Are short term govt bonds the same as cash?

[Olbidness]

I’ve been adjusting my AA out of S&P index and into short term government bonds. I see people posting their AA in terms of Stock/bonds/cash. Is there any difference in risk between government bonds and say a checking account or MM account?

 

[brewer12345]

Inside of 6 months maturity I would call them cash.

 

[mrfeh]

I’ve been adjusting my AA out of S&P index and into short term government bonds. I see people posting their AA in terms of Stock/bonds/cash. Is there any difference in risk between government bonds and say a checking account or MM account?

No.

But, it's simpler to just think of your AA as equities/fixed income.

 

[big-papa]

Some people who hold a "cash" position do so as an emergency fund with the idea that is can be instantly liquidated. Others hold a cash position as the buffer that they withdraw from during retirement as they sell other assets. Still, others hold a cash position but ignore that they have it when they post their AA's.

Regarding the difference between bonds and a CD/MM, it depends on the bond duration. If it's important to you that your "cash" holdings never lose value (ignoring inflation), then either CD's/MM or holding actual bonds all the way to maturity would work. Whether one gets you better returns than the other depends interest rates of each choice.

If you're OK with the value fluctuating day to day, month to month, etc. then a bond fund works. Just know that the shorter the duration of the bond fund, the lower the volatility and the lower the long term return will be. Choose your poison.

 

[pb4uski]

... Is there any difference in risk between government bonds and say a checking account or MM account?

In theory, while the credit risk is the same because both are "full faith and credit" (I assume that you are referring to U.S. government bonds), bonds have interest rate risk (if rates rise the value will decline and vice versa) where a checking or MM account don't.

Inside of 6 months maturity I would call them cash.

+1 As brewer suggests, the interest rate risk for short term bonds is negligible.

Recently, the sweet spot has been online bank savings accounts... fully FDIC insured and pay around 1%.... much better yields than 6 month or 1 year U.S. government bonds or checking or MM.

 

[OldShooter]

Cash is whatever you choose to call cash. In my case, the only cash I have is in my wallet or, maybe, the inherited old coins in a box in my gun safe. Everything else in my AA is either equity or fixed income. For people who include "cash" separately in their AA, the "cash" seems to be a tranche of their total fixed income number, selected using a rule that they personally like. There isn't any right or wrong here.

 

[pb4uski]

FWIW, I consider cash to be

short-term, highly liquid investments that are readily convertible to known amounts of cash and that are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates

 

[brewer12345]

Basically cash and cash type instruments are just really, really short duration fixed income. I simply lump cash, CDs, savings accounts, and short term bonds into the same "fixed income" bucket as my bond funds, cash balance pension value, etc.

 

[Chuckanut]

In theory, while the credit risk is the same because both are "full faith and credit" (I assume that you are referring to U.S. government bonds), bonds have interest rate risk (if rates rise the value will decline and vice versa) where a checking or MM account don't.



+1 As brewer suggests, the interest rate risk for short term bonds is negligible.

Recently, the sweet spot has been online bank savings accounts... fully FDIC insured and pay around 1%.... much better yields than 6 month or 1 year U.S. government bonds or checking or MM.

I had a 1 yr CD at Schwab come due this month. Interest rates on new 1 yr CDs were in the area of 0.15% on the Schwab list of CDs. Really? I have to wonder if that was some error on their part or in my search. I will check again later this weekend. I put the money into a Federal MM fund paying about 1% until I can find something better.

 

[OldShooter]

I had a 1 yr CD at Schwab come due this month. Interest rates on new 1 yr CDs were in the area of 0.15% on the Schwab list of CDs. Really? I have to wonder if that was some error on their part or in my search. I will check again later this weekend. I put the money into a Federal MM fund paying about 1% until I can find something better.

Call the Schwab bond desk. Those guys can easily map the landscape for you. It's where they live. 800-824-4027 This may be a general number or it may be the direct number for a guy there, Chris Virgilio, who has been very helpful for me in the past. Either way it should work. To me, hunting around the web site for fixed income alternatives is a lot like an Easter egg hunt. It can be fun, but it is not the most effective means to acquire eggs.

If you actually buy from a person on the phone there may be a small charge, but the information is free and sometimes they have even waived the charge for me. If that's an issue, take the free information and make the purchase on the web.

 

[Olbidness]

For almost all of the time I have been investing I only invested in stocks or stock funds with a small MM account. I’ve been transferring stock funds to a short term government bond fund. I’m still at a relatively aggressive AA 75/25 . Bonds are still a bit of a unknown but I’m aiming for less volatility.

 

[foxfirev5]

At today's rates all of my short term fixed is in either high yield savings, no penalty CD's and a small amount of short term govt bond funds. With the miniscule returns I would go with whatever is most convenient.

 

[Olbidness]

At today's rates all of my short term fixed is in either high yield savings, no penalty CD's and a small amount of short term govt bond funds. With the miniscule returns I would go with whatever is most convenient.

The rates on bonds are very low but my hope is to at least equal the inflation rate.

 

[brewer12345]

I had a 1 yr CD at Schwab come due this month. Interest rates on new 1 yr CDs were in the area of 0.15% on the Schwab list of CDs. Really? I have to wonder if that was some error on their part or in my search. I will check again later this weekend. I put the money into a Federal MM fund paying about 1% until I can find something better.

Not an error. Those are actual brokered CD rates.

 

[Olbidness]

I looked up the rate of return on the bond fund. It shows average daily rate YTD 3.03

 

[pb4uski]

I looked up the rate of return on the bond fund. It shows average daily rate YTD 3.03

The 3.03% is probably total return, including increases in value of the underlying bonds due to lower interest rates, which could turn on a dime in interest rates rise.

BND's YTD return based on NAV is 7.19%, but about 5.9% is based on increase in NAV since the beginning of the year.

 

[kevink]

I’ve been adjusting my AA out of S&P index and into short term government bonds. I see people posting their AA in terms of Stock/bonds/cash. Is there any difference in risk between government bonds and say a checking account or MM account?

Getting back to your original question, only U.S. Treasury securities are backed by the full faith and credit of the government and are thus considered as close to "riskless" as a is possible. You can buy short duration T-bills at no cost from most brokerages or pay a fee for the convenience of a Treasury money market fund but make sure it is 100% Treasuries and doesn't include other government securities if absolutely safety is your first concern.

Regular money market accounts like Vanguard's Prime MM or Schwab's sweet funds are primarily composed of commercial paper (short-term corporate debt). Read the fine print. They're not FDIC insured and could lose value ("break the buck") as indeed came very close to happening during the 2008 market crash.

Bank and Credit Union MM accounts and CDs are typically FDIC (or NCUA) insured up to 250K. As long as you stay below that limit safety should be comparable to Treasuries.

Good recent thread on this topic on Bogleheads BTW:

https://www.bogleheads.org/forum/viewtopic.php?t=299856

It's a worthwhile question to be asking in these tumultuous times. I have a lot of my cash position in short-term Treasury funds but decided to keep 6 months worth of living expenses in CDs and MM funds at my local credit union where I can walk in and get physical cash if need be. If things get any scarier with the markets I may look into the old mattress stashing technique.

 

[Olbidness]

Getting back to your original question, only U.S. Treasury securities are backed by the full faith and credit of the government and are thus considered as close to "riskless" as a is possible. You can buy short duration T-bills at no cost from most brokerages or pay a fee for the convenience of a Treasury money market fund but make sure it is 100% Treasuries and doesn't include other government securities if absolutely safety is your first concern.



Regular money market accounts like Vanguard's Prime MM or Schwab's sweet funds are primarily composed of commercial paper (short-term corporate debt). Read the fine print. They're not FDIC insured and could lose value ("break the buck") as indeed came very close to happening during the 2008 market crash.



Bank and Credit Union MM accounts and CDs are typically FDIC (or NCUA) insured up to 250K. As long as you stay below that limit safety should be comparable to Treasuries.



Good recent thread on this topic on Bogleheads BTW:



https://www.bogleheads.org/forum/viewtopic.php?t=299856



It's a worthwhile question to be asking in these tumultuous times. I have a lot of my cash position in short-term Treasury funds but decided to keep 6 months worth of living expenses in CDs and MM funds at my local credit union where I can walk in and get physical cash if need be. If things get any scarier with the markets I may look into the old mattress stashing technique.

I just trimmed more of my stock position today, now 65/35. The government may decide to take it all after November so it might not matter what I do. Scary times indeed.

 

[pb4uski]

... The government may decide to take it all after November so it might not matter what I do. ...

Why would you post such foolishness?