How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

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MikeT
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How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeT »

I'm trying to compare CD's vs. Bond Funds rates.

Current CD's:
1 yr: 2.65%
2 yr: 2.90%
3 yr: 3.15%

For the intermediate treasury bond fund (VSIGX), how am I supposed to compare it to CDs? The Rates are PAST performance. The 30 day SEC yield is only 30 days. Do they have a 3 year SEC yield?

I only learned just recently that the price charts don't reflect the interest payments, just the NAV.

Many folks here have urged the bond fund but it can go down in value if rates go up. If I made my own little bond fund with 1, 2 and 3 year CD's in a ladder, wouldn't that be much better because it's guaranteed not to lose value as long as I don't cash it in early?

(I'm 50 and this is long term retirement money so I don't need it all to be liquid. I'd leave some in a short term fund in case I need to rebalance stock losses).

I'm sorry I'm having such a problem understanding this topic; I'm not getting why everyone isn't advocating CD's over something that can lose value if rates go up).

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venkman
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by venkman »

In your situation, I think a CD ladder is a good choice. Brokered CD's tend to offer a premium rate over Treasuries because they are less liquid and are subject to state tax. Neither of those things matter within a long term retirement account. Your ladder will have an average rate of 2.9% in Year 1, which is significantly higher than a short-term Treasury fund.

Technically, the market value of a brokered CD will fluctuate with changing interest rates, but those fluctuations don't matter if you plan to hold to maturity. The biggest drawback of CD's in a portfolio is that they're hard to sell when you need to rebalance. As long as you maintain a separate bond fund, you've got rebalancing covered.
LFKB
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by LFKB »

There is interest rate risk with bonds, but it can be an upside as well. Remember that expected future interest rate hikes are already priced in, so the bond prices should only go down if interest rates increase faster than expected or if there is a deteroriation in the credit worthiness of the underlying borrower.

If you stick with high quality bonds and short to mid term maturities, there’s isn’t a large amount of risk in NAV falling materially.

The downside to the CDs is liquidity and you’re sacrificing some yield, but it’s not like there’s anything wrong with going that direction if you’d like.
Topic Author
MikeT
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeT »

Can you compare CD yields to bond funds?

Or, do they only quote a 30 day yield and/or historical yields?

What is an intermediate treasury bond fund paying in relation to a 2 year CD?
Prudence
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by Prudence »

I would compare a short term Treasury bond fund to a two year CD since the ST fund has a duration of two years. Capital One is offering 2.8% on a two year CD while the SEC Yield on the VG ST Treasury bond fund is 2.54%. The CD rate is guaranteed if you hold it to maturity while the bond fund fate will fluctuate.
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ruralavalon
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by ruralavalon »

I would compare the CD interest rate to the SEC Yield of the bond fund. But realize that the CD interest rate is guaranteed, while the SEC Yield of the bond fund is just a prediction.
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MikeT
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeT »

@Prudence:

Am I reading it wrong for:
Vanguard Short-Term Treasury Idx Admiral (VSBSX)
https://finance.yahoo.com/quote/VSBSX?p ... c=fin-srch

The "Yield" says 1.75%

This is where I'm getting confused: Is "Yield" the same as "Return" the same as a CD's "Rate"?

Its "5-Year Average Return=0.54%" keeps me wanting to run the other direction.

I realize that's past performance vs. future but I'm still not getting why people are not rushing to buy 2 year CD's that won't go down in value even if rates go up. This hurts my head so much :-)

-Mike
alex_686
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by alex_686 »

MikeT wrote: Thu Dec 27, 2018 1:53 pm @Prudence:

Am I reading it wrong for:
Vanguard Short-Term Treasury Idx Admiral (VSBSX)
https://finance.yahoo.com/quote/VSBSX?p ... c=fin-srch

The "Yield" says 1.75%

This is where I'm getting confused: Is "Yield" the same as "Return" the same as a CD's "Rate"?

Its "5-Year Average Return=0.54%" keeps me wanting to run the other direction.

I realize that's past performance vs. future but I'm still not getting why people are not rushing to buy 2 year CD's that won't go down in value even if rates go up. This hurts my head so much :-)

-Mike
First, read up on interest rate risk and duration risk.

Yield is the SEC yield, which is forward looking. It is a high quality number. However it can be affected by changes in the yield curve in the bond market.

Note, if you build a CD ladder and reinvest those CDs you become a bond manager and are subjected to similar risk as investing in a bond fund. Yeah!

"5-Year Average Return=0.54%" is a backwards looking number. The yield curve has been moving upwards so that makes sense.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Prudence
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by Prudence »

MikeT wrote: Thu Dec 27, 2018 1:53 pm @Prudence:

Am I reading it wrong for:
Vanguard Short-Term Treasury Idx Admiral (VSBSX)
https://finance.yahoo.com/quote/VSBSX?p ... c=fin-srch

The "Yield" says 1.75%

This is where I'm getting confused: Is "Yield" the same as "Return" the same as a CD's "Rate"?

Its "5-Year Average Return=0.54%" keeps me wanting to run the other direction.

I realize that's past performance vs. future but I'm still not getting why people are not rushing to buy 2 year CD's that won't go down in value even if rates go up. This hurts my head so much :-)

-Mike
I use the Vanguard data (not Yahoo): https://investor.vanguard.com/mutual-fu ... view/vsbsx
The 0.54% is the historical return for the past five years; this number can be ignored because it is not relevant for an investment decision today. The SEC Yield is 2.69%; this takes the fund's holdings over the past 30 days and projects the return if the holdings were held to maturity. It is a hypothetical projection but back testing has shown it to be a pretty good indicator (better than anything else). So, I think it is fair to compare the SEC Yield of 2.69% to the Capital One 2 year CD rate of 2.8%. Personally, I would rather own the bond fund with more liquidity and give up the 0.11% difference in return, and assume the interest rate risk over the next two years.
MikeG62
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeG62 »

MikeT wrote: Thu Dec 27, 2018 1:53 pm @Prudence:

Am I reading it wrong for:
Vanguard Short-Term Treasury Idx Admiral (VSBSX)
https://finance.yahoo.com/quote/VSBSX?p ... c=fin-srch

The "Yield" says 1.75%

This is where I'm getting confused: Is "Yield" the same as "Return" the same as a CD's "Rate"?

Its "5-Year Average Return=0.54%" keeps me wanting to run the other direction.

I realize that's past performance vs. future but I'm still not getting why people are not rushing to buy 2 year CD's that won't go down in value even if rates go up. This hurts my head so much :-)

-Mike
Mike, the 1.75% is the trailing 12 month yield. Not very useful in your comparison.

Look instead at the SEC yield - which is 2.69% (30 day annualized yield as of 12-24).

Duration of the fund is two-years.

So if you can get 2.90% in 2 year CD, then the CD would appear to be the better option for you - with the caveat that Treasuries are state income tax free so you need to adjust the 2.69% to a tax equivalent yield in your comparison. For example, if your state marginal tax rate is 5%, the taxable equivalent yield on the fund would be more like 2.83% (2.69%/(1-.05)) - still a bit below the 2.90% CD.
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GaryA505
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by GaryA505 »

MikeT wrote: Thu Dec 27, 2018 1:53 pm @Prudence:

Am I reading it wrong for:
Vanguard Short-Term Treasury Idx Admiral (VSBSX)
https://finance.yahoo.com/quote/VSBSX?p ... c=fin-srch

The "Yield" says 1.75%

This is where I'm getting confused: Is "Yield" the same as "Return" the same as a CD's "Rate"?

Its "5-Year Average Return=0.54%" keeps me wanting to run the other direction.

I realize that's past performance vs. future but I'm still not getting why people are not rushing to buy 2 year CD's that won't go down in value even if rates go up. This hurts my head so much :-)

-Mike
I've been having the same thoughts (and headache). The poor fund return was partially due to interest rate hikes and it's probably more likely that we'll see a couple more 0.25% hikes next year than none, so the fund would take another hit. The CDs return is guaranteed if held to maturity. I know the fund has the advantage of being liquid and you have to be your own "fund manager" but buying CDs is pretty easy and bank CDs are insured.
Topic Author
MikeT
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeT »

I'm glad I'm not the only one thinking about this.

Because everyone keeps pushing me towards the bond fund, I'm really thinking about that because I don't want to deal with CD interest payments ending up in the settlement account.

And, check out this historical analysis of bond fund performance:

https://www.betterment.com/resources/bo ... rest-rates
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by z3r0c00l »

Not sure they are, several have said CDs are a good choice and I also agree with them. You recently sold a bond fund at the worst possible time, locking in losses. I would suggest CDs instead, that will reduce the desire to tinker.
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ruralavalon
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by ruralavalon »

MikeT wrote: Sun Dec 30, 2018 6:45 am I'm glad I'm not the only one thinking about this.

Because everyone keeps pushing me towards the bond fund, I'm really thinking about that because I don't want to deal with CD interest payments ending up in the settlement account.

And, check out this historical analysis of bond fund performance:

https://www.betterment.com/resources/bo ... rest-rates
Thank you for the link.

That's a good summary of the limited impact of rising interest rates on bond funds, the impact is small and short-lived. It also illustrates that almost all of bond fund returns comes from interest, so rising interest rates are good for bond fund investors.
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Topic Author
MikeT
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by MikeT »

@z3r0c00l

I presume since I sold only 1 month ago, that rates/values have not changed soo much that I couldn't re-buy the bund funds to undo what might have been a hasty decision, right?

Thx
Mike
Turbo29
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Re: How compare rates for CD's vs Bond Funds? SEC Yield , Return,. Price Chart?

Post by Turbo29 »

You don't have to do either CDs or bond fund. You can do both. Plus if you have a bond fund you can put the interest the CDs throw off into bond fund.
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