Should anyone invest in short-term bonds at this point?

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abyan
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Should anyone invest in short-term bonds at this point?

Post by abyan »

I've been reading the various bond threads, and noticing a lot of folks recommending that fixed income go into ibonds, CDs, online saving accounts etc. instead of short-term bonds (because of the lousy yield on short-term bonds). I suspect it depends on your timeline, when you might need the money. So, I'll ask the same question for someone in the accumulation phase, someone early in retirement, and someone late in retirement (say in their 80s): Should they hold any short-term bonds at all, or rather just invest in CDs, ibonds, and online saving accounts (or intermediate bonds)?
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Re: Should anyone invest in short-term bonds at this point?

Post by livesoft »

I have a bit of money in short-term bonds, so yes, folks should invest in short-term bonds at this point and intermediate-term bonds, too.

Let me ask a question back: What is the performance of short-term bond fund such as VSCSX over the last 12 months? YTD? How does that compare to CDs that could have been purchased 12-months ago? 9 months ago?
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

Recent performance notwithstanding, there is no reason to invest in short bonds right now if bank products are available. Which they very often aren't, e.g. in 401k's or if the hassle of switching IRAs is too much or if the amount of money divided by the $250K FDIC guarantee results in too many accounts.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

That was some of my thinking as well, Livesoft. To what degree is past performance, in this case "not very good current yields," indicative of future performance, aka 'how they'll do in the next few years"? I'm still thinking a mix of some CDs, ibonds, short and intermediate is best (at least for my parents, who are in their 80s, and who would like a lot of security, but also aren't thrilled about losing money to inflation). Still, a lot of the recent threads here have really dissed the entire notion of any short-term bonds at this point, thus the reason I asked.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Ogd, I saw some folks in other threads talking about the risk of banks changing their withdrawal terms. I know for some CDs, they're worth it, even with the penalties -- even with a penalty, the yield would be more than 1%, which is what my parents are getting on a money market at a local bank. So in the case, why not shoot for a 2.3% 5-year CD -- unless, the banks there's concern about the bank changing the terms and making it harder to withdraw in the future.
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Re: Should anyone invest in short-term bonds at this point?

Post by Aptenodytes »

Half my liquid bond money is in short-term investment grade corporates. The spread between short-term corporates and short-term treasuries widened last month.

Most of my bond money remains illiquid, but I keep enough liquid to have on hand for rebalancing.

Things would have to get much worse in the bond market for me to tolerate the hassle of CDs.
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Re: Should anyone invest in short-term bonds at this point?

Post by jh »

.....
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abyan
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Re holding cash -- with a retired investor, who has 70% (or more) of their money in fixed income, it becomes an issue if a big chunk of that money is earning less than inflation.
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

abyan wrote:To what degree is past performance, in this case "not very good current yields," indicative of future performance, aka 'how they'll do in the next few years"?
For safe bonds, to a very negative degree. It's simple math: if you bought a 5 year bond at 2% yield, and it's returned 6% rather than 2% in a year, its new yield to maturity is about 1.18%. The new buyer is in a much worse position than a year ago, with much of that 2% yield having been paid upfront already. This is roughly what happened over the last year, with different numbers. The high return was a direct consequence of the rate increases last summer which caused losses. So that correlation was already at work in the opposite direction.
abyan wrote:Ogd, I saw some folks in other threads talking about the risk of banks changing their withdrawal terms. I know for some CDs, they're worth it, even with the penalties -- even with a penalty, the yield would be more than 1%, which is what my parents are getting on a money market at a local bank. So in the case, why not shoot for a 2.3% 5-year CD -- unless, the banks there's concern about the bank changing the terms and making it harder to withdraw in the future.
I used to have that concern, but it's been so easy and painless doing early withdrawals that I can't ever imagine it being a big deal. So I'm not voicing that worry anymore. As mitigating factors, my banks love me, I'll be early, and 2.3% for 5 years is not the end of the world even if market rates do rise.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Yeah, Ogd, I was impressed by the 2.3% yields. I could imagine parking a good deal of the fixed income there, then perhaps some in short and intermediate bonds, just in case they do better than expected. And if something changes in the bond market, I suppose I could always just withdraw the money from the CDs, pay the penalty, and invest in bonds.

Hey, regarding your math on the bonds, are you talking about a bond FUND, or bonds? I sometimes get confused here whether the same advice regarding bonds generally applies to bond "funds," which is likely what I'd be investing in (at Vanguard).
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Re: Should anyone invest in short-term bonds at this point?

Post by cfs »

Rick Ferri's article.

Decisions, decisions, decisions--Long, short, or intermediate bond funds?

Attached is a link to an article by Rick Ferri on this subject.

http://www.rickferri.com/blog/investmen ... ond-funds/

Thanks for reading.
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

abyan wrote:Yeah, Ogd, I was impressed by the 2.3% yields. I could imagine parking a good deal of the fixed income there, then perhaps some in short and intermediate bonds, just in case they do better than expected. And if something changes in the bond market, I suppose I could always just withdraw the money from the CDs, pay the penalty, and invest in bonds.

Hey, regarding your math on the bonds, are you talking about a bond FUND, or bonds? I sometimes get confused here whether the same advice regarding bonds generally applies to bond "funds," which is likely what I'd be investing in (at Vanguard).
I am talking about a bond, but it's the same underlying factor.

Well, now that you mention it, a component of bond fund return (or yours if you were to roll your bonds forward like the fund does) can actually come for free and not at the cost of future yield. Read the details here: http://www.bogleheads.org/forum/viewtop ... 32601&f=10 ; remember though that it's unreliable because the yield curve self-corrects before long. You can gauge how much of each by looking at the changes in SEC yield for the period you're looking at. Historical SEC yields are available at Vanguard under Price & Performance.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

I'll read Rick's piece (though I think I've seen it before) and the other thread. Man, bonds are a lot harder than equity to wrap your head around. I've read a lot on them the past few months, and still get a bit turned on my head when trying to understand how they fare under different circumstances. (The basic stuff, like overall risk based on what they invest in, I get. But still...)

PS Yep, I had read Rick's piece, and the ensuing thread where some said he was discounting the value of playing it safe -- meaning, in hindsight it was the more profitable move putting your money in intermediate bonds rather than short-term bonds. But that doesn't mean it was the wrong move. In hindsight, my 84 year old parents should have been 100% in small cap value the past 5 years :) As should we all :)
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Re: Should anyone invest in short-term bonds at this point?

Post by Offshore »

cfs
thank you for the link to Rick's article. Worth the read.

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Re: Should anyone invest in short-term bonds at this point?

Post by livesoft »

Probably more worth the read was the thread on Rick Ferri's article:
http://www.bogleheads.org/forum/viewtop ... 0&t=142228
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Re: Should anyone invest in short-term bonds at this point?

Post by JoMoney »

I have a chunk of savings in a short-term bond index fund. I keep telling myself the "smart" move is to just put it in an online high-yield savings account, but I'm just too lazy/stubborn to make the move. My expectation over the next few years is that the fund will net 0, with all of the interest barely compensating for losses to interest rate changes... but I could be wrong... if what I expect happens (or worse), it's not going to hit me that hard, and I just chalk it up to an expense I'm paying for the price of my laziness in not wanting to open up a new account.
There's very little difference in yield to maturity of my fund vs what I could get in some other account anyway. I'm not sure when (if ever) the bell will go off telling me to switch back from the bank account to the bond index fund, and if I just leave it alone it will roll into higher rate bonds as/if they come into the market, so I'll just roll with it for now... but that's not what I think is "smart" advice, so there's some dissonance going on there :?
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Re: Should anyone invest in short-term bonds at this point?

Post by Toons »

Vanguard Short Term Investment Grade & Total Bond ,,here.I don't pay any attention to the interest rate noise that is in the news,,I just invest
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Re: Should anyone invest in short-term bonds at this point?

Post by Tamales »

ogd wrote:
abyan wrote:Ogd, I saw some folks in other threads talking about the risk of banks changing their withdrawal terms. I know for some CDs, they're worth it, even with the penalties -- even with a penalty, the yield would be more than 1%, which is what my parents are getting on a money market at a local bank. So in the case, why not shoot for a 2.3% 5-year CD -- unless, the banks there's concern about the bank changing the terms and making it harder to withdraw in the future.
I used to have that concern, but it's been so easy and painless doing early withdrawals that I can't ever imagine it being a big deal. So I'm not voicing that worry anymore. As mitigating factors, my banks love me, I'll be early, and 2.3% for 5 years is not the end of the world even if market rates do rise.
I suppose there's a point where too many people getting the 60 month 2.3% CD and then closing them out en masse if rates go up would cause the bank's accountants to take note. I wonder if banks (legally) really have total freedom in changing the early withdrawal terms to suit their own financial interest, regardless of what they put in their T&C. They have to bear some risk in making the offering.

I vaguely remember something called "reliance interests" in the law where the party to an agreement relies on certain stated, upfront conditions as a key part of their reason for entering into the agreement, and there are limits on changing those conditions in the future (a form of bait and switch, I guess you could say).
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Re: Should anyone invest in short-term bonds at this point?

Post by john94549 »

Not sure its "either/or". We're both 67 and have a broad mix of fixed income. I'd vote for a CD ladder over short-term bonds, though.
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Re: Should anyone invest in short-term bonds at this point?

Post by BradMajors »

The yield on some short term bonds is negative. For example, three month Japanese treasury bonds.

I fail to see why an individual would want to buy a bond with a negative yield.
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Re: Should anyone invest in short-term bonds at this point?

Post by The Wizard »

I'm *thinking* about putting some $$ in one of VG's short-term bond funds in my taxable account for my New Truck purchase fund for 2015.
Thus far, it's piling up in my Ally online savings, but perhaps I should Reach For Yield, I'm thinking...
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Re: Should anyone invest in short-term bonds at this point?

Post by BigJohn »

abyan wrote:Man, bonds are a lot harder than equity to wrap your head around.
abyan, that's an understatment!! For stocks, the TSM/TISM choice is a no brainer for me but I've been struggling with what to do with my bond allocation for a while. Back to your original post, I'll give you my answer as someone who is 58 and about 6 months away from retirement.

Right now my AA is 60/40 so a bit more aggressive than the age in bonds or even the age in bond minus 10 rules of thumb. As a result, I want a very conservative and safe investment in bonds as the best possible stabilizer for my higher stock allocation. High quality, short-term bond funds have a place in my portfolio for a couple of reasons. First I plan to keep 2 to 3 years of living expenses in short term Treasury's (VFIRX) as a near cash equivalent. If things go south in both stocks and bonds, I can spend this down and wait for recovery so I'm not selling at market lows. Yields are not great but better than cash and totally liquid on a moments notice. In addition, I decided a few years back that I wanted an average duration shorter than the typical intermediate-term fund, I added a short-term fund to achieve this objective. While I'll readily agree with those that say this is bond market timing, the reduced interest rates risk improves my SWAN (sleep well at night) factor relative to sequence of return risks that exist early in retirement phase.

My logic obviously will not apply to someone in their 30's. It will not even be agreed to by many in exactly my situation. So it's back to your comment "Man, bonds are a lot harder than equity to wrap your head around".
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

BigJohn, for the short-term binds are you getting more than you'd get with a CD? I'm just curious why you're choosing the short term over ibonds or CDs.
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Re: Should anyone invest in short-term bonds at this point?

Post by sdsailing »

Vanguard short term investment grade

Vanguard short term corporate.

Are your CDs or savings paying as much as those funds?
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Re: Should anyone invest in short-term bonds at this point?

Post by BigJohn »

abyan, latest distribution yield of VFIRX was 0.63% with an SEC yield of 0.54%. Took a quick look on Vanguard and this is about the same as a 1 year CD there although I'm sure I could find something a bit higher if I shopped around. I had two reasons for going this way vs I-bonds or CD's. One is liquidity, I want to be able to go on-line, initiate a transfer and have access to the funds that quickly. I also have check writing capability for essentially instantaneous access. The other is simplicity, one of my objectives getting ready for retirement was to consolidate and simplify my holdings. Other than a big bank checking/saving/safety deposit box account, I've decide to use Vanguard for nearly everything else. A good discussion of some of these issues in this thread http://www.bogleheads.org/forum/viewtop ... 0&t=140960

Like sdsailing, I'm also considering use of VG short-term corporate (VSCSX) as part of my bond holdings when I rollover my 401(k) and I've decided against using TBM. If you interested, a good discussion of why in this thread http://www.bogleheads.org/forum/viewtop ... 0&t=145291. You'll see a recurring theme for me which is a leaning toward safety in my bonds holdings rather than a worry about reaching for yield.
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Re: Should anyone invest in short-term bonds at this point?

Post by feh »

abyan wrote:Should they hold any short-term bonds at all, or rather just invest in CDs, ibonds, and online saving accounts (or intermediate bonds)?
I do all of the above, since there isn't a clear winner at the moment, IMO.

Just bought some VFSTX this morning.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Can I ask a related, but unrelated, question -- meaning, it's a bond question, but not related necessarily to short vs long term.

What the heck does these lines from this new M* story mean?
U.S. Treasury prices extended losses Wednesday, lifting the 10-year yield above 2.5% as investors brace for a turning point in Federal Reserve policy. In early New York trading, benchmark 10-year notes fell 11/32 in price to yield 2.540%, according to Tradeweb. That's the highest yield since Aug. 1.
I get that when bond yields go up, if you already hold bonds at a lower yield, the price of your bond has to go down in order to entice new buyers (since the yield of YOUR bond hasn't changed). But here's what I'm confused about: Is this good news or bad news for bond buyers, bond holders? If I hold a bond index fund (let's just say total bond market, but it could be intermediate tax exempt too, or treasuries -- and does it matter which one I hold, in terms of my question that follows), is the news I quoted above good news or bad news for my investment?

I've done a lot of reading on bonds the past few months -- and I think I get the general idea that when yields go up, even though my index fund holding goes down in price, some of the bonds will come due, so the new bonds will have a higher yield, which helps my fund recoup the losses from the nav going down (I think) -- but I still get confused about this simple (?) point of what news is good news and what news is bad news? Do I want the price of the bond fund (the nav, I guess) to go up, or do I want the yield to go up? More yield means more payout throughout the year, but the nav going up means when I sell I make more money.

Help please (and I hope this isn't an idiotic question, but I just keep having a hard time with this). Thanks.
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Re: Should anyone invest in short-term bonds at this point?

Post by Austintatious »

abyan wrote:BigJohn, for the short-term binds are you getting more than you'd get with a CD? I'm just curious why you're choosing the short term over ibonds or CDs.
abyan, I bonds are an excellent alternative but, with the $10K limitation on one's annual purchase, they only go so far in resolving the problem. CD's are also a good alternative in today's low interest short-term bond environment, although those with greater amounts of wealth need to take the care to spread them out among "insured" institutions.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Thanks Austin. Yep, I was told to consider getting the $10k for each parent, then get the additional $10k paid for by the refund on their tax returns, totalling $30k a year, which isn't a bad amount after a few years of doing it. And yes, I'd also read about spreading the CDs around FDIC-insured institutions, if you have over $250k -- a very good point.
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Re: Should anyone invest in short-term bonds at this point?

Post by feh »

abyan wrote: I've done a lot of reading on bonds the past few months -- and I think I get the general idea that when yields go up, even though my index fund holding goes down in price, some of the bonds will come due, so the new bonds will have a higher yield, which helps my fund recoup the losses from the nav going down (I think) -- but I still get confused about this simple (?) point of what news is good news and what news is bad news? Do I want the price of the bond fund (the nav, I guess) to go up, or do I want the yield to go up? More yield means more payout throughout the year, but the nav going up means when I sell I make more money.

Help please (and I hope this isn't an idiotic question, but I just keep having a hard time with this). Thanks.
If you won't be selling the bond fund soon, rising interest rates are good, as over time, the expected return of a bond fund is its yield.

Go to M* and graph some bond fund NAVs over time - you'll see they don't move much.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Thanks Feh, yeah I was thinking the yield going up was a good thing for that reason. But the article seemed to be portraying this as a harbinger of doom or something. And then I assume that over time, we hope, the nav comes back to where it was or goes up. I know from looking at the bond performance graphs, they go up very slowly (or in some cases quickly) over time, as compared to S&P 500 etc. I guess I'm just trying to figure out, for a short or medium term investor, rather than a long-term (i.e., for someone in retirement, rather than in accumulation), how to look at the change in yield vs the change in NAV, in terms of which is better.
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

abyan wrote:
Morningstar wrote:U.S. Treasury prices extended losses Wednesday, lifting the 10-year yield above 2.5% as investors brace for a turning point in Federal Reserve policy. In early New York trading, benchmark 10-year notes fell 11/32 in price to yield 2.540%, according to Tradeweb. That's the highest yield since Aug. 1.
abyan: if you think from the perspective of a trader, or simply someone who imagines they can go in and out of the market to their advantage, this is bad news if you're holding Treasuries, because you obviously should have been holding cash instead. Yes, the yield is better going forward but if you had only sold yesterday and bought back today, like a good trader should have done, you could have avoided the price of that adjustment (which is essentially the yield difference accelerated 10 years into the present) and just nabbed the higher yield. So you can imagine some slapped foreheads.

However, if you don't hold such pretense and think of the above as the Wall Street equivalent of "I should have bet on RED :oops: ", higher yields are better news for you in the long term. You will eventually get more money, and your new contributions will get more money from the get go. A time when yields are a few percent higher than today with no significant increase in inflation is a much better time to retire, for example.

The question of "do I want the yields to go up or down" is pointless because you don't actually have that superpower; come to think of it, Yield Man is probably the worst superhero idea ever, though someone would still buy the movie rights in the current superhero environment. Instead, the question to ask yourself is, am I in a position to handle the price volatility that may arise from yields changing. The answers to this are relatively simple: if your horizon is shorter than your bonds, then NO, if you are eyeing long bonds but don't have a very high equity portfolio then again NO (because the volatility of long bonds contributes differently to different portfolios), otherwise YES because it's really no big deal.
BigJohn wrote:
abyan wrote: wrote:
Man, bonds are a lot harder than equity to wrap your head around.

abyan, that's an understatment!! For stocks, the TSM/TISM choice is a no brainer for me but I've been struggling with what to do with my bond allocation for a while. Back to your original post, I'll give you my answer as someone who is 58 and about 6 months away from retirement.
I think both of you are overthinking this. Sure, if you switch to short bonds before a time like summer 2013 you might avoid a few percent in losses, but if you're six months early and a year late on the other end, which if you're even a little humble you should see as quite likely, you give it away in lower yields. Either way, you're still only talking about a couple of percent. When stocks have a fit you'll get much bigger jolts in a matter of days! Most who come here have readily accepted that the stock volatility can't be deftly maneuvered around, but for some reason enough people think they can do it with bonds and they can reason their way around bond math, the yield curve or any number of things.

Here's the thing: not only is the bond market seen as very efficient [*] (it's certainly not forgetting simple things like the face value payment at maturity, or the fact that a 5 year bond will be a 3 year bond in 2 years), but all of this makes very little difference to begin with. Again, a few percent either way, if your timing is particularly good. This is why I say to people: do not overthink this, get a safe intermediate fund like Treasuries or TBM, then be on your merry way.

[*] Unfortunately, just when you have a nice argument going about the efficiency of the bond market, retail banks have to come out of the blue and wreck it with weirdly priced FDIC-insured retail accounts, which the market is watching helplessly from the other side of the fence, unable to access them and fix the obvious mispricing. This does complicate things and you can take advantage to some degree, one such way being to avoid short bonds if you do have access to a savings account because the latter is simply and measurably a better deal. So there.
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

That was wonderfully helpful, Ogd, and made me chuckle out loud in my doctor's waiting room. Yield Man!
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Ogd, what about for a taxable account? My parents are in the 15% tax bracket, buy after we sell the crazy investments "dad's guy" had them in, they'll be right on the edge of the 25% bracket. I was thinking possibly getting tax exempt bond fund, though munis aren't as "safe" as treasuries. I'm guessing I probably have to do the math (which I hate :-) ) as to whether tax exempt bonds are necessary for the taxable account. But I still worry about the risk, and whether I don't have a choice but to diversify the bonds by including some outside of tax exempt (just assume I'm right about only having taxable space left).

I've got a larger post coming up about my parents' account. We finally finished the god-awful paperwork to move them to Vanguard (moving a living trust, and dealing with agent authorizations, is not fun). So we're finally approaching the day when I'll need to make a final decision on asset allocation and specific investments. Thus my recent interst in bonds, for them. (They've asked me to handle all of this.)
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

Definitely prefer CDs for your parents in a 25% bracket. They tend to love them, btw -- a familiar instrument and no price volatility in sight.

The problem with munis is that the market already takes the tax discount into account, that is they are priced to yield X% lower than they would if they were not tax-advantaged. My estimate of X is between 25-30%. So if your tax bracket is lower than that, you should prefer bonds that are not tax-exempt, even in a taxable account.

This is quite obvious even now -- California munis yield about the same as Treasuries, and we all know which is safer. There were times in the past when they were 15% lower, while still being more risky. So there must be a non-trivial amount of tax factored in.

You might notice a pattern -- the decisions to make are about your circumstances, not about the market yields, which are what they are for a reason and you shouldn't second guess. Except for those darn CDs, where you do need to compare yields to comparable instruments because the market isn't allowed to do that for you. Right now, CDs are better than Treasuries, which are in turn equivalent or better to munis in low tax brackets, so CDs win.
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Re: Should anyone invest in short-term bonds at this point?

Post by nisiprius »

abyan wrote:Ogd, I saw some folks in other threads talking about the risk of banks changing their withdrawal terms. I know for some CDs, they're worth it, even with the penalties -- even with a penalty, the yield would be more than 1%, which is what my parents are getting on a money market at a local bank. So in the case, why not shoot for a 2.3% 5-year CD -- unless, the banks there's concern about the bank changing the terms and making it harder to withdraw in the future.
I'm paranoid about this, and probably overstating it... but having, several times in the past, bought CDs whose terms and conditions stated that early withdrawal was "at the bank's discretion" or "with the bank's permission," I have to say: read the terms and conditions on any CD you buy; they are not all the same, know what yours is; and read any notices that come in the mail announcing changes in those terms.

Almost everyone assumes that the only barrier to early withdrawal is the penalty. They assume they have the right to withdraw early if they are willing to pay the penalty. This isn't necessarily true. Do not assume it. Actual cases of a bank refusing an early withdrawal are almost unknown, but not quite--bankrate reports one case of it happening.

Recently some banks (Ally) have been modifying their terms and conditions, adding language that says "If we consent to the redemption of a CD or IRA CD prior to the maturity date, we will close the CD and impose a penalty," while assuring Allan Roth verbally that their current policy is to give that consent.

This shouldn't be a big deal, but it is something to know. My belief is that banks do not plan to play hardball on this, hope they will not have to play hardball on this, and probably will never play hardball on it--unless rates rise a lot. I think they're putting in that language for a reason: they want it there "just in case."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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abyan
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Thanks, Ogd. I'll do the larger post in a few days, or at least by next week, detailing my parents' portfolio, then seeking specific guidance. And yes, mom was quite excited about getting 1% at the local bank (though she admittedly thought it was 2%), so she'll be happy if we can get more than 2 with a CD. And Nisiprius, yes, that's my concern as well. Since it's my parents' money, they might need it in 5 years, or might not. Their heirs might need it in fewer than 5 years, or might not. As they're in their 80s, I don't think they want any money that they literally can't access at all just in case.
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ogd
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

nisiprius wrote:I'm paranoid about this, and probably overstating it... but having, several times in the past, bought CDs whose terms and conditions stated that early withdrawal was "at the bank's discretion" or "with the bank's permission," I have to say: read the terms and conditions on any CD you buy; they are not all the same, know what yours is; and read any notices that come in the mail announcing changes in those terms.
Nisiprius: you are not the only one with a paranoid past, though yours is as recent as an hour ago as far as I can tell and mine a bit older. Here's what I was writing last year:
ogd, June 2013, wrote:I remain suspicious of the ability to do early withdrawals in a steeply rising interest rate environment. From the credit union's perspective, they got shafted on the way down, having to pay high interest rates on CDs for 5-7 years while getting high yield mortgages refinanced from under them. On the way up, with mortgages now frozen at low yields, they might decide to patiently explain to their drive-by depositors without so much as a checking account that there is a difference between those "2 year CD" and "5 year CD (after withdrawal penalty)" columns on depositaccounts.com. Without early withdrawals, the main advantage of the CD disappears.
So what's changed? A few things:
  • I've actually done CD withdrawals from a couple of banks with not so much as a peep. Like, "there will be a penalty of $X, is this okay? good... done", three minutes or so, no questions. Much easier than removing HBO from your lineup. Interest rates had gotten higher, penalties were lower than the curent six months norm, and still, no resistance at all as if this was a normal aspect of CDs and something they do all the time.
  • The pushback on Ally's change of terms was significant, at least in this little bubble of ours.
  • Similar reports of painless withdrawals from others.
So I've decided to withdraw that objection. As far as I can tell, early withdrawals are quite safe.
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abyan
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

I do think that Nisiprius has a right to be paranoid when a big company suddenly decides that it's necesary to change their terms to permit them to do something they promise they'll never do. Trust my legal document, not my lips :)
BigJohn
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Re: Should anyone invest in short-term bonds at this point?

Post by BigJohn »

ogd wrote:I think both of you are overthinking this. Sure, if you switch to short bonds before a time like summer 2013 you might avoid a few percent in losses, but if you're six months early and a year late on the other end, which if you're even a little humble you should see as quite likely, you give it away in lower yields. Either way, you're still only talking about a couple of percent. When stocks have a fit you'll get much bigger jolts in a matter of days! Most who come here have readily accepted that the stock volatility can't be deftly maneuvered around, but for some reason enough people think they can do it with bonds and they can reason their way around bond math, the yield curve or any number of things.
ogd, my struggle has been more with things like negative convexity of muni's, corporate's and the MBS portion of TBM not the question of short vs long. Yes I know the market is very efficient and those risks are theoretically rewarded but that's not my worry. The things I've been struggling with are understanding the math involved and then deciding if I want to accept that risk even if it is rewarded.

Doesn't feel like I've overthought this as I have big decisions coming soon about how to invest a 401(k) rollover and a lump sum pension but..... it's always easier to see overthinking in others rather than yourself so certainly possible that I'm guilty as charged. :beer
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Re: Should anyone invest in short-term bonds at this point?

Post by ogd »

BigJohn wrote:ogd, my struggle has been more with things like negative convexity of muni's, corporate's and the MBS portion of TBM not the question of short vs long. Yes I know the market is very efficient and those risks are theoretically rewarded but that's not my worry. The things I've been struggling with are understanding the math involved and then deciding if I want to accept that risk even if it is rewarded.
That means you're worried about something that involves even smaller fractions of a percent. Last year rates climbed 1.2% in four months and you could barely drop a needle between Treasuries and TBM (VFIUX / VBTLX).

I agree that it's worth worrying about it a bit in the "long" muni funds, as in -- don't buy them enthusiastically for the high yield expecting not to pay for it with risk -- but that's about it. Just get the intermediate instead.
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Re: Should anyone invest in short-term bonds at this point?

Post by BigJohn »

ogd wrote:I agree that it's worth worrying about it a bit in the "long" muni funds, as in -- don't buy them enthusiastically for the high yield expecting not to pay for it with risk -- but that's about it. Just get the intermediate instead.
I was in the long muni fund for years because yield was a good bit higher and duration only marginally longer. Recent learnings on this site about convexity have me slowly reducing that position. This made me a bit cautious and drove my desire to learn more about the finer points of bonds. In hindsight I should have known there was no such thing as a free lunch :oops:

P.S. Your posts on bonds have routinely been very helpful to me, thanks!
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Dandy
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Re: Should anyone invest in short-term bonds at this point?

Post by Dandy »

Short term bonds/funds have pros and cons just like other fixed income products. The shorter duration of short term bond funds offer less interest rate risk than longer duration bond funds and they are more liquid than a CD (due to the penalty). At these low interest rates they don't offer much short term growth opportunity.

If you are mainly focused on asset preservation or Wm Bernstein's idea of having 20 -25 years of residual expenses in "safe" products then short term bonds/funds fit those strategies. Also the strategy of taking the risk on the equity portion of your portfolio.

Nothing wrong with diversifying your fixed income choices to include CDs, I bonds etc. I hold short term bond funds, intermediate bond funds, CDs, and other FDIC products. I would err on the side of taking lower risk options on the fixed income allocation rather than go longer duration or junk/high yield bonds. Late retirees in need of more income should consider some allocation to immediate annuities.
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abyan
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

Yep, I'm more and more sold on the notion of playing it very safe with your FI and perhaps a bit more loosey goosey with the equity if you're looking for greater returns.
john94549
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Re: Should anyone invest in short-term bonds at this point?

Post by john94549 »

OP: one thing I forgot to mention was the IRA CD option at several institutions (for folks over 59 1/2). For folks in that cohort, there's no EWP for a partial withdrawal. You get the higher rate (say, of a 5-yr CD) with the liquidity of a savings account, or a bond fund.
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abyan
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Re: Should anyone invest in short-term bonds at this point?

Post by abyan »

I'd heard of that but hadn't looked into it. I will, thanks.
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Re: Should anyone invest in short-term bonds at this point?

Post by Leeraar »

livesoft wrote:I have a bit of money in short-term bonds, so yes, folks should invest in short-term bonds at this point and intermediate-term bonds, too.

Let me ask a question back: What is the performance of short-term bond fund such as VSCSX over the last 12 months? YTD? How does that compare to CDs that could have been purchased 12-months ago? 9 months ago?
I have VFSUX and VBILX as my short-term investments, "in case".

I just checked Morningstar, the 1-year return on VFSUX is 3.8%, on VBILX it is 6.66%.

Please explain just exactly what I should be worrying about? I just want the money to be there if I need it. In such a case, I really do not care if I have 98%, 100%, or 102% of the amount compared to some arbitrary past date.

And, since I rebalance about twice a year, that past date is not ever more than six months ago.

L.
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