Bonds/Fixed Income and Asset Location

[Tranquility Base]

It’s a Fidelity option. You have to click on the “show more criteria” link and a whole bunch of cool things pop up including Continuously Callable yes, no or all.

Thanks. I have a Fidelity account too so I will take a look at that feature there.

 

[Echard]

The Eagle has landed!

A lot to pack in there.

Generally fixed income should be held in tax-deferred accounts because interest is ordinary income just like tax-deferred withdrawals are. If you hold equities in tax-deferred account it effectively converts qualified dividends and long-term capital gains from preferenced income to ordinary income.

Conversely, equities should be held in taxable accounts where possible because qualified dividends and long-term capital gains get preferential tax rates. Foreign equities are best held in taxable accounts because you can then use the foreign tax credit, which is lost for foreign equities held in tax-deferred and tax-free accounts.

I agree with your preference for individual bonds vs bond funds. While I hold individual bonds, I think the target maturity bond ETFs are a good choice for those who eschew bond funds but want simplification and diversification. These ETFs invest in stated categories of bonds that all mature in a stated year... in December of the maturity year there is a terminal distribution to the ETF holders and then the fund is done... akin to receiving the par value of an individual bond at maturity. Since the ETF holds hundreds of bonds, you have good diversification. (I don't currently own any of these but have owned both BlackRock iBonds and Invesco Bulletshares in the past). They offer Treasury, corporate, high yield and muni versions. Since diversification of credit risk isn't necessary for Treasuries, I think individual holdings are preferable for Treasuries.

It is fine to hold Treasuries in an tIRA. No reason to not hold munis if the yield is right or there are also taxable munis that would be appropriate for an tIRA.

Almost 1/3 of my fixed income are agency bonds... issued by GSEs... government sponsored entities like the Federal Home Loan Bank, Federal Farm Credit Bureau, et al... usually Aaa by Moody's and AA+ by S&P and IMO just a baby-step down from Treasuries with repect to credit risk.

Another 1/3 are in brokered CDs that are FDIC insured. These are issued by FDIC insured banks and sold through brokers. As long as you stay below the FDIC limits for any single issuing bank then you are fully protected from default risk.

I have a "trick" for not worrying about income. I have an online savings account that is the "gatekeeper" between my investment accounts and the checking account that I use to pay my bills. I have an automatic monthly "paycheck" transfer from this account to checking and periodically do other transfers to cover lumpy expenses like property taxes, insurance, etc. I have a target of having a year's worth of paycheck and $25k safety stock when I replenish the gatekeeper, which I do periodically from taxable account cash flow. The online saving account yields 4.3%. With this mechanism in place I don't have to limit myself to monthly payers or I can freely invest in lower coupon bonds that trade at a discount. I often look out for callable bonds where the coupon is 3% or lower since I think they are unlikely to be called that trade at a good discount and YTM.

Just out of curiosity, why are you committed to agency bonds instead of Treasuries for your Govt component of your bond portfolio? The yields are just barely higher but most come with near term callability.

Also, I assume you have the last 1/3 in corporate bonds. Why not higher, to say 50%? Just the additional risk?

 

[Mulligan]

I recently found BBB+ to A- corporate bonds for 7+%.

I am not saying this applies to your situation. But for newbees be aware credit agency ratings are notoriously slow to change credit ratings. The market always hits it harder before the rating event change. If something seems too much like a “yield bp freebee”, one better research a bit more.

 

[COcheesehead]

Read the rating reports. They will tell you all you need to know and note the date of the report. Also read the material events or issuer events. They will give you the recent news on a bond.

 

[pb4uski]

I have revisited the searching for corporate bonds and have played around with the settings. It has opened up more bonds in the results.


I have been looking at IBDT as an example to explore and read up on. But I can't find anything so far mentioning the ETF's portfolio YTM of 5.87%. Where are you finding the YTM? I've been on Schwab's site but I have looked elsewhere as well.

https://www.ishares.com/us/products/304570/ishares-ibonds-dec-2028-term-corporate-etf

Then go to portfolio charateristics and net acquisition yield calcuator in pick towards the bottom of the page. The $24.06 is the current trading price and is a 6c premium to yesterday's $24.00 NAV.

So what it is saying is that if you pay the current parket price and hold to maturity then the expected yield is 5.65%... the 5.82% portfolio yield less 10 bps for management fee less 7bp price adjustment. Obviously, one would try to buy as close to NAV as possible and at a discount if market condtitons permit.

 

[pb4uski]

Just out of curiosity, why are you committed to agency bonds instead of Treasuries for your Govt component of your bond portfolio? The yields are just barely higher but most come with near term callability.

Also, I assume you have the last 1/3 in corporate bonds. Why not higher, to say 50%? Just the additional risk?

IME Agency bonds typically yield more than similar term UST. Just ran a few screens of 2028 maturities at Schwab and selected highest 5 yielders:

UST Jan 2028-Dec 2028 4.593- 4.596%
Agency Non-callables 4.667- 4.875%
Agency Callables 5.942- 5.988%
Agency Callables* 4.890- 5.167%

* with coupons of 3% or lower so less likely to get called

So just agency uncallables are only slighly higher yield than UST but IMO negligible difference in credit risk so why not take the Agency bond. Similarly, the Agency callable with lower coupons pay a premium over UST but IMO the small call risk is worth the extra ~30-57 bps premium.

I don't have a target or limit for corporate bonds. I'm currently about 25% plus i-bonds and preferred stocks.

When I have money available to invest if corporates are attractive compared to similar term agencies then I buy them, if not then I don't. I usually look for A or higher and have a set $ limit for the amount of corporate bonds in any single issuer.

 

[jldavid47]

Is it appropriate to hold bonds (bonds other than municipals or US Treasuries) in an IRA?

Short answer is "Yes." My IRA has its fixed income allocation generally spread among three types: Treasury Bills on the short end for liquidity if I need it (the interest rates are very good on the short end), CDs intermediate-term (18 months to 4 years, generally) and Agency bonds on the long end. This gives me (currently) a blended 5.42% yield on my fixed income investments. Personally, I am not comfortable with individual corporate bonds so I have none of those, but that's me.

Where should fixed income investments be held? I tend to lean towards holding bonds in a taxable account because I think of them as providing the income I might periodically need to withdraw for expenses.

Well, they can be held anywhere. While the interest income is nice in a taxable account you need to analyze how that affects your overall tax situation. About 77% of our taxable fixed income allocation are in US government or agency debt which is not taxable at the state level.

 

[rayvt]

I have an online savings account that is the "gatekeeper" between my ... The online saving account yields 4.3%.

Out of curiosity, who is the account with? I see Etrade is paying 4.25% on savings and 3% on checking.

I have found that most regular (non-broker related) banks have a limit on how many external accounts you can link for money transfers. A couple I have limit you to only 1 external account.

Billpay doesn't seem to have a limit, though.

 

[pb4uski]

Out of curiosity, who is the account with? I see Etrade is paying 4.25% on savings and 3% on checking.

I have found that most regular (non-broker related) banks have a limit on how many external accounts you can link for money transfers. A couple I have limit you to only 1 external account.

Billpay doesn't seem to have a limit, though.

Mine is with Discover Bank. Currently 4.35%. We have had this for many years. They are rarely the best yield but are usually competitive enough that I don't care to change since many of our investment accounts are linked to the Discover Bank "gatekeeper".

At Schwab I have Discover as a linked account and it looks like I could push money from any of my Schwab accounts to Discover or pull money from Discover to any of my Schwab accounts.

Meanwhile on Discover, Schwab isn't even listed as a linked account, just the local credit union checking account that we use to pay our bills.

 

[ERhoosier]

Late to the thread, but after losing some significant $$ in bond funds with rising rates I now prefer buying individual bonds (laddered Treasuries, top quality munis, & IG corporates) for that portion of my AA. I found it a bit intimidating at first, but pretty easy once you get the hang of it. Even discount brokers have bond trading educational support these days.

IMHO- bond allocations are intended to provide stability of principle and predictable income. In ETFs bonds are transacted with potential gains or losses for investors, albeit generally less in 'target date' funds. Perhaps understandable for corporate bond ETFs as individual issue ratings (quality) may fall outside fund objectives, but Treasury 'target date' ETFs also transact significant quantities of bonds (check their semi-annual reports). This could introduce significant variance from a portfolio of Treasuries bought at the ETFs inception date & held to maturity.

 

[flyingaway]

If you hold the bond funds and build bond ladders with similar types and durations, their returns should be similar. When interests rise, bond funds lose value, when interests decline, bond funds increase value.
So in a long-term sense, building a bond ladder is more like a market timing, but you know what you will get, i.e., no uncertainty associated with bond funds. So bond ladders are good choices in retirement for the income of the next few years. But I would not put all my fixed income investment in bond or CD ladders, just too much work.

 

[COcheesehead]

If you hold the bond funds and build bond ladders with similar types and durations, their returns should be similar. When interests rise, bond funds lose value, when interests decline, bond funds increase value.
So in a long-term sense, building a bond ladder is more like a market timing, but you know what you will get, i.e., no uncertainty associated with bond funds. So bond ladders are good choices in retirement for the income of the next few years. But I would not put all my fixed income investment in bond or CD ladders, just too much work.

Bond funds and individual bonds are not the same. Has been reviewed on here ad nauseam.

 

[jldavid47]

If you hold the bond funds and build bond ladders with similar types and durations, their returns should be similar. When interests rise, bond funds lose value, when interests decline, bond funds increase value.

It doesn't actually work that way in practice. Bond funds are not bonds. This has been discussed to death here multiple times over the past several years.

So in a long-term sense, building a bond ladder is more like a market timing, but you know what you will get, i.e., no uncertainty associated with bond funds. So bond ladders are good choices in retirement for the income of the next few years.

A bond ladder is the antithesis of market timing. It's closer to dollar cost averaging. Market timing would be holding your cash in a money market fund then buying when you think the peak in interest rates are in.

But I would not put all my fixed income investment in bond or CD ladders, just too much work.

Too much work? Only for the lazy. You can easily set up a bond/CD ladder that requires about 1 hour of work per year. Yikes.

 

[meleana]

I recently sold many of my bond funds and put the money into a Treasury Money Market- within our IRA's- because it is over 5% and the bond funds have not done well the past few years.


I am 67 and my husband is 69.

 

[Montecfo]

after reading the thread to this point, a few notes:

Location I think has been well covered. But I do hold some bonds bonds in my taxable, for the purpose of laddering planned withdrawals over the next 2-3 years. I call this my stepladder. The rest of my taxable account is high quality dividend payers. I also hold some ibonds at Treasury direct as part of my fixed income allocation.

My tax deferred accounts hold the balance of my bonds which is the lion's share. They are mainly high quality corporates, CDs, agencies and TIPS, non-callable or low-coupon callables (same as PB4's approach). I keep the quality high here, since my equity portfolio is the risk taking part of my portfolio. Bonds are for ballast. I invest for total return, I do not try to live off the dividends and interest.

I also think the bulletshares are interesting. Theoretically this is the best of all worlds, as they are liquid (unlike most corporate bonds), diversified (unlike a portfolio you might try to build yourself), have an end date (unlike open-end bond funds) and are low cost. I have looked at those before and declined to invest due to perceived performance issues in the final year and not needing a ladder type format as a younger investor. They are worth a re-look in my view.

I have a gatekeeper account at a bank HY savings account (CFG Bank, 5.12%). Like PB4USKI I also do a "paycheck" and prefer this over ad hoc money movements. If you know your approximate spending level this let's you easily tell if you are on track and minimizes administration.

 

[pb4uski]

... Too much work? Only for the lazy. You can easily set up a bond/CD ladder that requires about 1 hour of work per year. Yikes.

+1 I set up a 10-rung, 5-year CD ladder for a friend earlier this week. It took about an hour to identify and buy 10 bonds maturing 6 months apart. Now will require 5 minutes every 6 months to buy a replacement 5-year CD for the maturing rung.

 

[pb4uski]

...I also think the bulletshares are interesting. Theoretically this is the best of all worlds, as they are liquid (unlike most corporate bonds), diversified (unlike a portfolio you might try to build yourself), have an end date (unlike open-end bond funds) and are low cost. I have looked at those before and declined to invest due to perceived performance issues in the final year and not needing a ladder type format as a younger investor. They are worth a re-look in my view. ...

+1 I had the same issue with them. Back when interest rates were very low, the yield in the year of maturity was hampered by the ETF reinvesting the proceeds from maturing bonds short term until the terminal distribution in December. My workaround was to just sell early in the maturity year.

 

[jazz4cash]

IMO it is between difficult and impossible for a small retail investor to assemble an adequately diversified corporate bond portfolio. Just selecting and buying a large number of positions is a lot of work and it takes a lot of money. Then you have to maintain the portfolio as bonds mature, are called, etc. So I am with you. Govvies aka zero credit risk are where we are. 90% TIPS actually.

I would be interested to hear your definition of diversification.
I somewhat agree with your statement except for the “impossible” part. I have accepted the fact that my FI allocation is not as diversified as I would like it to be. I have decided that diversification may not be as significant for FI as it is for equities. I generally believe 5% max in a single position protects me from over concentration. That was Bob Brinker’s guideline. It’s not hard for me to sacrifice diversification in my FI portfolio since I am holding some risk free (treasuries) and near risk free (CDs) positions. I do avoid concentration in corporates.

 

[Healthy Lifestyle]

+1 I set up a 10-rung, 5-year CD ladder for a friend earlier this week. It took about an hour to identify and buy 10 bonds maturing 6 months apart. Now will require 5 minutes every 6 months to buy a replacement 5-year CD for the maturing rung.

I have been trying to build my 5-year (6 figure) CD ladder with only 5 rungs, but hesitate on the 3rd rung when I see 3 year rates at 5.1% and hope for higher rates.

I currently have some of my cash sitting in MMFunds returning ~5.28%.


Would you purchase a 5.1% non callable 3-year CD or wait for higher CD/Treasury rates?

 

[pb4uski]

I did. May 2026 noncallable for 5.2% yield and Nov 2026 noncallable for 5.15%. I'm more focused on filling out the ladder as long as the composite yield is ok. At the high level I swapped money in a mm yielding 5.25% for a 5-year ladder yielding 5.38% and I don't see anything wrong with that.

 

[jazz4cash]

So in a long-term sense, building a bond ladder is more like a market timing,.

I disagree. If anything the ladder is the opposite of timing. More precisely It’s more like dollar cost averaging.

 

[pb4uski]

+1 Not market timing at all. Now one might legitimately claim that deciding when to establish the ladder is market timing, but operating a rolling bond or CD ladder is not market timing at all.

 

[Montecfo]

I have been trying to build my 5-year (6 figure) CD ladder with only 5 rungs, but hesitate on the 3rd rung when I see 3 year rates at 5.1% and hope for higher rates.

I currently have some of my cash sitting in MMFunds returning ~5.28%.


Would you purchase a 5.1% non callable 3-year CD or wait for higher CD/Treasury rates?

Given we may have seen the highs I would not wait. But you can split the baby and do some now, more later.

 

[rayvt]

Given we may have seen the highs I would not wait. But you can split the baby and do some now, more later.

I don't know if we have seen the highs or not. But this talking head on youtube thinks we have not seen the peak yet. Her reasons sound reasonable.

 

[COcheesehead]

I just watch the market. When rates dropped recently any bond with yield, duration and some call protection shot up rapidly. I guess I would rather own something appreciating and not be caught with short duration, a callable or worse, sitting on the sidelines. Just my two cents.