Prime Money Market vs. Bonds/CDs

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Scorpion
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Prime Money Market vs. Bonds/CDs

Post by Scorpion » Wed Nov 07, 2018 7:50 am

I’ve been doing a lot of reading on bonds and fixed income lately. I’m starting to wonder why I don’t move a substantial portion of my fixed income assets to the Vanguard Prime Money Market and wait for the Fed to stop raising rates. That would have been a better outcome than any bond approach for the past two years, and it seems reasonable to me to expect that relationship to continue until the Fed stops raising rates (currently expected in 2020). It just seems like the small amount of extra yield in bonds of medium duration is not worth the interest rate risk.

So I guess the counterargument is that the public’s demand for bonds (for all sorts of reasons) could outweigh the downward pressure on bond prices due to Fed interest rate increases, and therefore there is no certainty that bond prices will continue to go down. It just seems weird that we have an entity announcing its interest rate plans, and I stand pat knowing those plans will hurt me (and I know that Fed funds rate moves don’t translate directly to bond moves). Would it be crazy to move a lot of my fixed income money to Prime Money Market or Short-Term Bonds, at least until the Fed seems like they are done raising rates? On the other hand, I do think it is true that I have more to lose, percentage-wise, by not being in “real” bonds if the stock market crashes and there is a flight to bonds than I have to gain by being in money market and avoiding bond losses due to fed rate increases. So maybe that is what motivates people to keep longer dated bonds even in this environment? I appreciate your help in thinking this through!

This all sounds a lot like market timing to me – is that a little more acceptable in the bond market, where the Fed forecasts its moves? I say this having never been someone who has tried to time the market. I bought stocks all the way down and all the way back up during the Great Recession. For reference, I retired (early) in March 2017. In preparation for that, in October 2016 I moved to an allocation of approximately 30% bonds, 45% stocks and 25% real estate investments. This was my first time owning bonds, and I did it very begrudgingly, and of course it hasn’t been fun. The last time I owned bonds to any degree before that was late 1993 as a student, leading right into the fun bond crash of 1994.

~65% of my bonds are in Intermed-Term Investment Grade Index and the rest is in Total Bond Market Index, with only my emergency fund in Prime Money Market, and then I have 40K of I Bonds. Everything except money market is in tax-preferred accounts, but I am at a point where I probably need to add some bonds (or more money market) in taxable accounts to keep my desired 30% fixed income allocation. I'm owning bonds for diversification rather than with target spending in mind on a specific date.

onourway
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Re: Prime Money Market vs. Bonds/CDs

Post by onourway » Wed Nov 07, 2018 7:55 am

Do you need to spend the money today? If not, you should strongly consider staying put because this is indeed market timing. You are selling low. The increased yields are too new for you to have seen much of their advantage, but your selling price has already been depressed. Over time you will start to see the advantage of the higher yields and in the long run you will likely have a better outcome by staying in your bonds.

Jumping to a MMF may seem appealing in the short term, but in the long term rates nearly always lag bonds of anything but the shortest duration.

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Blueskies123
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Re: Prime Money Market vs. Bonds/CDs

Post by Blueskies123 » Wed Nov 07, 2018 8:02 am

Many of us have gone through this same thought process. There are numerous discussions threads. Many call it timing and say it is a mistake but many have shortened their duration. If there is a recession in the next year or two your MM fund will pay less interest and bonds should go up in value. There is no consensus.

About 6 months ago I moved half of my intermediate bonds to 2 year CDs paying 2.8% and treasures paying something less. The problem with my move is that if there is a recession in 2 years I will not be able to renew my bonds and CDs at anything close to what I am currently earning.

So who knows what is going to happen, that is why I only moved half.

betablocker
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Re: Prime Money Market vs. Bonds/CDs

Post by betablocker » Wed Nov 07, 2018 8:05 am

It’s true that if you can go to a money market and then transfer back to bonds when the fed stops raising interest rates you’ll net more but the problem is knowing when the fed stops raising and additionally how the market will react. My guess is it isn’t as bad as market timing with stocks where a few days make up most of the returns. Two potential strategies are to do half in a MM and half in a bond fund. Second would be to trend follow. I do this with Alpha Architect’s signals. They post them every month. This has some academic evidence behind it.

Finally If you want to capture a flight to quality premium you need to be in treasuries. Corporates can fall with the market and while CDs won’t fall they also won’t appreciate. For CDs you have to see if the additional spread makes up for that lack of flight to quality.

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Abe
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Re: Prime Money Market vs. Bonds/CDs

Post by Abe » Wed Nov 07, 2018 10:37 am

I'm not moving any money from bond funds, but I hold a considerable amount of my fixed income in CD's, VG money market and VG municipal money market accounts. I probably will transfer some of this money to bond funds at some point, but I don't feel comfortable doing it now with the prospect of interest rates continuing to go up for a while.
Slow and steady wins the race.

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ruralavalon
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Re: Prime Money Market vs. Bonds/CDs

Post by ruralavalon » Wed Nov 07, 2018 11:26 am

Scorpion wrote:This all sounds a lot like market timing . . .
This is indeed market timing.

I suggest sticking with the intermediate-term Investment-grade bond and total bond market funds for investments. Vanguard Prime Money Market Fund (VMMXX) is an excellent choice for your cash needs.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Scorpion
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Re: Prime Money Market vs. Bonds/CDs

Post by Scorpion » Thu Nov 08, 2018 9:21 am

Thanks for the responses. The more I analyze this, the more I think that there is not much upside to going short, so why bother. I might move a little from VMMXX to the ultra short bond fund, in fact. For those of us who have never market timed before, going to money market with bond cash seems too risky - you would never know for sure when to get back into bonds, and you would feel awful if recession hit and you missed the upswing in bonds. So in other words, it's the down side to all market timing strategies.

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