Are bond funds a good parking place for liquidity?

[mrfeh]

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.

Recency bias can cause people to do strange things.

Yes, 2022 was very bad for bonds. It was also a once-every-40 years type of event.

Do we remember 2008? Why would anybody ever invest in equities?

 

[mrfeh]

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.

While the NAV of such funds will tend to vary less, they still aren't appropriate substitutes for cash.

As always, the time horizon for needing the funds needs to be in sync with the attributes of the holding. If the money may be needed in less than a year, I'm keeping it in a MM or T bills.

 

[jebmke]

Recency bias can cause people to do strange things.

Yes, 2022 was very bad for bonds. It was also a once-every-40 years type of event.

Do we remember 2008? Why would anybody ever invest in equities?

re-balancing

 

[Randy145]

I think a lot of opinions and experiences have been put forth here already. I'd suggest the OP throw out a few more of his parameters and maybe things can get narrowed down a bit.

 

[mrfeh]

I think a lot of opinions and experiences have been put forth here already. I'd suggest the OP throw out a few more of his parameters and maybe things can get narrowed down a bit.

I thought the OP was pretty clear - the money may be needed in a matter of days.

 

[Randy145]

I thought the OP was pretty clear - the money may be needed in a matter of days.

Pretty sure he mentioned heloc as a source for the matter-of-days need. Anyway, there are more parameters to consider, risk tolerance comes to mind as one.

 

[Al18]

Park 1 year in an online Savings account or a MMF. The rest should go in a CD ladder or a MYGA.

 

[Montecfo]

I am not a fan of putting years of money in a MMF. If you use bond funds you are going to need to actively manage it if the interest rate environment signals coming change.

Bond and CD ladders give you needed liquidity at needed intervals. I think that is the way to go in most cases.

 

[target2019]

Liquid funds at Schwab are here: Charles Schwab

I use SWVXX and SNSXX (treasuries) depending on the account type.

VUSB when I want more gusto.

When rates change I'll reevaluate my choices.

 

[Koolau]

I ditched my last bond fund. I'd be looking for any other kind of "guaranteed" money fund (like a MMF or even a bank account).

 

[NomDeER]

Do we remember 2008? Why would anybody ever invest in equities?

Is someone suggesting that equities are a good substitute for cash? Because cash equivalents or substitutes was the issue raised by the OP.

If someone is looking to keep money on hand to use in the next few years, I don't think that bond funds are the equivalent of cash. And I definitely don't think that stock fund are, either.

 

[COcheesehead]

Is someone suggesting that equities are a good substitute for cash? Because cash equivalents or substitutes was the issue raised by the OP.

If someone is looking to keep money on hand to use in the next few years, I don't think that bond funds are the equivalent of cash. And I definitely don't think that stock fund are, either.

I think you missed that 2008 was used as an example of recency bias not a recommendation to use equities as a cash substitute

 

[FD1000]

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.

Bingo. You take a bit more risk and may get 3% than MM or CD. That's why I never bought CDs.

 

[Al18]

I prefer zero risk on the fixed interest part of my portfolio. MYGA are paying in excess of 5% interest from A rated insurance companies.

 

[FD1000]

The problem is that many look for a perfect case. It doesn't exist.
If you want 100% certainty and buy and hold, you get lower returns and must invest in MM or CDs.
The trick is to find something with a bit more risk and get 2-3% better performance.
Different funds work differently based on markets in that time.

 

[Markola]

Recency bias can cause people to do strange things.

Yes, 2022 was very bad for bonds. It was also a once-every-40 years type of event.

Do we remember 2008? Why would anybody ever invest in equities?

I expect equities plunges and have lived through many. The Vanguard experts told us that bond index funds. are ballast. It was a lesson.

With our mushrooming debt and bipartisan fiscal recklessness, I don’t want any exposure to longer term debt. Who would?

We’re having another lesson in the importance of diversification into harder assets that cannot be printed to infinity, especially gold. I’d buy some, except I don’t want to be the greater fool, as I was in bonds in 2022. So I’m going to wait a couple years.

 

[jazz4cash]

Recency bias can cause people to do strange things.

Yes, 2022 was very bad for bonds. It was also a once-every-40 years type of event.

Do we remember 2008? Why would anybody ever invest in equities?

Are you distinguishing between bonds and bond funds? Yes, ‘22 was bad for bonds, but bond fund investors seemed to experience more pain/disappointment. Individual bond investors clung to the idea of holding to maturity. I think OP is asking specifically about bond funds.

 

[VanWinkle]

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.

It didn't have a 2022 return listed on Morningstar, but the index it follows lost about 12%. It shows a less than one year duration, so I'm not sure how it would have held up, possibly better than the index. That yield is better than current MYGAs so it may be a good fit for tax deferred funds.

 

[COcheesehead]

It didn't have a 2022 return listed on Morningstar, but the index it follows lost about 12%. It shows a less than one year duration, so I'm not sure how it would have held up, possibly better than the index. That yield is better than current MYGAs so it may be a good fit for tax deferred funds.

It didn’t exist in 2022.

 

[VanWinkle]

I ditched my last bond fund. I'd be looking for any other kind of "guaranteed" money fund (like a MMF or even a bank account).

Et Tu Brute!!

 

[VanWinkle]

It didn’t exist in 2022.

View attachment 62138

I know, but the index existed, what index are they using for the fund comparison? I am interested in this fund, just need more facts.

 

[COcheesehead]

I know, but the index existed, what index are they using for the fund comparison? I am interested in this fund, just need more facts.

It’s in the chart in my post, securitized bonds.

 

[VanWinkle]

It’s in the chart in my post, securitized bonds.

oops, sorry didn't realize that. Thanks.

 

[KingMota]

Like others, I got burned big time by bond funds losing value in 2022 at the same time equity funds lost value! From 2023 through early 2024, I used Treasury and CD ladders for my six month to two year liquid (non-stock) investments and was getting 5.5% to 6.25% and Schwab SWVXX (around 4.5%) for my one to six month cash. For diversity, I would keep about $20,000 at Marcus G bank and earn around 4.5% and I usually keep about $10,000 in my local bank savings account.

Starting in mid-2024 as treasury and CD rates decreased, I started buying callable 20 year government securities (like FHLB, FFCB) doing ladders based on call dates. At least in our falling interest environment, these have always been getting called on first date. I have been getting at least 1% to 1.5% higher than comparable CD's. These are not FDIC insured.

I have also, stopped using Schwab SWVXX (currently 3.43%) as Marcus is offering no penalty CD's at 3.95%. I created a bunch of separate $5,000 CD's so that if I call any early I won't have to call the entire amount.

 

[mrfeh]

It didn't have a 2022 return listed on Morningstar, but the index it follows lost about 12%. It shows a less than one year duration, so I'm not sure how it would have held up, possibly better than the index. That yield is better than current MYGAs so it may be a good fit for tax deferred funds.

As always, there is no free lunch. Not a substitute for cash:


HOSAX (Holbrook Structured Income Fund) is a high-risk mutual fund, as indicated by Morningstar. It focuses on structured products like mortgage-backed securities and collateralized loan obligations, with a high turnover rate (80%). Key risks include exposure to illiquid securities, default risk of underlying issuers, and high expenses, with a 1.66% expense ratio and 2.25% load.

Key Risk Factors for HOSAX:

• Investment Strategy: Invests primarily in complex, securitized debt instruments (commercial/residential mortgage-backed securities, CLOs).
• High Risk Rating: Morningstar and US News Money indicate high risk relative to peers.
• Liquidity Risk: The fund may invest up to 15% of its assets in illiquid, private, or restricted securities.
• Credit/Default Risk: It may hold securities from issuers in bankruptcy or with defaulted debt.
• High Fees: The fund carries a 2.25% front-end load and a 1.66% total expense ratio.
• Active Trading: An 80% turnover rate increases transaction costs.