vey sensitive to interest rate or to the fact the market is high or low.
What do you guys think?

 

[REWahoo]

Penfed 3yr CDs are paying 2%. Not great, but far better than zero and far less risk than high yield bonds.

 

[pb4uski]

or online savings pay 0.5% to 1.0%

 

[brewer12345]

I would NOT touch high yield with your 10 foot pole right now. I say this as someone who has made a living as a high yield/distressed debt analyst in the past.

 

[clifp]

I'd listen to Brewer. The Penfed 5 year 3% CD are good option even with the 1 year interest penalty.

If you hold them for 2 years you still get 1.5%/year and by year three you make 2%/year. Which is the the same you would get for a 3 year 2% CD. If turns out you don't need the money and interest rates remain flat you'll be happy.

 

[bUU]

We've moved some money into floating rate funds. They return better than CDs albeit with some more risk.

 

[audreyh1]

Well yes since short term instruments CD and bonds return about 0% , longer term istruments will tank at the slight increase in interest rate, it seems i might as well leave the money in checking account. I am thinking I may need the money in about Three years time.
Or... Would it be crazy to put the money into a High Yield Bond fund. They are not vey sensitive to interest rate or to the fact the market is high or low.
What do you guys think?

Look a little harder and you'll find some <1yr options in the 0.85% or so range. Way better than 0%.

If you are willing to go out 2 to 3 years you can do much better.

 

[audreyh1]

We've moved some money into floating rate funds. They return better than CDs albeit with some more risk.

These can behave as nastily as high yield bonds and equities when a credit crisis occurs. Take a peek at the 2007/2008 performance before buying.

 

[Midpack]

We put our fully liquid cash at Ally, earning 0.85% now (was 0.95%). The rest is in short-medium duration bond funds but I expect to jump on the 3-7 yr CD bandwagon soon with a good chunk of it. You're right, there's no good place for cash or fixed income now, and it's not likely to change soon IMO. Pick the lesser of all evils and spread among them.

 

[pb4uski]

I would NOT touch high yield with your 10 foot pole right now. I say this as someone who has made a living as a high yield/distressed debt analyst in the past.

IIRC brewer the reason you are bearish on high yield is that the junk has become much junkier but spreads are not commensurately wider so the investor is not being adequately compensated for the risk they are assuming?

 

[Ticker]

I am buying I bonds, currently at 1.8%. I know the rate floats and is subject to change, but where else do I go? One year commitment, safe as they get.

 

[Midpack]

I am buying I bonds, currently at 1.8%. I know the rate floats and is subject to change, but where else do I go? One year commitment, safe as they get.

More than I get with iBonds, what am I missing?

The composite rate for I bonds issued November 1, 2013 – April 30, 2014 is 1.38%

 

[Ticker]

Sorry, my mistake. 1.38 is correct. my memory is fading.......
but, it's still the best place for my money in my circumstances.

I was going through some old tax stuff yesterday, and came across an old 1099int. $300 interest from a savings account. I pine for those days....

 

[Fermion]

Right now I like the Penfed 5 year CD better than I-bonds as we will not be getting high inflation anytime soon. 3% is a lot better than 1.38% plus you can buy more than $20,000.

 

[Midpack]

Right now I like the Penfed 5 year CD better than I-bonds as we will not be getting high inflation anytime soon. 3% is a lot better than 1.38% plus you can buy more than $20,000.

In all fairness, wouldn't you have to compare the return on a PenFed 5-yr CD surrendered after 1 year to compare to an I-Bond?

Early Redemption Penalties

Penalties are imposed for early withdrawal of money market share certificates. This will reduce earnings on the account. You must provide your request in writing.

Certificates with a term of 5 years or greater;

(applies only to certificates issued or rolled over on 3/15/11 or later)

If redeemed within 365 days of the issue date or any renewal date, all dividends will be forfeited.

If redeemed thereafter, but before the maturity date, dividends for the most recent 365 days will be forfeited.

 

[audreyh1]

In all fairness, wouldn't you have to compare the return on a PenFed 5-yr CD surrendered after 1 year to compare to an I-Bond?

For shorter term money, yes.

But remember that 1.38% rate is only good for six months!

If you expect to leave the money in for the 5 year duration, the CDs are the clear winner if inflation doesn't go up over that time period. Even the 2 and 3 year CDs at 1.4% and 2.0% beat the current IBond rate.

So you are making a bet about inflation over that period. If inflation goes up, the IBond rates increase and they may end up beating the current CDs.

If inflation drops, the IBond rate will drop too. But the CD will not.

Inflation over the past several months has been quite low, so I expect the March IBond rate to drop. If you buy now you will get 6 months at 1.38% rate, but I suspect the next six months to be paid at a lower rate.

 

[brewer12345]

IIRC brewer the reason you are bearish on high yield is that the junk has become much junkier but spreads are not commensurately wider so the investor is not being adequately compensated for the risk they are assuming?

The junk market has, in a word, gotten stupid. Spreads have crashed all the way down to 400 over treasuries for the main junk index. Historically, the only time they have gone lower in recent history is when they got down to about 250 during the height of the credit boom. At the same time, junk investors have gotten very undiscriminating about bond quality. Covenants are as weak as they have ever been; every deal that comes to market seems to get upsized no matter how risky; doddering wrecks that are ordinarily shut out of the market can pound out paper at will; and we are back to boom levels of issuance of PIK/toggle notes which allow the weaker issuers to pay interest with more bonds instead of cash (and a lot of these are being issued to fund dividends for the owners of these crap piles). All of these indicators tell me that junk buyers are setting themselves up for a huge amount of pain when the market eventually turns hard again. I don't know when this will happen. It could be tomorrow, nest month or in 5 years, but it will come and it will be ugly. And if you are buying funds you will find that all the older, higher quality bonds in the funds have been called (standard contractual provision for junk bonds) and replaced by crap.

I currently own zero junk. When that market comes apart at the seams I will be picking through the wreckage for the stuff worth buying at a fraction of par.

 

[perinova]

Thank You all for your feedback. I have reallocated everything at the end of the year which is something I haven't done in a while. It looks difficult to know where to put anything since:
1) The stock market is at an all time high
2) Bond funds values are poised to drop with the rate changes.

As for the initial question: I am not sure when I will need the money and want it to be flexible. I know I was exaggerating with the 0% on short money but we are not that far off from that.

Looking deeper into HY fund it is glaringly not a good idea when looking at capital preservation. I initially looked at total return and current income which are not all that bad. I then looked into the Bogleheads forum where there have been heated discussion on the subject,

The PenFed CDs are not a bad option but less flexible and again this is not tax sheltered money so it may be best for me to put it into Limited or Short Term Tax exempt fund. This i what I am leaning toward now.

 

[perinova]

The junk market has, in a word, gotten stupid. Spreads have crashed all the way down to 400 over treasuries for the main junk index. Historically, the only time they have gone lower in recent history is when they got down to about 250 during the height of the credit boom. At the same time, junk investors have gotten very undiscriminating about bond quality. Covenants are as weak as they have ever been; every deal that comes to market seems to get upsized no matter how risky; doddering wrecks that are ordinarily shut out of the market can pound out paper at will; and we are back to boom levels of issuance of PIK/toggle notes which allow the weaker issuers to pay interest with more bonds instead of cash (and a lot of these are being issued to fund dividends for the owners of these crap piles). All of these indicators tell me that junk buyers are setting themselves up for a huge amount of pain when the market eventually turns hard again. I don't know when this will happen. It could be tomorrow, nest month or in 5 years, but it will come and it will be ugly. And if you are buying funds you will find that all the older, higher quality bonds in the funds have been called (standard contractual provision for junk bonds) and replaced by crap.

I currently own zero junk. When that market comes apart at the seams I will be picking through the wreckage for the stuff worth buying at a fraction of par.

Thanks. I was going to ask the same question as pb4uski .
What is the easy way to look at the spread you are talking about? Is it purely the yield difference between Treasuries and Junk Index (I actually didn't know about this index).

Brewer - I also have some bond funds with a mix of high grade and there is a kick of high yield there. Are you thinking it would be better to move this into a purely high grade fund for now? These are Fidelity funds: Total Bond vs Bond Index, I actually have a mix of both.

 

[perinova]

These can behave as nastily as high yield bonds and equities when a credit crisis occurs. Take a peek at the 2007/2008 performance before buying.

Can you guys give an example of floating rate fund? Is it A bond fund Or is this something else I don't know,

 

[Fermion]

Thank You all for your feedback. I have reallocated everything at the end of the year which is something I haven't done in a while. It looks difficult to know where to put anything since:
1) The stock market is at an all time high
2) Bond funds values are poised to drop with the rate changes.

As for the initial question: I am not sure when I will need the money and want it to be flexible. I know I was exaggerating with the 0% on short money but we are not that far off from that.

Looking deeper into HY fund it is glaringly not a good idea when looking at capital preservation. I initially looked at total return and current income which are not all that bad. I then looked into the Bogleheads forum where there have been heated discussion on the subject,

The PenFed CDs are not a bad option but less flexible and again this is not tax sheltered money so it may be best for me to put it into Limited or Short Term Tax exempt fund. This i what I am leaning toward now.

Even though we are at an all time high, I can easily see the market going up another 15% in 2014. In 2013 I thought maybe it would go up 10% and it went up 30%.

 

[audreyh1]

Can you guys give an example of floating rate fund? Is it A bond fund Or is this something else I don't know,

It's a type of bond fund that has super low duration, but tends to be very, very credit risk sensitive.

FFRHX is an example. It had a great run in 2013. If you look at what happened in 2008, you can see the downside. I think a lot of investors have been piling into floating rate funds just as they have into high yield bond funds. I don't recommend them for a new investor.

 

[brewer12345]

Thanks. I was going to ask the same question as pb4uski .
What is the easy way to look at the spread you are talking about? Is it purely the yield difference between Treasuries and Junk Index (I actually didn't know about this index).

Brewer - I also have some bond funds with a mix of high grade and there is a kick of high yield there. Are you thinking it would be better to move this into a purely high grade fund for now? These are Fidelity funds: Total Bond vs Bond Index, I actually have a mix of both.

The lazy way I monitor spreads since I no longer have access to a Bloomberg terminal is a daily (or so) visit to this site: BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread (BAMLH0A0HYM2) - FRED - St. Louis Fed

I have a couple of small positions in closed end funds that have a smidge of junk. If its a truly tiny amount and you have a reason for holding the fund (I expect discounts to tighten on my CEFs), I would say it is no biggie. If this is just a bond fund, I would insist on no junk.

Floating rate fund hold leveraged loans, which is junk by another name. They have little or no interest rate risk, but they have lots of (junk) credit risk. Basically they are loan to the same shaky companies that issue junk bonds, but if the company goes bust the loans are ahead of the bonds in order of who gets paid. In theory this means that loan holders should be less at risk than bond holders. In practice, these loans did not do so well in the crash, so don't be mislead that they are safe money.

 

[jazz4cash]

GE Capital Bank

GE Capital Bank has a slight edge over Penfed for terms < 2 yrs

www.gecapitalbank.com

Term Interest Rate APY
MM 0.90% 0.90%
6 Months 0.70% 0.70%
9 Months 0.70% 0.70%
12 Months 1.00% 1.00%........was 1.05 in December
18 Months 1.04% 1.05%
24 Months 1.14% 1.15%
30 Months 1.14% 1.15%
3 Years 1.29% 1.30%
4 Years 1.50% 1.51%
5 Years 1.99% 2.01%
6 Years 2.03% 2.05%

 

[bUU]

These can behave as nastily as high yield bonds and equities when a credit crisis occurs. Take a peek at the 2007/2008 performance before buying.

Yup we did and we still bought. The reality is that there is a choice between only bad options (and yes, I consider earning 2% guaranteed to be worse than the worst that could go wrong with floating rate funds mitigated by the small probability of that happening), in the context of a diversified approach to that end of our asset allocation. The reality is that if we reduce our risk too much, we're guaranteed to run out of money before we die.