Money market vs Bond funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
retired02
Posts: 2
Joined: Tue Sep 11, 2018 4:00 pm

Money market vs Bond funds

Post by retired02 »

What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Money market vs Bond funds

Post by vineviz »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
Like any other asset, the current price of bonds already reflects current expectations about the probably course of future events (including estimates about the likelihood and/or magnitude of future interest rate hikes). Those expectations are priced in, so there is no reason to assume that those same expectations will lead one class of fixed income to offer better or worse risk-adjusted returns.

So why bond funds? Longer term bonds are viewed by some investors as generally being riskier, so they generally offer higher returns to compensate for that. Within the fixed income portion of your investment portfolio, any money you don't expect to spend in the next five or six years should probably be invested in intermediate-term bonds. Any money you don't expect to spend in the next 15 years should probably be invested in long-term bonds. Same as always.

Many people, including me, would say that things like CDs or money market funds are not investments at all. Instead, I'd say they are a form of savings and are suitable as higher return alternatives to a savings account: a good place to park money you expect to spend (or need) in the next 1 to 3 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
sabhen
Posts: 360
Joined: Sat Feb 27, 2016 12:03 am

Re: Money market vs Bond funds

Post by sabhen »

I am in the same predicament as OP. For the "safe" portion of my portfolio, MM is a probably better choice in the current environment with interest rate on the rise. I am one who thinks that the best days for bonds are over after a 30+ year bull market run.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Money market vs Bond funds

Post by Grt2bOutdoors »

sabhen wrote: Tue Sep 11, 2018 5:28 pm I am in the same predicament as OP. For the "safe" portion of my portfolio, MM is a probably better choice in the current environment with interest rate on the rise. I am one who thinks that the best days for bonds are over after a 30+ year bull market run.
Bonds still will yield more over time. A long term investor should not switch from bonds to money market instruments, unless their objective has changed requiring monies to be available from 1-5 years or shorter. In that case, holding money market funds, Treasury bills and/or cd's is perfectly acceptable.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Kevin8696
Posts: 162
Joined: Mon Oct 08, 2012 7:45 pm

Re: Money market vs Bond funds

Post by Kevin8696 »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
I don't think you are missing anything, especially if you are retired (like me) and have a shorter-than-average investment horizon.

With the Fed's continuing program of raising short-term rates, the spread between the 2-yr and 10-yr Treasuries has narrowed to just 0.25% compared to a historic spread of about 2.0%. This flat yield curve has analysts saying that investors in intermediate term bond funds (such as Vanguard Total Bond Market Index Fund, VBTLX) are not being adequately compensated for the interest rate risk associated with the 6+ year duration of these funds.

As interest rates go up, bond prices go down. The rule of thumb I have read is: Duration minus SEC yield approximates the impact of a 1% increase in rates. Using this method for VBTLX, portfolio duration of 6.1 years minus the current SEC yield of 3.13% indicates a price drop of approximately 3.0% for a 1% increase in rates. At current interest rate levels, a hit like this this to principal would not be fun.

As a retiree with a substantial portion of my portfolio in fixed income, I'm not enthused about taking capital losses on the bond side of the portfolio. I recognize that the higher yielding bonds that will be added to the portfolio will eventually offset the hit to total return coming from the capital losses. In the meantime I'm seeing losses, and who knows when I'll be back in the black ?

Year-to-date results for VBTLX show total return of -1.40%. With a distribution yield of 2.77%, the fund has been taking capital losses over the last eight months. During the same period, VMMXX return has been 1.25% and shows a 7-day yield of 2.09%.

Here's the dilemma, with rates still being very low on a historic basis, is it worth rolling the dice and riding out the storm with an intermediate-term bond fund, or just go with the safety of principal and the increasing returns of the money market fund ?

I've decided to go with the money market fund, and also changed my stock/bond allocation a tad to offset the lower risk that I am now taking on the bond side of my portfolio.
Last edited by Kevin8696 on Fri Sep 14, 2018 8:11 pm, edited 1 time in total.
Chaconne
Posts: 239
Joined: Sat Dec 15, 2007 3:18 pm

Re: Money market vs Bond funds

Post by Chaconne »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
What you're doing is equivalent to looking at the attack on Pearl Harbor and assuming that Japan won World War II. If you're investing for the long haul (and, granted, you gave us no idea whether you are or not), you need to take a longer-term perspective. That is what you're missing.
InvestingGeek
Posts: 351
Joined: Tue Aug 28, 2018 6:31 am

Re: Money market vs Bond funds

Post by InvestingGeek »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
All depends on your time horizon and appetite for risk. If you're retired and need safety of principal above all else, obviously zero-risk CDs and money market or short-term bonds is the way to go.
User avatar
EddieGee
Posts: 59
Joined: Sun Jan 08, 2017 1:19 pm

Re: Money market vs Bond funds

Post by EddieGee »

It would seem to me that if you can get nearly comparable interest from either a MM or bond fund then the only thing you are "missing" from MM is the opportunity for appreciation if interest rates go down. Since this is highly unlikely, MM appears a prudent alternative to a bond fund at this time. If and when interest rates rise and/or the yield curve steepens, you can always shift funds from MM into bond funds.
Topic Author
retired02
Posts: 2
Joined: Tue Sep 11, 2018 4:00 pm

Re: Money market vs Bond funds

Post by retired02 »

I am the writer of the original post. I failed to mention that I recently turned 80 with my wife only a few years behind me. My investment horizon is anywhere from 1 day to 20 years. I have always been a "stay the course" type investor..... probably with Vanguard for 25-30 years, so it makes it difficult for me to totally stray from usual diversification. Presently have a 33/33/34% cash/bonds/stocks allocation. I have considered the VG Target funds but I have an aversion to international stock or bond funds. Would probably make sense to be 100% in short term, liquid assets but reluctant to possibly miss more upside gains. (greed factor)
smectym
Posts: 1530
Joined: Thu May 26, 2011 5:07 pm

Re: Money market vs Bond funds

Post by smectym »

As long as the Fed continues to hike short-term interest rates, an overweight allocation to money market funds vs. bonds is a reasonable investment decision. And if your investment horizon is shorter, then that reinforces the argument.

Smectym
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Money market vs Bond funds

Post by aristotelian »

If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Money market vs Bond funds

Post by Northern Flicker »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
Since the date of the referenced posting (9/11/2018) the total bond index and the vanguard intermediate treasury bond index fund both returned about 4.5% while the Federal Money Market fund returned about 1.5%:

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Predicting the future is hard.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Money market vs Bond funds

Post by dbr »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
You would if you wanted to invest at higher expected return at the risk that return would not show up in any particular interval of time. Of course some bond funds may not offer higher expected return than any particular money market, savings account, or CD, in which case a lot of people would not buy one of those bond funds. This trade-off continues through the gamut of investing choices including the addition of riskier higher returning investments such as stocks. Is everything you own in that money market fund?
SleepCity
Posts: 24
Joined: Fri Jul 14, 2017 2:43 pm

Re: Money market vs Bond funds

Post by SleepCity »

Omg! You have to pay taxes on dividends??????????
User avatar
welderwannabe
Posts: 1634
Joined: Fri Jun 16, 2017 8:32 am

Re: Money market vs Bond funds

Post by welderwannabe »

retired02 wrote: Tue Sep 11, 2018 4:11 pm What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
A money market is a bond fund with really ultra ultra short term bonds and some special accounting rules that allow them to hold a $1 NAV.

Over the long term the intermediate bonds should out perform. The short term is a different story, but again one should hold assets suitable for their time horizon so I dont view it as a major issue.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
FIby45
Posts: 101
Joined: Wed Oct 30, 2019 4:41 pm

Re: Money market vs Bond funds

Post by FIby45 »

aristotelian wrote: Fri Sep 14, 2018 11:34 am If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.
I never thought about this. Is this the main difference?

In event of a downturn the bond fund would appreciate? I'm seeing a 0.36% interest rate difference between fzdxx (MM) and bnd at vanguard.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Money market vs Bond funds

Post by aristotelian »

FIby45 wrote: Wed Oct 30, 2019 7:13 pm
aristotelian wrote: Fri Sep 14, 2018 11:34 am If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.
I never thought about this. Is this the main difference?

In event of a downturn the bond fund would appreciate? I'm seeing a 0.36% interest rate difference between fzdxx (MM) and bnd at vanguard.
That is the upside. Of course, there is risk. Take a look at various bond funds and how they performed in '08 and other periods. The idea is that a combination of stocks and bonds together will provide the best risk-adjusted returns, more so than cash.
rerod
Posts: 194
Joined: Fri May 31, 2013 9:05 am
Location: Iowa

Re: Money market vs Bond funds

Post by rerod »

I bought my VBTLX for the wrong reason in 2012 at $11.22.. It was hard to except that the money I had set away for my retirement house had dropped in value over 12k until I realized how interest rates effected bond prices.. Shares dropped down to $10.24 but I held on even when people said bonds only had one way to go..

But now that the price of VBTLX is back to very close where I bought it, I also wonder about MM which sounds like a better place to save money for a house to be built within 5 years. But MM wasn't returning 2% in 2012..

My luck, as soon as I transfer the money from Bonds to money market, the stock market will correct 20% and the fed will further drop rates..
anoop
Posts: 3930
Joined: Tue Mar 04, 2014 12:33 am

Re: Money market vs Bond funds

Post by anoop »

rerod wrote: Sun Jan 12, 2020 1:17 pm I bought my VBTLX for the wrong reason in 2012 at $11.22.. It was hard to except that the money I had set away for my retirement house had dropped in value over 12k until I realized how interest rates effected bond prices.. Shares dropped down to $10.24 but I held on even when people said bonds only had one way to go..

But now that the price of VBTLX is back to very close where I bought it, I also wonder about MM which sounds like a better place to save money for a house to be built within 5 years. But MM wasn't returning 2% in 2012..

My luck, as soon as I transfer the money from Bonds to money market, the stock market will correct 20% and the fed will further drop rates..
I tend to stay away from bond funds in taxable (which I assume is where your money is). I prefer either individual treasuries (if state tax is high) or MM.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Money market vs Bond funds

Post by KlangFool »

OP,

It is very simple.

I put my emergency fund into the MM fund. I put the fixed income portion of my AA into the Total Bond Market Index fund. So, I do not understand why are you asking this question?

MM fund is for when you absolutely want the principal to stay at $1.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
sid hartha
Posts: 442
Joined: Fri Dec 09, 2016 1:17 pm

Re: Money market vs Bond funds

Post by sid hartha »

I'm not understanding this either. The MM I have yields the same as BIV when I look at the monthly distributions, the MM is actually slightly more right now. So if there is more risk with BIV (that's what the fund profile says) than a MM but the yields are the same why would anyone choose BIV right now? Is it that you expect to also make a return / capital gain on top of the yield by the price of BIV going up? I really don't get it. Thanks for anyone that can explain this to me.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Money market vs Bond funds

Post by dbr »

sid hartha wrote: Fri Feb 03, 2023 9:00 am I'm not understanding this either. The MM I have yields the same as BIV when I look at the monthly distributions, the MM is actually slightly more right now. So if there is more risk with BIV (that's what the fund profile says) than a MM but the yields are the same why would anyone choose BIV right now? Is it that you expect to also make a return / capital gain on top of the yield by the price of BIV going up? I really don't get it. Thanks for anyone that can explain this to me.
It is entirely possible that at any point in time yields for some bond fund and yields for a MM or a CD or a Stable Value fund are similar or even "upside down." Right now you see that in a flat (actually inverted) yield curve. A person who can find a way to position money quickly enough or ahead enough of the constant variability of interest rates is welcome to engage in that strategy and may or may not come out consistently ahead.

Normally a fund of intermediate duration is intended to be a component of a long term investing plan, 10-20 years and longer, and one does not try to jump from investment to investment at every moment. Normally the yield curve will also be more progressive consistent with long term investment strategy.

You can make you own decisions as you please.
sid hartha
Posts: 442
Joined: Fri Dec 09, 2016 1:17 pm

Re: Money market vs Bond funds

Post by sid hartha »

dbr wrote: Fri Feb 03, 2023 9:08 am
sid hartha wrote: Fri Feb 03, 2023 9:00 am I'm not understanding this either. The MM I have yields the same as BIV when I look at the monthly distributions, the MM is actually slightly more right now. So if there is more risk with BIV (that's what the fund profile says) than a MM but the yields are the same why would anyone choose BIV right now? Is it that you expect to also make a return / capital gain on top of the yield by the price of BIV going up? I really don't get it. Thanks for anyone that can explain this to me.
It is entirely possible that at any point in time yields for some bond fund and yields for a MM or a CD or a Stable Value fund are similar or even "upside down." Right now you see that in a flat (actually inverted) yield curve. A person who can find a way to position money quickly enough or ahead enough of the constant variability of interest rates is welcome to engage in that strategy and may or may not come out consistently ahead.

Normally a fund of intermediate duration is intended to be a component of a long term investing plan, 10-20 years and longer, and one does not try to jump from investment to investment at every moment. Normally the yield curve will also be more progressive consistent with long term investment strategy.

You can make you own decisions as you please.
Sorry I poorly phrased that question. I'm not trying to time anything. I just wanted to get a decent yield on some funds right now and didn't really know where to put it. And when I looked the MM is actually a better monthly distribution than BIV which I was kind of shocked by at first. But now I understand it's a very weird rate environment right now and that can happen. Thank you for your helpful comment.
Hogan773
Posts: 799
Joined: Thu May 07, 2015 11:14 am

Re: Money market vs Bond funds

Post by Hogan773 »

I am facing this same issue. Yes, the MM funds have montly distributions that are similar to the bond funds. Yes, the bond funds can LOSE principal too, if interest rates continue to rise. But of course the other side of that is that the bond funds can GAIN principal value if rates go down. This HAPPENED to me over the past month, unfortunately. I did a tax loss harvest on my bond funds in late December, (as those funds had gone DOWN due to interest rates increasing in 2022) and unwisely just parked the money in the MM fund, thinking that I would be getting a similar yield distribution and that the NAV probably wouldn't change too much in 31 days. Well, the NAV went UP 2% or more in January as the market started to think that maybe the Fed rates were peaking and inflation was moderating and now the market is looking ahead to rates moving lower again over time (except today the rates are back up). So I "lost" 2% on this if I go ahead and buy back now. So basically hard to know exactly which way the NAV is going to move, but to say at this point that it is a certainty that rates are going to continue to rise and thus you will lose money in NAV by being in a bond fund is certainly not for sure
sid hartha
Posts: 442
Joined: Fri Dec 09, 2016 1:17 pm

Re: Money market vs Bond funds

Post by sid hartha »

Hogan773 wrote: Fri Feb 03, 2023 10:30 am I am facing this same issue. Yes, the MM funds have montly distributions that are similar to the bond funds. Yes, the bond funds can LOSE principal too, if interest rates continue to rise. But of course the other side of that is that the bond funds can GAIN principal value if rates go down. This HAPPENED to me over the past month, unfortunately. I did a tax loss harvest on my bond funds in late December, (as those funds had gone DOWN due to interest rates increasing in 2022) and unwisely just parked the money in the MM fund, thinking that I would be getting a similar yield distribution and that the NAV probably wouldn't change too much in 31 days. Well, the NAV went UP 2% or more in January as the market started to think that maybe the Fed rates were peaking and inflation was moderating and now the market is looking ahead to rates moving lower again over time (except today the rates are back up). So I "lost" 2% on this if I go ahead and buy back now. So basically hard to know exactly which way the NAV is going to move, but to say at this point that it is a certainty that rates are going to continue to rise and thus you will lose money in NAV by being in a bond fund is certainly not for sure
Right, you said it much better than I did! It's really strange times.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Money market vs Bond funds

Post by dbr »

sid hartha wrote: Fri Feb 03, 2023 9:13 am
dbr wrote: Fri Feb 03, 2023 9:08 am
sid hartha wrote: Fri Feb 03, 2023 9:00 am I'm not understanding this either. The MM I have yields the same as BIV when I look at the monthly distributions, the MM is actually slightly more right now. So if there is more risk with BIV (that's what the fund profile says) than a MM but the yields are the same why would anyone choose BIV right now? Is it that you expect to also make a return / capital gain on top of the yield by the price of BIV going up? I really don't get it. Thanks for anyone that can explain this to me.
It is entirely possible that at any point in time yields for some bond fund and yields for a MM or a CD or a Stable Value fund are similar or even "upside down." Right now you see that in a flat (actually inverted) yield curve. A person who can find a way to position money quickly enough or ahead enough of the constant variability of interest rates is welcome to engage in that strategy and may or may not come out consistently ahead.

Normally a fund of intermediate duration is intended to be a component of a long term investing plan, 10-20 years and longer, and one does not try to jump from investment to investment at every moment. Normally the yield curve will also be more progressive consistent with long term investment strategy.

You can make you own decisions as you please.
Sorry I poorly phrased that question. I'm not trying to time anything. I just wanted to get a decent yield on some funds right now and didn't really know where to put it. And when I looked the MM is actually a better monthly distribution than BIV which I was kind of shocked by at first. But now I understand it's a very weird rate environment right now and that can happen. Thank you for your helpful comment.
Don't forget that if the yields on the bonds in BIV would drop by 1% the NAV of the fund would go up about 7% overnight. This is the reverse of the losses that happened last year. Naturally one does not invest trying to predict that. Also, with increased interest rates and reinvested dividends the bond fund will gain back lost values but that takes years.
Post Reply