Short Term Corp Fund, I-Bonds, or CDs?

[Bob_Smith]

First question: I have some money set aside for goals other than retirement. I'm not sure when I'll spend it, so I want to keep it relatively liquid in case I need to access it. I'll probably spend most of it within two years. Anything not spent by then will go back into the retirement pot. Where are you keeping money you might need within one to two years. I'm torn between I-Bonds, one year CDs, and Vanguard's ST Corp Fund. What would you do? Better ideas?

Second question: Where would you keep money you won't need for 3-5 years. I'm thinking Total Bond Market Index Fund. I'm thinking the odds are that the extra yield on an intermediate fund will balance out share price declines if rates rise. Do you agree or would you stay short until this plays out some more? Other suggestions?

 

[wabmester]

I have about half of my expenses for the next 8 years covered by a cd/bond ladder with an average yield of around 7%. The rest will come from selling off appreciated assets (i.e., "rebalancing").

This makes cash flow management pretty easy for me. I don't think in terms of near-term, mid-term, and long-term cash flow. These things just keep maturing periodically, and I either spend the cash or reinvest it.

My biggest problem these days is finding good homes for all of my cash.

Normally, I would just add new bonds towards the end of the ladder (out 6-9 years), but the yield curve is pretty flat right now, so new cash goes into short-term instruments, and I'll reconsider the long end of the ladder next year.

You can get 1-year CD's at over 3% now. You can get a little better yield from i-bonds, but you hit the annual cap on those so quickly, they only make sense for relatively small purchases (i.e., <$60K).

I know people have been yammering about rising interest rates for a couple of years now, but I'm still very wary of going out more than a couple of years in this environment.

There is no escaping the fact that the demand for bonds is driven by a very few Big Players, and the supply of US debt is hitched to a rocket. The law of supply and demand will eventually cause rates to rise -- it's just a matter of when.

 

[brewer12345]

I think you'd have to try hard to do better than a 5 year CD with a small early surrender eriod. If you shop around, many of the banks offering the highest rates only charge a 6 month interest penalty, and they are paying top-of-market rates. The ability to pull out pretty much at book plus interest might be valuable in a upward rate spike environment.

 

[Jarhead*]

First question: I have some money set aside for goals other than retirement. I'm not sure when I'll spend it, so I want to keep it relatively liquid in case I need to access it. I'll probably spend most of it within two years. Anything not spent by then will go back into the retirement pot. Where are you keeping money you might need within one to two years. I'm torn between I-Bonds, one year CDs, and Vanguard's ST Corp Fund. What would you do? Better ideas?

Second question: Where would you keep money you won't need for 3-5 years. I'm thinking Total Bond Market Index Fund. I'm thinking the odds are that the extra yield on an intermediate fund will balance out share price declines if rates rise. Do you agree or would you stay short until this plays out some more? Other suggestions?

Bob: Fortunantly you are asking questions for short-term situation. Would have been a little more interesting if you were asking long term.
You (early retired), Wab (Very early retired), and me
As Wab stated, you can get short-term CD's for 3%., might do a little better with I Bonds, and as far as short term corporates, (I currently have a pretty good sized commitment to them), my total return has been less than 2% this year. Not much to chose from.
For the 3-5 year term, if you stay intermediate, you should be o.k.
Personally, I like short-term corporates at this stage of
the interest rate cycle. (Veteran of 1966-1982 bond carnage.)
Bad memories when anything over 6 mos. was a long term committment
Take Care, Bob

 

[Nords]

The ability to pull out pretty much at book plus interest might be valuable in a upward rate spike environment.

Brewer, I'm a bond neophyte. How do you tell when a 5-year CD is becoming a worse deal than an EE or an I bond?

 

[brewer12345]

Brewer, I'm a bond neophyte.  How do you tell when a 5-year CD is becoming a worse deal than an EE or an I bond?

EE and I bonds have floating rates set every six months. 5 Year CDs typically (aside from step ups and other strange beasts) have fixed coupons set for the whole maturity. So it is a simple comparison of yields combined with how far and how fast you think rates will go. If you have, say, a 150BP spread or better between EE/I bond rates and a 5 year CD with a 6 month interest penalty upon early surrender, I'd say that its probably worth taking a chance on the 5 year CD. If the worst happens and rates spike dramatically, you can always yank the money from the CD, pay the piddling penalty, and reinvest at higher rates.

 

[Bob_Smith]

Thanks for the input. I'm going to take a look at 5 year CDs with the intent of pulling out early, plus around $60,000 in I-Bonds in January (I already have the max for 2004). I have been expecting rates to rise for so long now that I run the risk of caving in and reaching for yield, just at the wrong time. I think I'll keep hanging in there on the low end, and add some 5 year CDs and I-bonds. Thanks.

 

[John Galt]

I was quite worried about "reaching for yield at just the wrong time" also. I told myself 3 things:

1. The money I was investing that would likely mature after I was dead was "forever money", that only
needed to throw off interest each month.

2. The yields I was locking in were acceptable to me,
even when considering inflation and interest rate
history.

3. The income (when added to SS) will be enough to
sustain us without dipping into the original investment.

So far rates have stayed low, so I look pretty good.
If we get 14% CDs again and I am locked out............
well, I would not be a happy camper.

JG

 

[Bob_Smith]

So far rates have stayed low, so I look pretty good. If we get 14% CDs again and I am locked out............ well, I would not be a happy camper.

Yep, inflation is my biggest fear. I'm hoping TIPS and stocks will keep me in the game over the long haul. I plan to dip into REITs if the prices decline, but haven't seen a good entry point for awhile. I think Charlie got in awhile back - I wish I had listened to him when he was talking about it a few months ago.

 

[charlie]

Bob, I am sure you already know this but for
other readers who may not ........

You can buy $30,000 of paper I-bonds plus $30,000
more through Treasury Direct each year per SS
number. Thus a couple could buy a total of
$120,000 per year. The catch is that you have to
hold them at least 1 year and you pay a 3 mo.
interest penalty if you cash them before 5 years.

Even so, they are currently paying 3.67% . I think
they are a safer bet than Vanguard's Short Term
Investment Grade fund for money you want to use
within the next 2 years.

Cheers,

Charlie

 

[Bob_Smith]

Thanks Charlie. No, I was not aware I could double dip and buy both paper and Treasury Direct. I appreciate knowing that, and will act upon it. Actually, since I bought $60,000 this year, I could buy $60,000 more before 12/31, and another $120,000 in January, right? I'll look that up on the Treasury direct site. Thanks!

 

[wabmester]

I'm sure you guys know this -- but paper i-bonds are no longer available from TreasuryDirect. You have to buy them at a bank.

 

[MJ]

I'm sure you guys know this -- but paper i-bonds are no longer available from TreasuryDirect. You have to buy them at a bank.

W,

Do the banks add a charge or commission for the purchase of i-bonds?

MJ

 

[charlie]

Bob, that's the way I understand the rules. However,
I have never used Treasury Direct so far. Wab, I
never new that you could get paper I-bonds from
Treasury Direct .... but it is moot at this point.
mj, I don't think most banks charge anything ... but
could be wrong.

Cheers,

Charlie

 

[soupcxan]

On a related note, I have about $10k that I want to invest in mutual funds in the next 6-12 months (not sure of the timing exactly, may do $5k in 6 months and $5k in 12 months, for example). Right now it is in my savings account at 2.25%, however I wonder if I should move it to a short term bond fund such as:

- VFSTX Vanguard short-term investment grade fund
- VBISX Vanguard short-term bond index fund

If my time horizon is only 6-12 months, is this a bad idea? Is the risk of the NAV decreasing not worth the extra 1% I'd get over keeping it in my savings account?

 

[charlie]

Soup, IMHO it is a coin toss. A lot of us on this board
use Short Term Investment Grade as a MM substitute.
It worked OK this past year, but interest rates never
really took off like many expected ...... could be different
this coming year. It might be hard to beat 2.25%

Cheers,

Charlie

 

[Nords]

Bulls make $, bears make $, pigs get slaughtered.

For a 6-12 month horizon, I think a MM or CD is the ONLY appropriate place.

Especially when that extra 1% on the $10K for 6-12 months is only $50-$100. You can "earn" more money than that with a lot less risk by skipping a Starbuck's habit or cutting back on restaurant meals or just about any low-key frugal effort.

Then you can add the extra savings to the $10K and congratulate yourself on achieving such a high "virtual" return.

 

[MJ]

If you decide to go with CD's and can put together the min 10k, Corus Bank has 6 m @ 2.87% or 12 m @ 3.28%.

http://www.corusbank.com/

MJ