What to do with Fixed Income

[pb4uski]

Money market mutual funds have broken the buck only a few times in the last 100 years. I don't worry about such remote risks.

From Perplexity:

Money market mutual funds have broken the buck only a few times in the last 100 years. There have been three confirmed instances:

1. In 1994, the Community Bankers US Government Fund became the first money market fund to break the buck, paying investors 96 cents per share
   Money market fund - Wikipedia
2. On September 16, 2008, the Reserve Primary Fund broke the buck during the financial crisis, with its net asset value (NAV) falling below $1 per share
   Money Market Mayhem: The Reserve Fund Meltdown
3. During the 2008 financial crisis, at least one other fund also broke the buck, as sources mention "less than a handful" of occurrences up to that point.

It's important to note that while these are the confirmed cases, there were likely more instances where funds were close to breaking the buck but were saved by sponsor support. Moody's identified 62 instances of sponsor support that prevented funds from breaking the buck during the 2008 financial crisis.

 

[Lsbcal]

I hope this is a fair place to ask the question, but for the fixed income portion of a portfolio, why do some people seem to advocate TIPS while others advocate CDs/Treasuries/MYGAs? If TIPS are optimal, why doesn't everyone use them exclusively? I don't really see why I would need the inflation protection feature if the equity portion of my portfolio is intended to address that. Are TIPS favored more by those who shy away from equities?

Sometimes nominal Treasuries do better then TIPS and vice-versa. No way to know which will turn out better. But historically a 2% real return on bonds is quite good and removes the risk (read worry) of inflation ruining the bond return.

I prefer to take my risk in equities and just get a good historical rate of return on bonds via TIPS. That was not possible a few years back when rates were so low. Now it is possible to build a TIPS ladder which helps to remove the re-investment risk. I structure my TIPS to take care of RMD's from my tIRA.

 

[mrfeh]

Time horizon is important; didn't read the entire thread, so don't know if you are planning to soon sell whatever you are about to buy.

For >5 years, I'd just stick with BND.

 

[Flieger]

Money market mutual funds have broken the buck only a few times in the last 100 years. I don't worry about such remote risks.

From Perplexity:

I guess I will worry about other things. I'm sure I could find a "perfect, safe" place to put cash for short term, but it may burn up in a fire....

Flieger

 

[Car-Guy]

I guess I will worry about other things. I'm sure I could find a "perfect, safe" place to put cash for short term, but it may burn up in a fire....

Flieger

Then it might not be the "perfect safe" place.

 

[Flieger]

Then it might not be the "perfect safe" place.

My point exactly. No such thing.

Flieger

 

[rkser]

I think -

As the CDs mature in our IRAs I will keep the money required for Roth Conversions this year in Cash- SPAXX & the rest wil go for buying the CDs,

What we have in BNDs will remain there for now, selling them now will be a mistake.

Thanks guys

 

[Koolau]

I have used and am still using MYGAs and SPDAs for some of my fixed.

 

[rkser]

I have not acted on this Fixed Income issue in our IRAs as I do not understand Bonds/Tips.

Recently Money Markets have done better than BND.

I understand that my AA of 80/20 is aggressive/risky for retirement, but I do not want Bonds in our Taxable or in Roths, I am happy with VTI, VXUS & VGT in those.

We are 68 & 63, both retired, Serial Roth Conversions have got our AA from 60/40 to the present 80/20,
Conversions have been from BND in IRAs to VTI/VGY in Roths.
A portion of our savings of several million $ may well go to our 2 children & charities. We may be investing for our children of ages 40 & 32.
I understand Corporate Bonds behave like equities in case of a Market Downturn. IRAs cannot be all CDs as I may pay penalties when I do further Roth Conversions when the Market goes down (yes Market Timing)

Our IRAs in round numbers are now worth $ 950,000 -
BND - $ 537000
FDRXX - $ 113000 -( Money Market )
CDs are $ 300,000

Also, lurking in back of my mind is the question. is this the right time to get rid of BND ??

Please advise -

 

[Al18]

5 year total return was -2.98%, or you lost 0.75% per year. In my opinion, the right time to get out of BND was 2022.
If you sell all of BND, keep $37K in your MM IRA account, and buy 1,2,3,4,5 year CD at $25K each now and every 3 months, you’ll have put all your fixed income to work in 1 year. Fidelity has 1,2,3,4,5 year CD at 4.25% APR.

 

[SnowballCamper]

I got rid of BND at a sub-optimal time, but I'm happy with the short term treasury returns I've had since then. If you believe interest rates are going to be higher when you need to sell BND, then now is is the time to get rid of BND. If you don't foresee needing to sell BND, then it probably doesn't matter.

 

[pb4uski]

... I understand Corporate Bonds behave like equities in case of a Market Downturn. IRAs cannot be all CDs as I may pay penalties when I do further Roth Conversions when the Market goes down (yes Market Timing)

... Please advise -

I prefer individual CDs, Treasuries and corporate bonds to BND because I can control my destiny. With individual bonds I can use interest income and proceeds from maturities for cash flow needs where with BND I need to sell for cash flow needs.

Also, you are mistaken thinking that you may need to pay penalties to do Roth conversions. You can just transfer CDs in kind for Roth conversions and avoid any penalties.

That and corporate bonds, particularly investment grade corporate bonds, don't necessarily behave like equities in the case of a market downturn. They may decline, but not near as much as stocks because of their contractual interest payments.

 

[Alex The Great]

What's wrong with high yield corporate bond ETF in TIRA? This is exactly what I have, except for the index fund in 401K which I did not convert yet. Like many of us, my plan is to do Roth conversions. Not so much as of now, as I have to keep an eye on ACA cost but after 65 for sure. I consider it is great to limit growth in TIRA, to avoid extra tax during Roth conversions. CDs and US Treasuries are OK too. I try to avoid growth stock in this account.

 

[rkser]

Thank you all for your feedback -

Do I wait for the few possible Fed Rate Cuts this year to sell the BND

OR

Sell BND now & do not look back.

I know bottom line it is MY CALL.

Ideally my IRA investments need to be on auto manage.
I am thinking of the auto roll feature of CDs or Treasuries which Fidelity provides.

I am also looking at an actively managed Bond ETF like FBND etf from Fidelity which is a Core Plus ETF, has better past returns than BND.

But, first things first, WHEN to get out of this BND

A Bond investment I have been with for 30+ yrs. A relatively safer with mostly investment grade high quality bonds but with returns comparable to a no risk Money Market Fund.

I have dialed my risk pretty high already with a 80/20 AA in retirement, a part of me says a Money Market Fund or no risk CDs with no expense ratios will not be a bad way to go.

I am reminded of 90/10 of Mr Buffet S&P/MM & leave it alone.

Thanks again, sorry for a long post.

 

[Al18]

It's your call on when to sell BND. If you follow my plan, you could sell 1/4 at a time and buy the CD's every 3 months. I don't like the auto roll feature at Fidelity, because I research the health of the bank before buying a CD. I don't worry immediately investing in a new CD, as all interest and your principal is deposited into your core MM account such as SPAXX, which is currently paying 4.1%.

I see little advantage to switching to FBND, as the total 5 year return is 3.03%. CD's are currently paying more for 1 year!

 

[rkser]

Thank you AI18,

I sold 1/4 of the BND today, around $125k in our Fidelity IRA, thanks for the guidance.

The gradual way helped me out to execute my call/decision.

I am thinking to buy the CDs of larger $ amounts for a minimum of 1-2 yrs, so that I do not have to tinker with them too much, & also I see the rate does not go up that much if I go up on the time period of the CDs.
I may call the Fidelity Fixed Income 800 number to guide me to do that.

Thank you all again,

Shucks fx?&X@,......... me & my emotions with attachment to investments,
30+ yrs with VBTLX/BND, just an investment, some marriages do not last that long.

 

[Koolau]

^^^^^^^


Probably not a record, but very impressive. I'm guessing there WOULD be some emotion in such a decision - no matter how well thought out and reasoned. Glad you made your decision and executed.

 

[Al18]

I’m glad you made a decision. The CD interest rates have not been behaving normally since 2022 - when the 6 months-1 year CD were paying higher yearly interest rates than longer terms. It’s only been the past 2 months where 1-5 year CD’s were paying the same rate.

Hopefully you bought call-protected CD’s.

 

[rkser]

Yes, all the CDs we have now are Call protected......& I will watch for that ...
Thanks again....

 

[rkser]

^^^^^^^


Probably not a record, but very impressive. I'm guessing there WOULD be some emotion in such a decision - no matter how well thought out and reasoned. Glad you made your decision and executed.

I put too much faith in - "Stay the Course" & the Boglehead 3 Fund Portfolio I started with in 1993, I still have VTI & VXUS, but am getting out of BND

 

[Montecfo]

What's wrong with high yield corporate bond ETF in TIRA? This is exactly what I have, except for the index fund in 401K which I did not convert yet. Like many of us, my plan is to do Roth conversions. Not so much as of now, as I have to keep an eye on ACA cost but after 65 for sure. I consider it is great to limit growth in TIRA, to avoid extra tax during Roth conversions. CDs and US Treasuries are OK too. I try to avoid growth stock in this account.

Hi yield usually trades like equity. Don't you want something less correlated in your bond portfolio? Your equity allocation should be doing the heavy lifting.

 

[Montecfo]

I think you want to avoid bond index funds. Not just due to the poor recent performance, but because of the non-selective nature of the holdings. Equities and bonds are not the same. Indexing works great for equities. Not as well for bonds.

In my opinion you want active management of your bond allocation. Bond market sectors do not move in lockstep. Expertise is needed to capture the best return.

If you are actively managing you should have exited bond funds with duration beginning when the Fed began signalling a hiking cycle. Short term near cash and floating rate securities were in season and performed well.

Now, I am sticking with individual CDs and bonds (laddered) with some preferreds floating rate and mortgage backed securities (funds).

 

[rkser]

Thanks Montecfo,

As you can see, I am still learning the ropes of fixed income, finally gradually getting out of long held BND after being bruised .

Anyway --

I see a 3 yr MYGA, a deferred Annuity at 5% at Fidelity by USAA a A++ company as usually all companies at Fidelity are, I am pretty sure I will not NEED the money for 3 yrs.

Where as a 1 yr CD is at around 4.2%, does not get much higher at 3 yrs.

I am looking to invest just $100k, much lower than the $250k Annuity guarantee limit.

What do you guys think ? any thoughts ......

 

[ncbill]

I just went with a short-term Treasury fund for "X years in expenses" then everything else in equities.

 

[FiveDriver]

I think you want to avoid bond index funds. Not just due to the poor recent performance, but because of the non-selective nature of the holdings. Equities and bonds are not the same. Indexing works great for equities. Not as well for bonds.

In my opinion you want active management of your bond allocation. Bond market sectors do not move in lockstep. Expertise is needed to capture the best return.

If you are actively managing you should have exited bond funds with duration beginning when the Fed began signalling a hiking cycle. Short term near cash and floating rate securities were in season and performed well.

I was savvy enough to get out of my Bond ETF in 2022, a lesson I first learned way back in 1980. I'm now looking for Actively Managed Bond Mutual Funds that I can put on my Watch List. I'm not sure what the FOMC's next move will be, but if we get some direction about lower rates.,.,.,.,I'd like to have a good Bond Mutual Fund on my radar.

Montecfo, any suggestions on that front ??