treasuries vs. online savings accounts

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treasuries vs. online savings accounts

Postby north star » Sat May 18, 2013 12:12 pm

Hi, newbie question on fixed-income - or let’s call it non-equity - investing... While many in this forum favor broad bond market funds, others such as Larry Swedroe advise to “take your risk on the equity side.” Having read Mr. Swedroe's very helpful books I take that to mean favoring treasuries (especially shorter-term treasuries) and municipal bonds.

However, I notice that, for example, Vanguard short-term treasury fund admiral shares (VFIRX) with a 2.2-year average duration currently pays a 0.18% SEC yield: https://personal.vanguard.com/us/funds/ ... =INT#tab=1

Meanwhile leading online savings accounts seem to be paying 0.70 to 1.00% (Barclay’s): http://www.nerdwallet.com/rates/

I feel like I’m missing something. My questions are:

  1. How is the bank investing those saving deposits to be able to pay 1.00% if short-term treasuries are paying in the 0.18% range?
  2. Why do conservative fixed-income investors like Mr. Swedroe prefer short-term government bonds over online savings accounts (if they in fact do)? I realize one can’t open an online savings account within a 401K, but the rate difference looks large enough to justify using taxable money.

Thanks,

NS
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Re: treasuries vs. online savings accounts

Postby tfb » Sat May 18, 2013 1:04 pm

north star wrote:
  1. How is the bank investing those saving deposits to be able to pay 1.00% if short-term treasuries are paying in the 0.18% range?
  2. Why do conservative fixed-income investors like Mr. Swedroe prefer short-term government bonds over online savings accounts (if they in fact do)? I realize one can’t open an online savings account within a 401K, but the rate difference looks large enough to justify using taxable money.

1) They loan to consumers and businesses at higher rates.
2) Short-term government bonds used to be competitive with online savings accounts. It costs too much staff time for an advisor to open online savings accounts for their clients one by one whereas buying a short-term government bond fund can be done easily with software for all clients.
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Re: treasuries vs. online savings accounts

Postby stan1 » Sat May 18, 2013 1:16 pm

I think Larry has posted several times within the past 2 years that he's advising clients to use some cash accounts/CDs/I-Bonds right now.

Some advisors don't like CDs because clients may withdraw money and manage their CDs themselves (lowering AUM and thus fees).
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Re: treasuries vs. online savings accounts

Postby Johm221122 » Sat May 18, 2013 9:44 pm

Do you have 401 with a stable value fund? This may work for you
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Re: treasuries vs. online savings accounts

Postby bayview » Tue May 21, 2013 10:30 pm

north star wrote:[*]...Why do conservative fixed-income investors like Mr. Swedroe prefer short-term government bonds over online savings accounts (if they in fact do)? I realize one can’t open an online savings account within a 401K, but the rate difference looks large enough to justify using taxable money.[/list]

Thanks,

NS

In fact, you can: http://www.ally.com/bank/ira/online-savings-account/

Whoops, I got so excited about the forums getting back online that I read 401k and thought IRA. :oops:
Last edited by bayview on Wed May 22, 2013 5:40 am, edited 1 time in total.
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Re: treasuries vs. online savings accounts

Postby rmelvey » Tue May 21, 2013 11:29 pm

Treasuries are slightly higher credit quality as well. There is also no state income tax on them. These two factors can explain a preference for Treasuries even if they have a lower rate.
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Re: treasuries vs. online savings accounts

Postby north star » Wed May 22, 2013 9:33 am

Many thanks for all the great replies!

rmelvey wrote:Treasuries are slightly higher credit quality as well.

I assume you mean for investors exceeding the $250,000 per depositor per bank FDIC limit. Even then I'd think the quality difference would be, as you say, slight.

I get the sense that correlation with stocks should be roughly the same: zero for the savings account, and close to zero for the treasury (?), though of course the treasury is more volatile and complex to analyze.

Of course, portions of the CD vs. bond wiki also apply to savings accounts: http://www.bogleheads.org/wiki/CDs_vs_Bonds

John, good thought about adding stable-value funds to the discussion, but I'll save that topic for another day.

Again, thanks, everyone.
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Re: treasuries vs. online savings accounts

Postby rmelvey » Wed May 22, 2013 1:51 pm

north star,

IMO even under $250,000 Treasuries are slightly higher credit quality. The FDIC does not have enough money set aside to cover multiple large bank failures. It is highly likely that congress would act to save the depositors, but that would take legal action. The issue might turn into a political football or take time. Most importantly, the US not paying its Treasury obligations is unconstitutional. The US paying its Treasury obligations is automatically built into our legal/institutional structure in a way that possible FDIC cash infusions aren't.

I am not trying to say that FDIC deposits are unsafe. But I wouldn't put them exactly on par with Treasuries as far as credit quality is concerned. Treasuries are slightly safer.
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Re: treasuries vs. online savings accounts

Postby kenyan » Wed May 22, 2013 2:01 pm

rmelvey wrote:north star,

IMO even under $250,000 Treasuries are slightly higher credit quality. The FDIC does not have enough money set aside to cover multiple large bank failures. It is highly likely that congress would act to save the depositors, but that would take legal action. The issue might turn into a political football or take time. Most importantly, the US not paying its Treasury obligations is unconstitutional. The US paying its Treasury obligations is automatically built into our legal/institutional structure in a way that possible FDIC cash infusions aren't.

I am not trying to say that FDIC deposits are unsafe. But I wouldn't put them exactly on par with Treasuries as far as credit quality is concerned. Treasuries are slightly safer.


I get what you're saying, but that difference is basically theoretical only. I wouldn't pay a single basis point for the assumed credit quality difference. There are other reasons I would (and do) hold treasuries, though. The pitiful yields everywhere are making my brain hurt.
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Re: treasuries vs. online savings accounts

Postby kenyan » Wed May 22, 2013 2:05 pm

north star wrote:I get the sense that correlation with stocks should be roughly the same: zero for the savings account, and close to zero for the treasury (?), though of course the treasury is more volatile and complex to analyze.


Historically, safer bonds have correlated near-zero with the stock market, but in recent years, the correlation has turned negative, more strongly so for treasuries. Over the last 6 months, the daily correlation between TLT and VTI is -0.64! That's crazy good from a MPT standpoint.
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Re: treasuries vs. online savings accounts

Postby tfb » Wed May 22, 2013 2:13 pm

kenyan wrote:
north star wrote:I get the sense that correlation with stocks should be roughly the same: zero for the savings account, and close to zero for the treasury (?), though of course the treasury is more volatile and complex to analyze.


Historically, safer bonds have correlated near-zero with the stock market, but in recent years, the correlation has turned negative, more strongly so for treasuries. Over the last 6 months, the daily correlation between TLT and VTI is -0.64! That's crazy good from a MPT standpoint.

TLT = iShares Barclays 20+ Yr Treas.Bond ETF. That's not the type of Treasuries the OP is talking about.
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Re: treasuries vs. online savings accounts

Postby kenyan » Wed May 22, 2013 5:48 pm

tfb wrote:
kenyan wrote:
north star wrote:I get the sense that correlation with stocks should be roughly the same: zero for the savings account, and close to zero for the treasury (?), though of course the treasury is more volatile and complex to analyze.


Historically, safer bonds have correlated near-zero with the stock market, but in recent years, the correlation has turned negative, more strongly so for treasuries. Over the last 6 months, the daily correlation between TLT and VTI is -0.64! That's crazy good from a MPT standpoint.

TLT = iShares Barclays 20+ Yr Treas.Bond ETF. That's not the type of Treasuries the OP is talking about.


I understand that perfectly well, but I was making a point. Anyhow, even short-term treasuries have had negative correlation. SCHO to VTI -0.20 over the same period.
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Re: treasuries vs. online savings accounts

Postby Dandy » Thu May 23, 2013 10:18 am

When the you know what hits the fan - Treasuries will rise in value as many investors flee to safety. That has been a major factor why Treasury funds have such a low yield - people are buying them for safety. They also avoid state taxes on income - a minor reason people hold them. Bank CDs will hold there value but not change their value. (Brokered CDs value will vary with interest rates). CD interest is state taxable and has a penalty for early withdrawal. If interest rates go up Treasuries will drop, at least temporarily, and rise, at least temporarily if interst rates drip. bank CDs will not.

Interest rates are at historic lows. Are they likely to go up or down? Many feel once the Fed stops its QE approach the interest rates will rise. If you buy bonds they will drop, at least temorarily - depending on their duration. If you buy bank CDs no change.

So the CDs have a higher yield today, they are goverment guaranteed and their value will not change, they have a penalty for early withdrawal and are state taxable. If rates rise you will have to wait for maturity or pay a penalty to get the higher rate.

Treasuries have a lower yield today, are goverment guaranteed and their value will drop if interest rates rise (and vice versa), no penalty for withdrawal, and avoid state taxes.

Both have a role depending on your risk tolerance and view of the future. For me I think Treasuries are a bubble and while still a safe haven in troubled times I prefer CDs and not Treasury bond funds. They fill the bill of stability on the fixed income side and provide safety in troubled times but won't appreciate like Treasuries will.

Hope this helps
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