Are bond funds a good parking place for liquidity?

[COcheesehead]

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.

There is no load at Fidelity.
It has a Sharpe ratio of almost 3 which is an extremely high measure of risk adjusted return.

 

[mrfeh]

There is no load at Fidelity.
It has a Sharpe ratio of almost 3 which is an extremely high measure of risk adjusted return.

I'm just pointing out it has risks. You don't get 6% without taking additional risk.

People should not pretend it's a cash alternative, or even a total bond fund alternative.

 

[COcheesehead]

I'm just pointing out it has risks. You don't get 6% without taking additional risk.

People should not pretend it's a cash alternative, or even a total bond fund alternative.

I never said it was risk free. I never said it was a substitute for a total bond fund. I said it can be used as a substitute for cash because it has a much more steady NAV than other bond products.
If it’s not for you, that’s OK.

 

[mrfeh]

I never said it was risk free. I never said it was a substitute for a total bond fund. I said it can be used as a substitute for cash because it has a much more steady NAV than other bond products.
If it’s not for you, that’s OK.

It's been in existence for 3 years. We have no idea how stable its NAV will be.

 

[Markola]

Here’s a Reuter’s article generally on the OP’s topic of where to park cash. I got it free from the Reuter’s website. If you can’t open it, go there and search for the title.

https://www.reuters.com/business/finance/dollar-bonds-or-gold-which-is-safest-haven-hold-2026-03-05/

Summary:

• Unpredictable moves spur search for best haven
• Dollar gains, Swiss franc and yen weaken
• Gold retains appeal despite volatility

It also goes into bonds.

 

[Golden Mean]

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 don't think this is a very good analogy. Equities being down due to sentiment is not the same as the money burning behavior of an index bond fund. When interest rates are rising, a bond index fund is constantly selling its bonds at a loss. No stock or index fund I have behaves like that.

What most of us found out in 2022 is that bond funds are NOT equivalent to holding bonds to maturity. I earned maybe 1% more than a MMF for years and then the NAV dropped as much as 9% right when equities were going down.

For me it's MMF until longer dated (1-2yr) bonds are yielding 2% more then the MMF. Then, maybe a bond ladder.

 

[mrfeh]

I don't think this is a very good analogy. Equities being down due to sentiment is not the same as the money burning behavior of an index bond fund. When interest rates are rising, a bond index fund is constantly selling its bonds at a loss. No stock or index fund I have behaves like that.

What most of us found out in 2022 is that bond funds are NOT equivalent to holding bonds to maturity. I earned maybe 1% more than a MMF for years and then the NAV dropped as much as 9% right when equities were going down.

Of course they aren't. Anybody who thought otherwise didn't understand what they were buying.

That doesn't mean they need to be avoided.

 

[gauss]

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!

Only if you think that prevailing interest rates are going to be steady or decline until the time you redeem your bond funds. If rates raise, you will very likely incur a loss on the market value of your bond funds if you redeem while rates are higher than when you purchased. The amount of the loss will be based upon how much prevailing interest rates have risen and the "duration" of your bond fund.

A better approach might be to setup a rolling ladder of individual bonds. If you stray from US Treasuries, then make sure you understand the "bond called early" problem and how a "make whole" provision may protect you, somewhat, until it expires.

This is how I handle the "fixed-income" portion of my portfolio. I dumped all of my "balanced" funds in lieu of pure equity funds and the above types of strategies back in the 2019 time frame.

-gauss

 

[COcheesehead]

It's been in existence for 3 years. We have no idea how stable its NAV will be.

 

[target2019]

View attachment 62148

Hope springs eternal?

 

[COcheesehead]

Hope springs eternal?

A pessimist sees difficulty in every opportunity. An optimist sees an opportunity in every difficulty.
Winston Churchill.

 

[target2019]

A pessimist sees difficulty in every opportunity. An optimist sees an opportunity in every difficulty.
Winston Churchill.

A risk is a chance you take; if it fails you can recover. A gamble is a chance taken; if it fails, recovery is impossible.
Erwin Rommel

 

[LTSTRYAGIN]

thank you all for sharing i am walking away smarter from everyone's shared perspective
in the end for me it's going to be combination of most
thanks for clarifying the pros and cons

 

[Diogenes]

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?

The key issue isn't how ghastly was the drop itself, but what happened cumulatively... before, during and after. Yes, stocks were walloped in 2008. But how have they done subsequently? Compare that to how bonds have fared since 2022. Also compare how bonds were doing in 2021, 2017, 2014 and so on.

It's OK for an investment to be highly volatile, if the cumulative long-term growth is good. It's OK for an investment to be low-return, if the volatility is also very low. It's not OK for the volatility to be substantial, but for the long-term CAGR to barely match inflation. That latter combination sounds like all-pain, no-gain. How would that be attractive?

 

[mrfeh]

The key issue isn't how ghastly was the drop itself, but what happened cumulatively... before, during and after. Yes, stocks were walloped in 2008. But how have they done subsequently? Compare that to how bonds have fared since 2022. Also compare how bonds were doing in 2021, 2017, 2014 and so on.

The CAGR for VBTLX the last 3 years is 4.94%

 

[Al18]

According to Portfolio Visualizer, BND performance for 3/1/21 to 3/1/26 has a CAGR of 0.4%. $10,000 deposited on 3/1/21 is now worth $10,202.

By comparison, if you deposited $10,000 into CD, you would have $11,928. To calculate this number I used my CD ladder average and assumed I invested the money in a 1 year CD, each year.

 

[Golden Mean]

Of course they aren't. Anybody who thought otherwise didn't understand what they were buying.

You yourself called bond funds, "bonds". If they aren't the same, it's confusing (esp for the new investor) to refer to them by the same word.

That doesn't mean they need to be avoided.

I disagree. In what world does owning a fixed income asset that behaves more like a dividend stock which includes the feature that the broker is forced to sell a piece of the asset even if its price drops, useful?

 

[Golden Mean]

The CAGR for VBTLX the last 3 years is 4.94%

So it has yielded 1% more than VMFXX, but unfortunately you'd still be down from the 9% drop in 2022.

 

[Al18]

The 5 year performance of VBTLX is nearly identical to BND, with a CAGR of 0.39% and your $10,000 investment would be worth $10,197

 

[Golden Mean]

The 5 year performance of VBTLX is nearly identical to BND, with a CAGR of 0.39% and your $10,000 investment would be worth $10,197

Aren't they the same investment but ETF vs MF? e.g. VTI and VTSAX?

 

[Al18]

Don’t know. I don’t own any bond funds, because they’re a terrible investment.

 

[scrabbler1]

I have been in bond funds since 1990. I don't invest in them to turn a profit. I invest in them for the income, especially the big bond fund I invested in bigtime back in late 2008 when I ERed. The monthly income from that bond fund provides me with most or all of the income I need to pay the bills.

Another bond fund, an intermediate-term muni bond fund I have been in since 1994, I use as a second-tier emergency fund. It has been paying 2-2,5% annually, mostly tax-free. It has checkwriting privileges, making the money more quickly and easily accessible. I have written 19 checks in the 31 years I have been in the fund. Sometimes, I made a profit. Sometimes, I took a loss. Overall, I am slightly ahead. I use FIFO for cost basis, so a paper profit or loss usually depended on which shares I bought 10 or 15 years earlier. An intermediate-term fund does fluctuate in price, but not too much for me.

I also have a intermediate-term corporate bond fund in my rollover IRA. It is the bond component in that account. It has been growing nicely since its inception in 2008 when I ERed. And rebalancing moves I have made in that account in the last 17 years have had no tax consequences.

I like bond funds.

 

[FD1000]

How do you think I made over 13% on average annually with a portfolio that owns 95+% in bond OEFs since 2018 and never lost more than 1% from any last top?
* I don't use indexes
* I don't use high-rates bond funds
* I use nice uptrend funds without high volatility for that period.
* Any time my fund is losing 0.5%, I watch carefully; at -0.7% to -0.8% I sell and switch to another.
* I use only 2-3 funds
* Every year I find funds like that.
* If I don't find funds like that, I stay with a generic, very good risk-reward fund until I find one.
* I sell immediately when risk is very high
* There is no way to predict the future; markets and charts in real time are the ultimate indicators.
* There is no way to do anything close to the above without flexibility, thinking outside the box, timing, and finding funds like that.
* You will not find funds that you can buy and hold that have done it.

Examples:
From early 2023 to 03/2025 I used HOSIX. I never used CLO before. In the last several months, the managers increased liquidity and ratings to 84% IG.
From early 2024 to 03/2025 I used CLOZ.
From April 2025 I started with EIGMX + EGRIX. Several months later, only EGRIX. I never used EM/international before.

Hosix latest INFO

 

[Al18]

CD and MYGA require zero watching, maintenance, anything. They are guaranteed, in writing. The interest is always paid, on-time.

 

[mrfeh]

According to Portfolio Visualizer, BND performance for 3/1/21 to 3/1/26 has a CAGR of 0.4%. $10,000 deposited on 3/1/21 is now worth $10,202.

Great. And VTSAX was down 37% from 1/1/2000 to 1/1/2003.

Horrible investment. Why would anybody ever own this?

I can pick arbitrary start and end dates also. Doesn't prove anything.