Are bond funds a good parking place for liquidity?

[davidfin]

I know many investors park several years of cash in saving accounts and MMF. Is it a good idea to instead park the cash in a high quality corporate bond fund? I’ve been using Schwab’s SCHI 5 to 10 year bond etf yields near 5%. If cash is needed, might take a day or two. Immediate needs can be easily satisfied with a few days of a HELOC bridge loan until the bond fund redemption is funded. Thoughts!

 

[CautaServans]

Following.

 

[Phroig]

A bond fund could lose value, which means you might end up with less cash that you expected. You could do a ladder using bonds or target maturity bond funds. Finally, nothing wrong with giving up a little yield for the safety, liquidity, and certainty of a MMF.

 

[pb4uski]

The problem with bond funds for that use is interest rate risk, but that may be less of a concern now since interest rates on the short end of the curve seem unlikely to be going up anytime soon.

I would suggest that you look at a 3 rung ladder of target maturity bond ETFs, either backed by Treasuries or investment grade corporate bonds.

 

[SnowballCamper]

I've been parking my cash in short term treasuries on treasury direct. The website isn't very modern, but once you figure it out it's pretty easy. You have to anticipate needs to align with maturity, but that's not too hard, and yes, a HELOC loan can be a bridge in an emergency. I'm not getting 5%, but thats fine.
The problem with a vanilla bond fund is that when rates go up, prices go down, and there is no holding to maturity to get what you thought you were getting back out. There are the fixed duration bond funds but they distribute everything at the end of the duration...so might as well use a bond ladder of individual bonds.

 

[Dash man]

Compare SCHI with JAAA. Over 5 years JAAA was more stable in value, especially during the 2022 year.

 

[target2019]

Using HYSA, SWVXX, CD, and VUSB. SWVXX is the largest holding.

 

[OldShooter]

DW and I are on a couple of nonprofit investment committees plus we run our own money. In all three cases, we permit only very short funds like SWVXX. IMO the risk, though minimal, of longer funds is poorly compensated for by any slightly larger prospective return. YMMV, of course.

We have never had an IA argue against this approach.

 

[COcheesehead]

I use HOSAX as a cash substitute. It’s NAV is really stable so less risk of capital erosion and it yields about 6%. 6.6% 12 month distribution yield.
I look at it as a position and not something I would sell for funds. It is part of boring side of my portfolio.
5 star fund, 2.97 Sharpe ratio - extremely high, no transaction fee at Fidelity.

 

[Steelpony]

We use VWAHX, PONAX and SGOV along with actual cash in varying amounts.The funds cover long, medium and short time periods with different risk parameters. Lots of choices.

 

[Chuckanut]

As many of us have learned bond funds can go down and stay down with the changes in interest rates. Like many of us, I learned the hard way when bond funds took a dive a few years ago under pressure from rising interest rates. I was smart enough to sell my long term bond funds before the prices fell out of the sky. But not smart enough to sell my shorter term funds.

Today, I use bond/CD ladders filled with investments I fully plan to hold to maturity. Some of those bonds are TIPS in the event we see inflation rise again.

YMMV.

 

[Randy145]

I know many investors park several years of cash in saving accounts and MMF. Is it a good idea to instead park the cash in a high quality corporate bond fund? I’ve been using Schwab’s SCHI 5 to 10 year bond etf yields near 5%. If cash is needed, might take a day or two. Immediate needs can be easily satisfied with a few days of a HELOC bridge loan until the bond fund redemption is funded. Thoughts!

Basic rules of thumb apply here. Safest bets are US treasury funds with very short durations and huge net assets (liquidity), e.g., SGOV. Go beyond short duration treasuries or corporates and get a little more yield but take on interest rate risk and more volatility. That risk is minimized in our current declining interest rate environment, though. I wouldn't put multiple years in SGOV so maybe 1 year there for quick access and and a few more years in an intermediate term fund like VCIT. Just a thought. Be careful with mutual funds as there may be minimum holding times before getting redemption fees.

 

[Diogenes]

Do we remember 2022? Suppose that it's the year 2020, and a person is interested in parking cash somewhere for 6 years, intending say to buy a house in the year 2026. Our hero puts the money into intermediate term bonds, annoyed that money market returns are paltry. What happens?

 

[Flyfish1]

My cash is parked in SWVXX and in the garage and at the marina. The latter two are underperforming the MMF....lol

 

[NomDeER]

I know many investors park several years of cash in saving accounts and MMF. Is it a good idea to instead park the cash in a high quality corporate bond fund? I’ve been using Schwab’s SCHI 5 to 10 year bond etf yields near 5%. If cash is needed, might take a day or two. Immediate needs can be easily satisfied with a few days of a HELOC bridge loan until the bond fund redemption is funded. Thoughts!

Shortly after I retired, my bond funds (including corporate bond fund) started dropping. I definitely do not consider bond funds to be a substitute for cash. If you don't care about volatility and you're just looking for an asset that you can liquidate quickly, that would apply to equity funds as well and those might be more tax friendly, especially if you're doing an after tax investment. (IMO, most people benefit from having cash/FI in their traditional retirement funds.)

Do we remember 2022?

I definitely do.

 

[CalBird]

BOXX will give you steady value and no need to pay income tax for the gain until you need the money.

 

[Randy145]

Do we remember 2022? Suppose that it's the year 2020, and a person is interested in parking cash somewhere for 6 years, intending say to buy a house in the year 2026. Our hero puts the money into intermediate term bonds, annoyed that money market returns are paltry. What happens?

The OP can correct me if I'm wrong, but I don't think his intent was for home purchases, rather a place to put cash for expenses should the need arise to ride out rough spots in the market.

 

[mrfeh]

No, I wouldn't treat an intermediate bond fund as a cash equivalent.

The NAV will fluctuate. Not a good attribute for a holding for this situation.

 

[Markola]

I am so burned from 2022, when both stocks and bonds crashed, I don’t want to use total bond index funds anymore. I was ignorant and didn’t think a bond bear market that severe that could happen. Some things we learn the hard way.

 

[Randy145]

One's experiences shapes one's tolerance for risk, no doubt. With a duration of .1 years, SGOV isn't going to cause much pain in a nasty market, though. It will barely keep you up with inflation but will come closer to doing that than a money market fund. Plus, if this is in a taxable account, you'll get a little break on state income tax.

If you're really, really averse to a possible market downturn that hammers stocks AND bonds, that would be a good place to put all your cash. OR it can waste away little by little to inflation in a MMF...and it is not unheard of for MMF's to break the buck, though rare.

There's no free lunches out there, if you want a little more yield you have to take on a little more risk, of one sort or another.

 

[jebmke]

We ditched cash in our early 40s and never looked back. Short-term and intermediate bond funds. Even through the 2008-09 market down tick and we were fully retired by then.

 

[jazz4cash]

Do we remember 2022? Suppose that it's the year 2020, and a person is interested in parking cash somewhere for 6 years, intending say to buy a house in the year 2026. Our hero puts the money into intermediate term bonds, annoyed that money market returns are paltry. What happens?

When MM rates were zero-ish bond funds were tempting. Today’s MM rates are quite good. I’d use CDs and laddering to lock in rates and provide some liquidity.

 

[RetiredHappy]

We prefer MYGAs.

 

[Out-to-Lunch]

Do we remember 2022? Suppose that it's the year 2020, and a person is interested in parking cash somewhere for 6 years, intending say to buy a house in the year 2026. Our hero puts the money into intermediate term bonds, annoyed that money market returns are paltry. What happens?

Well, if he put $100,000 in Jan 2020 into an intermediate-term Treasury fund (for example, FUAMX, Fido's Intermediate Treasury Fund), he would have $105,693 now. If he kept it in cash (3-month T-bills, say), he would have $118,593.

 

[MichaelB]

I know many investors park several years of cash in saving accounts and MMF. Is it a good idea to instead park the cash in a high quality corporate bond fund? I’ve been using Schwab’s SCHI 5 to 10 year bond etf yields near 5%. If cash is needed, might take a day or two. Immediate needs can be easily satisfied with a few days of a HELOC bridge loan until the bond fund redemption is funded. Thoughts!

The fund you are using has a duration of 6, meaning a 1% rise in interest rates will cause the fund to lose 6% of asset value. That’s a lot of risk for a safe asset.

If you are looking for a safe place to hold cash with a shorter term horizon, a limited term or short term fund is more appropriate. I’m not familiar with Schwab funds, but according to Miz Google, SCHO (short term treasury) has a duration of 1.9 and SCHJ (short term corporate) has a duration of 2.6.