Bought Bonds Today

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Bought Bonds Today

Postby Greenie » Thu Apr 04, 2013 9:53 pm

I didn't listen to the noise and I bought a significant chunk of California Tax Exempt (intermediate term) bonds today in my taxable account to rebalance. All the talk of rising interest rates is a concern but the equity portion of my portfolio was getting away from my plan for asset allocation. Thoughts anyone?
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Re: Bought Bonds Today

Postby Random Musings » Thu Apr 04, 2013 10:18 pm

You are showing discipline by sticking with your plan. Although the bond arena stinks as much as Pepe Le Peux (and perhaps more) we have to hold our noses and play with the cards we have been dealt with.

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Re: Bought Bonds Today

Postby tfb » Thu Apr 04, 2013 10:36 pm

Greenie wrote:I didn't listen to the noise and I bought a significant chunk of California Tax Exempt (intermediate term) bonds today in my taxable account to rebalance. All the talk of rising interest rates is a concern but the equity portion of my portfolio was getting away from my plan for asset allocation. Thoughts anyone?

Munis are fine. Bankruptcy news is holding the yields up.
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Re: Bought Bonds Today

Postby am » Thu Apr 04, 2013 10:53 pm

Munis will lose value when they lose some of their tax exempt status. I dumped mine earlier in the year.
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Re: Bought Bonds Today

Postby NYBoglehead » Thu Apr 04, 2013 10:57 pm

am wrote:Munis will lose value when they lose some of their tax exempt status. I dumped mine earlier in the year.


Please tell the rest of us when that will happen so that we can plan appropriately!
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Re: Bought Bonds Today

Postby Paul Basenberg » Thu Apr 04, 2013 11:14 pm

Good for you. Noise is exactly what all the turmoil is. The Fed has set the conditions with certainty as to when they will begin raising rates. Regardless of what people may think of the Fed. bankers, they are not dummies. Also unless we get our federal debt to a more manageable position, interest rates will remain low for quite a while, since we will not be able to afford the interest on higher rates. If we were to pay higher interest on our bonds and bills, that would negate a certain amount of tax revenue. Does anyone think that anyone, especially our politicians, wants that to happen?

In addition we are the key currency of the world and the rest of the world will have to chase our interest rates or become non-competitive.

The "talkng heads" on bonds have been wrong for the last 5 years and may be wrong for a while longer. Whatever happens will probably be slow and gradual as opposed to the sharp drops that you sometimes see in the stock market.

Good decision on your part.
Paul
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Re: Bought Bonds Today

Postby denismurf » Thu Apr 04, 2013 11:51 pm

I buy some munis whenever I have enough cash in my muni bond account to do so and the price is right. Let the talking heads talk to each other. They have nothing to say to me.
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Re: Bought Bonds Today

Postby bargainhuntingking » Fri Apr 05, 2013 12:15 am

I have been eying that same fund (VCAIX). It has over $7 billion in assets, so you are not alone. I figure why not diversify my bond holdings a bit?

I have about a third each of my fixed allocation in intermediate treasuries, total bond index, and TIPS, but plan to make room for about 10% total international bond in July and about the same for CA Munis (dropping my % of total bond and TIPS to make room).

I'm not chasing yield but rather using my bonds to stabilize the portfolio during the next a big equity dip; I keep my fixed assets treasury heavy for that reason too. My investment horizon is probably another 20-25 years.

Looking back on the 2001-2003 tech crash and the 2008-2009 subprime crash VCAIX provided that ballast adequately.

I welcome any critiques to this plan.
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Re: Bought Bonds Today

Postby gkaplan » Fri Apr 05, 2013 8:27 am

I did something similar several weeks ago when I reallocated a large sum from within my Vanguard Roth to Vanguard's TIPS fund.
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Re: Bought Bonds Today

Postby johnep » Fri Apr 05, 2013 9:17 am

NYBoglehead wrote:
am wrote:Munis will lose value when they lose some of their tax exempt status. I dumped mine earlier in the year.


Please tell the rest of us when that will happen so that we can plan appropriately!


+1
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Re: Bought Bonds Today

Postby dratkinson » Fri Apr 05, 2013 9:54 am

Bought VWLUX (national LT TE) on Monday. Wished I could buy more.
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Re: Bought Bonds Today

Postby Valuethinker » Fri Apr 05, 2013 10:07 am

Paul Basenberg wrote:Good for you. Noise is exactly what all the turmoil is. The Fed has set the conditions with certainty as to when they will begin raising rates. Regardless of what people may think of the Fed. bankers, they are not dummies. Also unless we get our federal debt to a more manageable position, interest rates will remain low for quite a while, since we will not be able to afford the interest on higher rates. If we were to pay higher interest on our bonds and bills, that would negate a certain amount of tax revenue. Does anyone think that anyone, especially our politicians, wants that to happen?


The economic logic of that, blurring monetary and fiscal policy, is so wonderfully convoluted I burst out laughing.

The normal theory is high deficits-- greater competition for capital, therefore higher interest rates. Also greater risk premium on government debt (so same impact)

Not this time? Why not? Because private demand for loanable funds is so low that the money has nowhere to go, so it buys government bonds. It's the absence of profitable risk opportunities in private capital markets. So safe sovereign bonds get bought up.

ST interest rates btw are largely set by Fed policy. No evidence that is set in opposition to fiscal policy/ deficits. Except in that if the Fed thinks there is excess demand for goods and services ie inflationary pressure, then it tightens. We have not been in that position since 2008 anywhere in the developed world.

The government, any government, is a price taker in terms of the interest rates it pays on bonds. Capital markets for sovereign bonds are global and the marginal buyer or seller (who thus sets interest rates) is a global investor (exceptions: the domestic bond markets in Japan and Italy are huge and historically somewhat captive). Interest rates are set by markets.

Low ST interest rates have some impact but the steepness of the yield curve is driven by markets, not by central bank actions. Even Quantitative Easing has not really undone that (estimates of c. 1-1.5% off the yield of long gilts and long US T Bonds).

There's not a whole lot politicians can do about this. You can appoint central bankers who are less hawkish about inflation (Bernanke, Carney vs. their European Central Bank confreres), who might keep interest rates lower for longer. You can hope your currency devalues (whilst you busily deny you are engaging in 'currency wars'. Japan the extreme case (after 20+ years of deflation or near as!). But you cannot engineer 10 year bond yields to lower your interest rate bill.

All you can hope for (George Osborne, we are calling you) is for loose monetary policy to offset fiscal contraction (remember: "there is No Plan B") and increase your tax revenues. We'll let you know if he pulls it off, but no sign yet and the Coalition is past its half way mark.
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Re: Bought Bonds Today

Postby Valuethinker » Fri Apr 05, 2013 10:11 am

Greenie wrote:I didn't listen to the noise and I bought a significant chunk of California Tax Exempt (intermediate term) bonds today in my taxable account to rebalance. All the talk of rising interest rates is a concern but the equity portion of my portfolio was getting away from my plan for asset allocation. Thoughts anyone?


California the state is lurching towards surplus. Some municipalities seem to be in the deep do do. Problem is generally over generous pensions, and when taxpayers find most of their money is going to pay pension benefits, you will see Taxpayer Revolts -- Proposition 13, the Sequel.

The restorative powers of American capitalism and society have never ceased to amaze me and I have learned never to bet against them. It's a country where people get out of bed every morning and reinvent themselves. This is the nation of try and fail, of The Second Chance, of being Born Again. And perhaps California, always one foot into the American Future ahead of everyone else, is the best test laboratory of this.

It says something that Philip K Dick, probably now the most lauded science fiction writer of the 20th century, did so much of his work in Orange County. It really does.
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Re: Bought Bonds Today

Postby Scooter57 » Fri Apr 05, 2013 10:52 am

You locked in whatever the rate was when you purchased. If you can live with that rate going forward five to ten years, you did the right thing.
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Re: Bought Bonds Today

Postby Tom_T » Fri Apr 05, 2013 11:07 am

It is a good example of tuning out the noise and not trying to predict rates. A few weeks ago, when the 10-year rate went over 2 percent (again), most people were convinced (again) that the "bond bubble" had finally burst, and look out below! Right now I'm watching as the rate drops under 1.7% on whatever the latest news is.
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Re: Bought Bonds Today

Postby Scooter57 » Fri Apr 05, 2013 11:52 am

If you are, in fact, investing for the long term, rate fluctuations over a few months are irrevelent.

The fundamental thing about buying bond funds is that you are locking in a late for a long term. As long as people understand that, it works.
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Re: Bought Bonds Today

Postby YDNAL » Fri Apr 05, 2013 12:24 pm

Greenie wrote:I didn't listen to the noise and I bought a significant chunk of California Tax Exempt (intermediate term) bonds today in my taxable account to rebalance. All the talk of rising interest rates is a concern but the equity portion of my portfolio was getting away from my plan for asset allocation. Thoughts anyone?

I agree that "the noise" may at times impede our ability to concentrate on the task at hand and make overall-portfolio decisions - in your case, managing Equity risk.

Presumably you mean Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX) or Admiral. If you can live with 4.9-year average duration and SEC yield of 1.57% for the risk involved, then you should be fine.
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Re: Bought Bonds Today

Postby Falco » Fri Apr 05, 2013 4:29 pm

Today was the perfect example of why you did great by holding true to your plan and ignoring the noise - nice bump in bond prices today!

The pontificators will be correct at some point, but no one knows when. :sharebeer
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Re: Bought Bonds Today

Postby yukon50 » Sat Apr 06, 2013 2:42 am

Paul Basenberg wrote:Good for you. Noise is exactly what all the turmoil is. The Fed has set the conditions with certainty as to when they will begin raising rates. Regardless of what people may think of the Fed. bankers, they are not dummies. Also unless we get our federal debt to a more manageable position, interest rates will remain low for quite a while, since we will not be able to afford the interest on higher rates. If we were to pay higher interest on our bonds and bills, that would negate a certain amount of tax revenue. Does anyone think that anyone, especially our politicians, wants that to happen?

In addition we are the key currency of the world and the rest of the world will have to chase our interest rates or become non-competitive.

The "talkng heads" on bonds have been wrong for the last 5 years and may be wrong for a while longer. Whatever happens will probably be slow and gradual as opposed to the sharp drops that you sometimes see in the stock market.

Good decision on your part.
Paul


But the cumulative effects of slow and gradual can be just as bad, if not worse, as sharp fast drops.
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Re: Bought Bonds Today

Postby Paul Basenberg » Sun Apr 07, 2013 8:42 pm

Curious. I am assuming that those who feel that the OP has locked in the interest rate at time of purchase, for any number of years, are also assuming that he will not tax loss harvest any bonds or bond funds that he purchased and rotate into higher yielding bonds or bond funds when the time comes that he does not find it advisable to hold those particular bonds.

Regards,
Paul
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Re: Bought Bonds Today

Postby Scooter57 » Mon Apr 08, 2013 10:14 am

Paul,

When you sell an asset whose main purpose is to generate interest income in a way that results in a capital loss, you make it so that you will earn less from the reinvested capital, even with a higher interest rate, because the interest will be paid on that diminished capital.

Say you have a fund with a 10 year duration that pays 3%. You put in $100K. You earn $3000 a year. Rates rise 2% and your NAV loses 20%. You sell. Yes you have a capital loss of $20K. if you are in the 15% bracket it saves you nothing, as capital gains aren't taxed in that bracket. If you are in the 25% bracket, it will save you $3,000 in taxes. In the highest brackets, it will save you $4,000. But in order to get these tax savings, you must also lose $20,000 in some other investment. So to "save" at most $4000, you have to lose $40,000.

Okay, so now you put the proceeds of your sale into another investment that pays 5% a year. But since you only invested $80,000, your annual income from your original capital is now $4,000, not the $5,000 you would have earned had you preserved your $100,000. Over 10 years, that capital loss costs you an additional $10,000--or more if rates continue to rise as you miss out on the earnings of that lost $20K forever.

Tax loss harvesting is a strategy that finds a silver lining in the otherwise depressing collapse of stock prices. It isn't something you should be investing to produce, because you only get tax losses by experiencing much bigger capital losses.

And if you end up with large capital losses, in retirement portfolio heavily tilted towards fixed income, you may never get to use the losses you harvest since you can't write them off against higher interest you receive from investing in some other income-producing asset.
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Re: Bought Bonds Today

Postby Doc » Mon Apr 08, 2013 10:31 am

Scooter57 wrote:You locked in whatever the rate was when you purchased. If you can live with that rate going forward five to ten years, you did the right thing.


The key here is that you have it "locked in" for the duration of the bond. If you sell it at a gain or a loss and repurchase a bond with a similar risk profile you gain or lose nothing before tax. All you do is get (or lose) current dollars in "capital gains" in place of getting (or losing) future dollars of "ordinary income" in the form of interest payments.

After tax it is possible to obtain some gain if you can shift that ordinary income into capital gains. Offhand I can't think of a way that tax loss harvesting bonds can accomplish this shifting other than if it results in a bracket shift which is probably not worth the effort.
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Re: Bought Bonds Today

Postby Paul Basenberg » Mon Apr 08, 2013 10:52 am

Scooter57 wrote:Paul,

When you sell an asset whose main purpose is to generate interest income in a way that results in a capital loss, you make it so that you will earn less from the reinvested capital, even with a higher interest rate, because the interest will be paid on that diminished capital.

Say you have a fund with a 10 year duration that pays 3%. You put in $100K. You earn $3000 a year. Rates rise 2% and your NAV loses 20%. You sell. Yes you have a capital loss of $20K. if you are in the 15% bracket it saves you nothing, as capital gains aren't taxed in that bracket. If you are in the 25% bracket, it will save you $3,000 in taxes. In the highest brackets, it will save you $4,000. But in order to get these tax savings, you must also lose $20,000 in some other investment. So to "save" at most $4000, you have to lose $40,000.

Okay, so now you put the proceeds of your sale into another investment that pays 5% a year. But since you only invested $80,000, your annual income from your original capital is now $4,000, not the $5,000 you would have earned had you preserved your $100,000. Over 10 years, that capital loss costs you an additional $10,000--or more if rates continue to rise as you miss out on the earnings of that lost $20K forever.

Tax loss harvesting is a strategy that finds a silver lining in the otherwise depressing collapse of stock prices. It isn't something you should be investing to produce, because you only get tax losses by experiencing much bigger capital losses.

And if you end up with large capital losses, in retirement portfolio heavily tilted towards fixed income, you may never get to use the losses you harvest since you can't write them off against higher interest you receive from investing in some other income-producing asset.


Hi Scooter57,

I don't know what route Greenie will take if he harvests losses nor do I know what tax bracket he is in. However you lost me when you said , in one sentence, that his investment lost 20% of NAV, and yet, he somehow preserved the full $100,000 in a later sentence. How did his investment get back to $100,000 without the addition of another $20,000? As I see it, he is still getting the 5% on only $80,000 unless he adds $20,000. Maybe I am misreading what you are saying and am missing something.

Regards,
Paul
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Re: Bought Bonds Today

Postby WHL » Mon Apr 08, 2013 11:04 am

Paul Basenberg wrote:
Scooter57 wrote:Paul,

When you sell an asset whose main purpose is to generate interest income in a way that results in a capital loss, you make it so that you will earn less from the reinvested capital, even with a higher interest rate, because the interest will be paid on that diminished capital.

Say you have a fund with a 10 year duration that pays 3%. You put in $100K. You earn $3000 a year. Rates rise 2% and your NAV loses 20%. You sell. Yes you have a capital loss of $20K. if you are in the 15% bracket it saves you nothing, as capital gains aren't taxed in that bracket. If you are in the 25% bracket, it will save you $3,000 in taxes. In the highest brackets, it will save you $4,000. But in order to get these tax savings, you must also lose $20,000 in some other investment. So to "save" at most $4000, you have to lose $40,000.

Okay, so now you put the proceeds of your sale into another investment that pays 5% a year. But since you only invested $80,000, your annual income from your original capital is now $4,000, not the $5,000 you would have earned had you preserved your $100,000. Over 10 years, that capital loss costs you an additional $10,000--or more if rates continue to rise as you miss out on the earnings of that lost $20K forever.

Tax loss harvesting is a strategy that finds a silver lining in the otherwise depressing collapse of stock prices. It isn't something you should be investing to produce, because you only get tax losses by experiencing much bigger capital losses.

And if you end up with large capital losses, in retirement portfolio heavily tilted towards fixed income, you may never get to use the losses you harvest since you can't write them off against higher interest you receive from investing in some other income-producing asset.


Hi Scooter57,

I don't know what route Greenie will take if he harvests losses nor do I know what tax bracket he is in. However you lost me when you said , in one sentence, that his investment lost 20% of NAV, and yet, he somehow preserved the full $100,000 in a later sentence. How did his investment get back to $100,000 without the addition of another $20,000? As I see it, he is still getting the 5% on only $80,000 unless he adds $20,000. Maybe I am misreading what you are saying and am missing something.

Regards,
Paul


I bolded the part that you missed. edit: I colored it, too, because the bold barely showed up.
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Re: Bought Bonds Today

Postby ftobin » Mon Apr 08, 2013 11:06 am

Valuethinker wrote:The government, any government, is a price taker in terms of the interest rates it pays on bonds. Capital markets for sovereign bonds are global and the marginal buyer or seller (who thus sets interest rates) is a global investor (exceptions: the domestic bond markets in Japan and Italy are huge and historically somewhat captive). Interest rates are set by markets.

Indeed, I am always surprised that people don't seem to realize that bond are sold at an auction.
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Re: Bought Bonds Today

Postby Doc » Mon Apr 08, 2013 11:09 am

Paul Basenberg wrote:Hi Scooter57,

I don't know what route Greenie will take if he harvests losses nor do I know what tax bracket he is in. However you lost me when you said , in one sentence, that his investment lost 20% of NAV, and yet, he somehow preserved the full $100,000 in a later sentence. How did his investment get back to $100,000 without the addition of another $20,000? As I see it, he is still getting the 5% on only $80,000 unless he adds $20,000. Maybe I am misreading what you are saying and am missing something.

Regards,
Paul


You lost $20k on a bond paying 2% and reinvested the smaller amount in an investment paying 5%. the present value of those higher interest payments equals your current loss on the sale. If the risk profiles of the two investments are the same the return is the same. That is the way bond pricing works and why it is called "fixed income". The return on you original investment remains fixed for the original duration. You can't change that return on a pretax basis by swapping for another investment that has the same risk.

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Re: Bought Bonds Today

Postby Paul Basenberg » Mon Apr 08, 2013 11:58 am

Thanks guys,

I guess I misinterpreted and mis read the post. I do most of my loss harvesting in the stock world and sometimes use bond losses to offset mostly short term stock gains, although bond losses have been hard to come by lately. But that's another story. I guess I am out of touch with the bond strategies since I get the retirement income I need in addition to SS and a small pension through the total return process of buying and selling stocks and ETF's a few times a year. (Fortunately the commission on ETf's at Vanguard are zero which helps a lot). Having said that, I believe that your comments earlier that Greenie will have to live with the low interest are probably correct especially since he will probably remain with those bonds for a while. Thanks for setting me straight.

Although I am not a Boglehead, and do not spend much time on the internet, I throughly enjoy reading this board, lots of good stuff.

Regards,
Paul
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Re: Bought Bonds Today

Postby Scooter57 » Mon Apr 08, 2013 3:03 pm

Doc,

If you reinvest the diminished capital in a higher paying vehicle you are getting a yield that, best case, will preserve the rate you were getting when you originally invested the whole $100,000. I understand that.

But the questioner was asking why not just sell the bond fund, take the loss and invest in a higher rate fund. The answer is because you don't end up getting a higher rate, due to that capital loss which reduces the higher yield, (at best) to the lower yield you started with.

So compared to investing the same amount of Fixed Income in a CD, you do have a real loss, since you could be earning that higher rate on the original principal if you'd invested that way.
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Re: Bought Bonds Today

Postby Doc » Mon Apr 08, 2013 7:09 pm

Scooter57 wrote:Doc,

If you reinvest the diminished capital in a higher paying vehicle you are getting a yield that, best case, will preserve the rate you were getting when you originally invested the whole $100,000. I understand that.

But the questioner was asking why not just sell the bond fund, take the loss and invest in a higher rate fund. The answer is because you don't end up getting a higher rate, due to that capital loss which reduces the higher yield, (at best) to the lower yield you started with.

So compared to investing the same amount of Fixed Income in a CD, you do have a real loss, since you could be earning that higher rate on the original principal if you'd invested that way.


I'm not sure what your point is here. For fixed income YTM, coupon and price are all related. Given any two you can calculate the third. If two securities have the same risk they will have the same YTM. You can't gain or lose by swapping two securities with the same risk. All you can do is gain some tax arbitrage by trading interest income for LTCG in some cases. By the very nature of the contract a CD and a bond do not have the same risk profile therefore you can gain or lose on the swap depending on whether you add risk or reduce risk. The biggest difference is arguably the lack of market for the CD. People say they can't lose "price money" on the CD and therefore it has less risk. But you can't gain "price money" either so it has more risk than the bond. The CD also has liquidity risk that the bond does not. Some people are immune to the higher risks in the CD and the swap makes sense for them. For others the opposite is true.
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Re: Bought Bonds Today

Postby Scooter57 » Mon Apr 08, 2013 7:43 pm

You can break a CD and come away with all your principal and most of your interest. That's potentially more liquid than a bond no one wants to buy.

And yes, there ARE differences between individual bonds with supposedly the same risk due to the imprecise way bonds are rated and the fact that the rating may be out of date. I learned when I sold a long bond that the price listed on Vanguard for the bond was not the price a bond broker would pay me. I suspect when yhe bond market confronts a long stint of rising rates we will learn more about what theory doesn't hold up in practice.

And no one yet has given me a good reason why CDs bought direct from nonprofit credit unions which clearly state the penalty for an admissible preterm withdrawal is somehow inferior or riskier than bond or bond funds paying virtually the same, pathetically low rate.

Bonds right now are Wall Street saying, "Hey kid, here's eighteen pennies. Gimme ten bucks and I promise I'll give it back to you in a year. Or most of it. Probably." Why bother when the bank will definitely give me back my FDIC insured ten bucks and twenty cents if I leave it there for a year.
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Re: Bought Bonds Today

Postby Doc » Tue Apr 09, 2013 10:15 am

Scooter57 wrote: ...
And no one yet has given me a good reason why CDs bought direct from nonprofit credit unions which clearly state the penalty for an admissible preterm withdrawal is somehow inferior or riskier than bond or bond funds paying virtually the same, pathetically low rate.

...


Scooter, you are arguing about the risk - prepayment penalties, liquidity, bond markup, FDIC insurance (which BTW does NOT insure unearned interest as Treasuries do), bond ratings losing or gaining principle etc.

These risk factors all exist and some are more important than others for some investors. Maybe the extra risk factors with CD's over Treasuries is not important to you. That doesn't make those risks non-existent. All I was saying is that for exactly the same risk you gain nothing by selling and buying a security with exactly the same risk profile except for a possible tax arbitrage.
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Re: Bought Bonds Today

Postby Scooter57 » Tue Apr 09, 2013 4:38 pm

The bond funds yielding anything worth investing in aren't heavily in treasuries. If the FDIC fails, what makes you think treasuries will be safe?

That said I look at the financials of the CUs I invest in.
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