Prime Money Market or Total Bond Market

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RobG
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Prime Money Market or Total Bond Market

Post by RobG » Thu Jul 04, 2019 4:24 pm

The yields of vanguard's prime money market and total bond index are very close (2.30% and 2.55% respectively), yet the total bond market fund has a duration of 6 years. Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?

rg
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Rob5TCP
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Re: Prime Money Market or Total Bond Market

Post by Rob5TCP » Thu Jul 04, 2019 4:32 pm

If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline. Prime should reflect declining values more quickly than the Prime. Prime probably won't break the dollar, but the rates will more quickly reflect the lower values.
Total bond, long term may have declining rates, but in the shorter term will get a boost from declining interest rates.

Of course, if/when interest rates raise again, the reverse may very well hold true.

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whodidntante
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Re: Prime Money Market or Total Bond Market

Post by whodidntante » Thu Jul 04, 2019 4:41 pm

I don't think duration risk is worth taking right now. There are those who disagree. It's your money so decide which camp you are in.

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Wiggums
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Re: Prime Money Market or Total Bond Market

Post by Wiggums » Thu Jul 04, 2019 4:42 pm

the duration of the bond fund is longer than a money market fund which will have better returns over long periods of time. Right now the rate of return is close but it will not always be that way. I personally would not sell my existing bond fund to switch to a money market fund because I have a long term view of my investments. So you might do better over the short term, but I don’t believe this will be true over the long haul.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Thu Jul 04, 2019 4:45 pm

Rob5TCP wrote:
Thu Jul 04, 2019 4:32 pm
If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline.
Actually, value of total bond market will drop while value of prime money market will be unchanged. What happens is that future yield of total bond market will increase and future yield of prime money market will increase less, but it actually depend on future yield curve.

As such, unless one forecasts a drop in interest rates, there is no advantage in holding total bond market vs. prime money market, only disadvantages.

Of course, switching may imply paying capital gains taxes, but for new contributions there is no such problem.
Last edited by Thesaints on Thu Jul 04, 2019 4:46 pm, edited 1 time in total.

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Re: Prime Money Market or Total Bond Market

Post by Chris K Jones » Thu Jul 04, 2019 4:45 pm

Wiggums wrote:
Thu Jul 04, 2019 4:42 pm
the duration of the bond fund is longer than a money market fund which will have better returns over long periods of time. Right now the rate of return is close but it will not always be that way. I personally would not sell my existing bond fund to switch to a money market fund because I have a long term view of my investments. So you might do better over the short term, but I don’t believe this will be true over the long haul.
I think it depends on what you are doing. If you are a long term, buy and hold investor, then in belongs in a bond fund. If you are chasing returns or need the money for something else in the next few years, then a money market fund is a better choice. I am in this for the long haul so I would not consider moving money from a bond fund to a money market. Best wishes.

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Re: Prime Money Market or Total Bond Market

Post by Wiggums » Thu Jul 04, 2019 4:47 pm

Chris K Jones wrote:
Thu Jul 04, 2019 4:45 pm
Wiggums wrote:
Thu Jul 04, 2019 4:42 pm
the duration of the bond fund is longer than a money market fund which will have better returns over long periods of time. Right now the rate of return is close but it will not always be that way. I personally would not sell my existing bond fund to switch to a money market fund because I have a long term view of my investments. So you might do better over the short term, but I don’t believe this will be true over the long haul.
I think it depends on what you are doing. If you are a long term, buy and hold investor, then in belongs in a bond fund. If you are chasing returns or need the money for something else in the next few years, then a money market fund is a better choice. I am in this for the long haul so I would not consider moving money from a bond fund to a money market. Best wishes.
Well said. I would agree with you.

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Re: Prime Money Market or Total Bond Market

Post by Rob5TCP » Thu Jul 04, 2019 4:51 pm

Rob5TCP wrote:
Thu Jul 04, 2019 4:32 pm
If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline. Prime should reflect declining values more quickly than the Prime. Prime probably won't break the dollar, but the rates will more quickly reflect the lower values.
Total bond, long term may have declining rates, but in the shorter term will get a boost from declining interest rates.

Of course, if/when interest rates raise again, the reverse may very well hold true.
Correction -- if interest rates FALL (as many are predicting right now) .....

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Re: Prime Money Market or Total Bond Market

Post by Artsdoctor » Thu Jul 04, 2019 4:59 pm

Larry Swedroe did a remarkable job in suggesting how to reasonably buy fixed income investments of varying maturities. I think that he attributes at least some of his suggestions to DFA.

He suggested demanding 20 bps per year in order to justify going further out on the yield curve. For example, if a 2-year note is yielding 2%, you'd want a yield of 2.2% for a 3-year note (or 2.4% for a 4-year note, or 2.6% for a 5-year note) to justify extending the maturity. He's recommended using 15 bps for munis.

If you're in the accumulation stage of investing, it's very hard to justify buying something that pays 2.5% for an average maturity of 6 years, for example, when you're going to earn 2.3% in a money market fund.

If you need the income to pay the bills in retirement, you might have different priorities.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Thu Jul 04, 2019 5:04 pm

Artsdoctor wrote:
Thu Jul 04, 2019 4:59 pm
If you're in the accumulation stage of investing, it's very hard to justify buying something that pays 2.5% for an average maturity of 6 years, for example, when you're going to earn 2.3% in a money market fund.

If you need the income to pay the bills in retirement, you might have different priorities.
The choice one has to make is between 100% TBM, yielding 2.5% with a chance of making 6% per future 1% drops in interest rates (or losing 6% if they move 1% higher), or 70% PMM yielding 2.5% with no chance of making, nor losing money, + 30% of HY bonds yielding 5.5%, for instance.

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Re: Prime Money Market or Total Bond Market

Post by MotoTrojan » Thu Jul 04, 2019 5:11 pm

Rob5TCP wrote:
Thu Jul 04, 2019 4:51 pm
Rob5TCP wrote:
Thu Jul 04, 2019 4:32 pm
If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline. Prime should reflect declining values more quickly than the Prime. Prime probably won't break the dollar, but the rates will more quickly reflect the lower values.
Total bond, long term may have declining rates, but in the shorter term will get a boost from declining interest rates.

Of course, if/when interest rates raise again, the reverse may very well hold true.
Correction -- if interest rates FALL (as many are predicting right now) .....
To take this even a step further... people are anticipating a reduction in the federal funds rate but that expectation is already priced into Total Bond. If it becomes truth though Total Bond still would likely go down in yield since the probable expectation now became certainty.

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Re: Prime Money Market or Total Bond Market

Post by nisiprius » Thu Jul 04, 2019 5:11 pm

In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).

But, as you see, that situation didn't last.

Source

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Re: Prime Money Market or Total Bond Market

Post by Sandtrap » Thu Jul 04, 2019 5:13 pm

nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).

But, as you see, that situation didn't last.

Source

Image
Wow!!
A picture is worth a thousand words, indeed!

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Re: Prime Money Market or Total Bond Market

Post by SquawkIdent » Thu Jul 04, 2019 5:17 pm

whodidntante wrote:
Thu Jul 04, 2019 4:41 pm
I don't think duration risk is worth taking right now. There are those who disagree. It's your money so decide which camp you are in.
+1

Call me a market timer but when the yields are paying more of a wider spread (and the NAV is lower in price) I will switch back. Until then the NAV risk is not worth taking IMHO. Similar thing going on in the muni market and I've acted on that also. :sharebeer

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Re: Prime Money Market or Total Bond Market

Post by Daryl » Thu Jul 04, 2019 5:18 pm

Back when the spread was higher, I would keep as much of my fixed income allocation in the Total Bond fund. Now that the spread is smaller, I don't worry as much. I'm content knowing that the money market fund is doing OK. I haven't bought or sold any Total Bond funds recently, nor do I anticipate any trades for the remainder of the year.

TD;DR: I'm a very, very lazy investor!

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Thu Jul 04, 2019 5:19 pm

MotoTrojan wrote:
Thu Jul 04, 2019 5:11 pm
To take this even a step further... people are anticipating a reduction in the federal funds rate but that expectation is already priced into Total Bond. If it becomes truth though Total Bond still would likely go down in yield since the probable expectation now became certainty.
"likely" ?? "By definition", I'd rather say. If interests rates go down TB yield will go down, right ?
nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).
Of course, starting with 2009 rates plunged. How far can they "plunge" today, starting from 2.5% ?

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Re: Prime Money Market or Total Bond Market

Post by MotoTrojan » Thu Jul 04, 2019 5:26 pm

Thesaints wrote:
Thu Jul 04, 2019 5:19 pm
MotoTrojan wrote:
Thu Jul 04, 2019 5:11 pm
To take this even a step further... people are anticipating a reduction in the federal funds rate but that expectation is already priced into Total Bond. If it becomes truth though Total Bond still would likely go down in yield since the probable expectation now became certainty.
"likely" ?? "By definition", I'd rather say. If interests rates go down TB yield will go down, right ?
nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).
Of course, starting with 2009 rates plunged. How far can they "plunge" today, starting from 2.5% ?
Example: If the market expected a 50bp drop in the funds rate but they only reduced them 25bp and signaled that they’d start raising again if a trade deal was reached then it would be totally reasonable to expect some bond funds to increase.

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Re: Prime Money Market or Total Bond Market

Post by RobG » Thu Jul 04, 2019 5:38 pm

Artsdoctor wrote:
Thu Jul 04, 2019 4:59 pm
Larry Swedroe did a remarkable job in suggesting how to reasonably buy fixed income investments of varying maturities. I think that he attributes at least some of his suggestions to DFA.

He suggested demanding 20 bps per year in order to justify going further out on the yield curve. For example, if a 2-year note is yielding 2%, you'd want a yield of 2.2% for a 3-year note (or 2.4% for a 4-year note, or 2.6% for a 5-year note) to justify extending the maturity. He's recommended using 15 bps for munis.
Swedroe's rule is what is driving me towards the money market.
Stay thrifty my friends.

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Re: Prime Money Market or Total Bond Market

Post by retiringwhen » Thu Jul 04, 2019 5:40 pm

MotoTrojan wrote:
Thu Jul 04, 2019 5:26 pm
Thesaints wrote:
Thu Jul 04, 2019 5:19 pm
MotoTrojan wrote:
Thu Jul 04, 2019 5:11 pm
To take this even a step further... people are anticipating a reduction in the federal funds rate but that expectation is already priced into Total Bond. If it becomes truth though Total Bond still would likely go down in yield since the probable expectation now became certainty.
"likely" ?? "By definition", I'd rather say. If interests rates go down TB yield will go down, right ?
nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).
Of course, starting with 2009 rates plunged. How far can they "plunge" today, starting from 2.5% ?
Example: If the market expected a 50bp drop in the funds rate but they only reduced them 25bp and signaled that they’d start raising again if a trade deal was reached then it would be totally reasonable to expect some bond funds to increase.
+1 you have to be right at two points to beat the market on the expected direction of the market. 1.) you have to be ahead of the market and get in before a rate change is anticipated 2.) you need to be at least as smart as the market as to what actually happens when it happens. If either decision point is wrong, you'll lose.

I like the approach from Larry Swedroe noted above, it makes it a relative risk decision, not a market interest rate direction decision.

It is probably harder to predict future interest rates than future returns of the S&P 500!

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Re: Prime Money Market or Total Bond Market

Post by MotoTrojan » Thu Jul 04, 2019 5:46 pm

retiringwhen wrote:
Thu Jul 04, 2019 5:40 pm


It is probably harder to predict future interest rates than future returns of the S&P 500!
Totally possible but at any given time I’ll trust the market for either bonds or equity above anything else.

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Re: Prime Money Market or Total Bond Market

Post by RobG » Thu Jul 04, 2019 5:55 pm

nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).

But, as you see, that situation didn't last.

Source

Image
That's a good illustration. However, if I remember right (questionable) Swedroe's rule pushed you significantly longer during/after the crash. Thus you would have sold the money market, bought longer term, and would up in about the same place. I wonder how his strategy did during that period.
Stay thrifty my friends.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Thu Jul 04, 2019 5:58 pm

RobG wrote:
Thu Jul 04, 2019 5:55 pm
That's a good illustration. However, if I remember right (questionable) Swedroe's rule pushed you significantly longer during/after the crash.
Actually, all the opposite: After the crash longer term rates plunged and short term rates didn't.

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Re: Prime Money Market or Total Bond Market

Post by RobG » Thu Jul 04, 2019 6:35 pm

Thesaints wrote:
Thu Jul 04, 2019 5:58 pm
RobG wrote:
Thu Jul 04, 2019 5:55 pm
That's a good illustration. However, if I remember right (questionable) Swedroe's rule pushed you significantly longer during/after the crash.
Actually, all the opposite: After the crash longer term rates plunged and short term rates didn't.
Hmmm, what Nisiprius's graph suggests is that Swedroe's rule would have pushed you longer in about 2008 so under your scenario it would have been the better strategy. It's really hard to tell because we'd need to add a graph using Swedroe's strategy.
Stay thrifty my friends.

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Re: Prime Money Market or Total Bond Market

Post by retiringwhen » Thu Jul 04, 2019 6:56 pm

MotoTrojan wrote:
Thu Jul 04, 2019 5:46 pm
retiringwhen wrote:
Thu Jul 04, 2019 5:40 pm


It is probably harder to predict future interest rates than future returns of the S&P 500!
Totally possible but at any given time I’ll trust the market for either bonds or equity above anything else.
I completely agree. It is safer to take what the market gives, not try to predict or time what you expect it will do.

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Re: Prime Money Market or Total Bond Market

Post by billfromct » Thu Jul 04, 2019 9:22 pm

The Prime MM Fund should track (up or down interest rate movement) the fed funds rate with a 30-60 day lag because the Prime MM "average maturity" is 31 days and the "weighted average life" is 60 days.

So if the Fed lowers interest rates by .25%, the Prime MM fund "7 day SEC yield" should reflect the the lower fed funds rate in 30-60 days. Same thing if the Fed lowers the fed funds rate by .50%.

If you think the Fed will lower rates you want to stay in the Total Bond Index & not move to the Prime MM Fund.

If you think the Fed will raise interest rates you may want to consider moving some money into the Prime MM fund.

I'm keeping my IRA fixed income allocation at 60% intermediate bonds & 40% short term bonds.

The Vanguard Intermediate Corporate Bond Index Fund (VICSX) has a 10.5% YTD return with a 3.15% SEC yield. I'm sure it will take a bigger hit during the next interest rate hiking period compared to the Total Bond Index, but I'm willing to take that risk for the added return.

BTW, the Total Bond Market Index YTD return is 6.52% with a 2.55% SEC yield.

I guess I was lucky choosing VICSX for my intermediate bond IRA allocation.

bill

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Re: Prime Money Market or Total Bond Market

Post by smectym » Thu Jul 04, 2019 9:39 pm

Many wise comments above, I would add that as to long term bond exposure, consider tilting to treasuries vs. corporate. “Total” bond market just “diversifies” you into a potential spike in corporate bond defaults,and the yield spread (corporate vs. treasury) isn’t attractive.

Also, as to international bonds: the magical “diversification” benefit there is to expose you to trillions of negative-yield European debt. Wonderful! I’d stick to U.S. treasuries

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Re: Prime Money Market or Total Bond Market

Post by sf_tech_saver » Thu Jul 04, 2019 10:04 pm

Just thinking out loud here as I'm learning bond investing myself....

I can understand the money market argument if part of the money is conceptually for an emergency fund within the AA.

For long term investing I believe the conventional wisdom is intermediate-term bonds are the right balance between risks of rates rising/falling as they buffer in both directions. For my conservative 50/50 and slowly trending to 60/40 portfolio with a heavy municipals bond presence, I am willing to buy some 6-7 year duration bonds because I have no plans to sell them.

Unless you plan on investing for 30 days buying the money market seems like market timing to me!

That said having a rebalance cushion and EF in MM when the curves are flat doesn't seem crazy.
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Re: Prime Money Market or Total Bond Market

Post by retiredflyboy » Thu Jul 04, 2019 11:02 pm

Determine the purpose of the money in question and allocate it approximately. If the money that is now in total bond is a part of your fixed income/bond AA leave it alone. If that money is emergency or cash allocation move it to prime .
Facts are stubborn things. Everything works until it doesn’t.

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Re: Prime Money Market or Total Bond Market

Post by venkman » Thu Jul 04, 2019 11:32 pm

RobG wrote:
Thu Jul 04, 2019 4:24 pm
The yields of vanguard's prime money market and total bond index are very close (2.30% and 2.55% respectively), yet the total bond market fund has a duration of 6 years. Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?
When you minimize duration risk, you maximize reinvestment risk.

The current small spread between PMM and TBM exists because the market thinks reinvestment risk is likely to show up soon, and is hedging against it. The market may turn out to be right or wrong, but in no way is PMM the obvious slam-dunk better choice, ex-ante.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Thu Jul 04, 2019 11:51 pm

RobG wrote:
Thu Jul 04, 2019 6:35 pm
Hmmm, what Nisiprius's graph suggests is that Swedroe's rule would have pushed you longer in about 2008 so under your scenario it would have been the better strategy. It's really hard to tell because we'd need to add a graph using Swedroe's strategy.
Swedroe's rule is that one only gets longer maturities if yield is higher (0.20%/yr. IIRC).
The graph does not show yields; it shows returns. Precisely it shows returns for longer maturities spiking up after 2008, due to their yield going down (and therefore their prices going up). In those circumstances, Swedroe's rule would have pushed people to move away from longer maturities, since the yield spread vs. shorter terms was fell..

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Re: Prime Money Market or Total Bond Market

Post by RobG » Fri Jul 05, 2019 12:18 am

Thesaints wrote:
Thu Jul 04, 2019 11:51 pm
RobG wrote:
Thu Jul 04, 2019 6:35 pm
Hmmm, what Nisiprius's graph suggests is that Swedroe's rule would have pushed you longer in about 2008 so under your scenario it would have been the better strategy. It's really hard to tell because we'd need to add a graph using Swedroe's strategy.
Swedroe's rule is that one only gets longer maturities if yield is higher (0.20%/yr. IIRC).
The graph does not show yields; it shows returns. Precisely it shows returns for longer maturities spiking up after 2008, due to their yield going down (and therefore their prices going up). In those circumstances, Swedroe's rule would have pushed people to move away from longer maturities, since the yield spread vs. shorter terms was fell..
I don't see the graph telling that particular story. Yes the graph shows returns, but the slopes of the curves are yield + capital gains. You can see that the yield of the MM went to about zero so you would have been pushed to longer term bonds. The timing of the movement would determine if you came out ahead... it looks to me to be about a wash, but it is hard to say when you would have made a switch.

A more comprehensive graph may confirm what you are saying, but that's not how I read nisiprius's graph.
Stay thrifty my friends.

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Re: Prime Money Market or Total Bond Market

Post by ivk5 » Fri Jul 05, 2019 1:31 am

venkman wrote:
Thu Jul 04, 2019 11:32 pm
RobG wrote:
Thu Jul 04, 2019 4:24 pm
The yields of vanguard's prime money market and total bond index are very close (2.30% and 2.55% respectively), yet the total bond market fund has a duration of 6 years. Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?
When you minimize duration risk, you maximize reinvestment risk.

The current small spread between PMM and TBM exists because the market thinks reinvestment risk is likely to show up soon, and is hedging against it. The market may turn out to be right or wrong, but in no way is PMM the obvious slam-dunk better choice, ex-ante.
+1000

Seems to be very hard for people to grasp that term risk is symmetrical. Instead there seems to be a tendency to anchor arbitrarily on principal protection rather than total return, ie ignoring the reinvestment risk which is magnified by widening gap between bond duration and timing of expected liabilities one is investing for. There is probably also some bias here based on impulse to tinker, desire to optimize / beat the market, fantasy of having more control, etc.

The optimal duration for one’s FI investments is a function of investment objective. It does not change based on slope/convexity of yield curve or any other market conditions.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Fri Jul 05, 2019 4:11 am

RobG wrote:
Fri Jul 05, 2019 12:18 am
I don't see the graph telling that particular story. Yes the graph shows returns, but the slopes of the curves are yield + capital gains. You can see that the yield of the MM went to about zero so you would have been pushed to longer term bonds.
At that time also the longer term bonds yielded zero.

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Re: Prime Money Market or Total Bond Market

Post by rossington » Fri Jul 05, 2019 4:28 am

RobG wrote:
Thu Jul 04, 2019 4:24 pm
The yields of vanguard's prime money market and total bond index are very close (2.30% and 2.55% respectively), yet the total bond market fund has a duration of 6 years. Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?

rg
Contributing to VBTLX and reinvesting dividends long term will prove to be the winner. (Although I do think VMMXX is a solid MM fund and very safe if you you are risk adverse). Some here will disagree but I do think VWETX is worthy of taking a close look at an considering it for part of your bond allocation...it is a very good fund historically.
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Re: Prime Money Market or Total Bond Market

Post by ruralavalon » Fri Jul 05, 2019 4:33 am

billfromct wrote:
Thu Jul 04, 2019 9:22 pm
The Prime MM Fund should track (up or down interest rate movement) the fed funds rate with a 30-60 day lag because the Prime MM "average maturity" is 31 days and the "weighted average life" is 60 days.

So if the Fed lowers interest rates by .25%, the Prime MM fund "7 day SEC yield" should reflect the the lower fed funds rate in 30-60 days. Same thing if the Fed lowers the fed funds rate by .50%.

If you think the Fed will lower rates you want to stay in the Total Bond Index & not move to the Prime MM Fund.

If you think the Fed will raise interest rates you may want to consider moving some money into the Prime MM fund.

I'm keeping my IRA fixed income allocation at 60% intermediate bonds & 40% short term bonds.

The Vanguard Intermediate Corporate Bond Index Fund (VICSX) has a 10.5% YTD return with a 3.15% SEC yield. I'm sure it will take a bigger hit during the next interest rate hiking period compared to the Total Bond Index, but I'm willing to take that risk for the added return.

BTW, the Total Bond Market Index YTD return is 6.52% with a 2.55% SEC yield.

I guess I was lucky choosing VICSX for my intermediate bond IRA allocation.

bill
We have our entire fixed income (bond) allocation in intermediate-term bonds, and will stay there.

We use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX), total return YTD = 8.08%, current SEC Yield = 2.44%.
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averagedude
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Re: Prime Money Market or Total Bond Market

Post by averagedude » Fri Jul 05, 2019 4:40 am

nisiprius wrote:
Thu Jul 04, 2019 5:11 pm
In 2006, I remember quite clearly being amazed by the high yields of money market funds. In 2006, there would have been no obvious reason to invest in Total Bond (orange) instead of Prime Money Market (blue).

But, as you see, that situation didn't last.

Source

Image
This! Also many other developed nations are at negative rates or close to zero. If the US does this, you will be glad that you are in total bond over a money market.

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nisiprius
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Re: Prime Money Market or Total Bond Market

Post by nisiprius » Fri Jul 05, 2019 6:05 am

RobG wrote:
Thu Jul 04, 2019 4:24 pm
... Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?...
Here's another way of looking at it. There's no "right" answer here.

I would argue that if you look at a portfolio without stocks, and look only at risk, the difference in risk between a money market fund and an intermediate-term bond fund is huge. But with stocks, not. if your portfolio has any normal stock allocation, that's going to contribute far more risk than the bond side. Once you have stocks in the picture, the big lever for controlling risk is changing the percentage of stocks. Changing the amount of risk in the safer assets does very little.

Once you're committed to the Monster Thickburger, you don't cut calories effectively by using Sweet-N-Low in your coffee.

Portfolios 1 and 2 are both 60% stocks, specifically VTSMX, the Vanguard Total Stock Market Index Fund.

In portfolio 1 (blue), the low-risk investment is VBMFX, Vanguard Total Bond.
In portfolio 2 (red), I swapped out Total Bond and replaced it with "CASHX," PortfolioVisualizer's cash asset, which is actually Treasury bills and very closely resembles a money market fund.

The main point here is that if it looks to you as if the size of the ups and downs of the two curves are about the same, then replacing a bond fund with a money market fund didn't do much to cut overall portfolio risk.

Since it's a semilog chart, equal fluctuations up and down represent equal percentages of profit and loss. It's obvious that over the time period shown, using a money market fund cut down on return. The question is: did it make the portfolio much less risky? Was the risk reduction worth it? That's a personal question, but we see that, for example, the standard deviation, a measure of volatility, was only reduced from 8.78% to 8.71%--in other words, microscopically. And the drawdown in 2008-2009 was actually very slightly worse in the portfolio with cash, changing from -30.72% to -32.00%.

What happens is that if you have 60% stocks, bonds aren't contributing much risk to speak of, so you can't cut risk much by swapping low-risk bonds for zero-risk money market funds. Second (although I think the importance of this effect is often exaggerated), the independent fluctuation of stocks and bonds means that bond risk does not add to stock risk in a simple way; the risk of the portfolio is less than the weighted average of bond risk and stock risk.

Source

Image
Last edited by nisiprius on Fri Jul 05, 2019 9:44 am, edited 3 times in total.
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nisiprius
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Re: Prime Money Market or Total Bond Market

Post by nisiprius » Fri Jul 05, 2019 6:17 am

Finally, I think you should be considering three options:

1) Total Bond Market or a similar "core" bond fund.
2) A money market mutual fund.
3) A collection of bank CDs, shopping for competitive rates. (By "bank CDs" I mean regular CDs from a bank, not "brokered CDs" which behave more like bonds than like regular bank CDs.
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.

onourway
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Re: Prime Money Market or Total Bond Market

Post by onourway » Fri Jul 05, 2019 6:34 am

FWIW, Vanguard Total Bond has returned over 6% this year. :D

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RobG
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Re: Prime Money Market or Total Bond Market

Post by RobG » Fri Jul 05, 2019 9:17 am

Thanks for all the responses. I’m just giving a little kickback to keep you on your toes. Keep discussing.
Stay thrifty my friends.

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RobG
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Re: Prime Money Market or Total Bond Market

Post by RobG » Fri Jul 05, 2019 10:03 am

Nisiprius - your graphs are great but they don't show the results of the Swedroe strategy. (Your analysis on risk is a good observation... I guess that makes this more of an academic exercise when the yield curve is inverted.)

Thesaints - 30 treasuries didn't go to zero. They never got below 2.5%, and that was a short period of time. See link below (ctrl-left mouse to increase range to include 2008).

https://finance.yahoo.com/chart/%5ETYX# ... In19fX0%3D
Stay thrifty my friends.

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Re: Prime Money Market or Total Bond Market

Post by RobG » Fri Jul 05, 2019 10:48 am

OK, I looked at historical yields for money market and total bond using Vanguard's site. If you used Swedroe's strategy you would have switched from money market to total bond in April of 2008. However, according to Nisiprius's graph it didn't matter which fund you were in prior to April 2008 so the returns would have been really close with either strategy. Therefore for returns it didn't matter, but if you believe money markets are less risky then Swedroe's strategy would have had lower risk, albeit probably not much lower and that risk didn't show up in 2008.
Stay thrifty my friends.

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Artsdoctor
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Re: Prime Money Market or Total Bond Market

Post by Artsdoctor » Fri Jul 05, 2019 12:09 pm

Interesting debate. I like having a plan like anyone else. At some point, I personally step back and ask myself if my next step makes sense.

Today, the 3-month treasury bill is yielding 2.22%. The 10-year bond is yielding 2.04%. You can say what you will regarding inverted yield curves, but I would not personally buy a 10-year treasury bond at this time with rates like this. One can continue to monitor and compare on a monthly or quarterly basis, but at some point, common sense has to at least be an integral part of decision-making.

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Re: Prime Money Market or Total Bond Market

Post by mptfan » Fri Jul 05, 2019 12:27 pm

Rob5TCP wrote:
Thu Jul 04, 2019 4:32 pm
If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline. Prime should reflect declining values more quickly than the Prime. Prime probably won't break the dollar, but the rates will more quickly reflect the lower values.
I think you have that backwards, if interest rates rise, then the value of the total bond market bond fund will decrease in value, while the money market fund will remain at $1 per share.

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Re: Prime Money Market or Total Bond Market

Post by mptfan » Fri Jul 05, 2019 12:31 pm

sf_tech_saver wrote:
Thu Jul 04, 2019 10:04 pm
For long term investing I believe the conventional wisdom is intermediate-term bonds are the right balance between risks of rates rising/falling as they buffer in both directions.
Some people do believe that, but I would not go so far as to say it is conventional wisdom because some people believe that you should match your bond duration to your investment time horizon and still others believe that you should take all of your risks on the equity side and only invest in short term treasury bonds on the bond side. And there are others who follow a bond or CD ladder approach. In short, there are a variety of views regarding how best to allocate your fixed income investing and I do not think any one view represents conventional wisdom.

Some suggest that if you are investing for retirement that is 20 years away, it would be appropriate to match your bond duration to the 20 year time horizon. Some go further and point out that your investment time horizon extends far beyond your retirement until your death, and in some cases extends beyond your death if you are investing for your heirs, so for many people your total investment horizon may be 40-50 or more years and within that context it is reasonable to invest in long term bonds for the additional return while ignoring shorter term NAV fluctuations.
Last edited by mptfan on Fri Jul 05, 2019 1:57 pm, edited 7 times in total.

jimkinny
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Re: Prime Money Market or Total Bond Market

Post by jimkinny » Fri Jul 05, 2019 12:34 pm

nisiprius wrote:
Fri Jul 05, 2019 6:17 am
Finally, I think you should be considering three options:

1) Total Bond Market or a similar "core" bond fund.
2) A money market mutual fund.
3) A collection of bank CDs, shopping for competitive rates. (By "bank CDs" I mean regular CDs from a bank, not "brokered CDs" which behave more like bonds than like regular bank CDs.
I would add brokered CDs and bank CDs. Brokered CDs may pay less than bank CDs at various times/most of the time, but it is a bit of a nuisance to open new accounts.

I don't think it is productive to try and time the markets and predict interest rates.

I wonder if Larry Swedroe's suggestion to extend maturities by a year for each 0.20% increase in basis points might be modified in a world where Treasuries yields have been so consistently low over the last 10 years or so. I tend towards sticking with intermediate range CDs.

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Fri Jul 05, 2019 3:28 pm

RobG wrote:
Fri Jul 05, 2019 10:03 am
Thesaints - 30 treasuries didn't go to zero. They never got below 2.5%, and that was a short period of time. See link below (ctrl-left mouse to increase range to include 2008).
Sure, but the graph is for Total Bond Market, which only contains a minimal portion of 30-year bonds.

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Re: Prime Money Market or Total Bond Market

Post by Ferdinand2014 » Fri Jul 05, 2019 3:59 pm

1.) In tax deferred, you start with 100% X available space.
2.) If you place bonds in that X available space, you reduce the amount of compounding tax deferred presumably higher growth with stocks over time.
3.) I combine my fixed income/emergency funds as one and the same because I like simplicity
4.) All of my fixed income is in taxable which gives me access and peace of mind.
5.) To reduce my tax burden with that in mind, I only use T-bills and Fidelity treasury only money market fund (FDLXX) for my fixed income.
6.) My risk is amped up or down based on my stock portfolio.
7.) I view my approach as a barbell of T-bills/MMF on one end and the one low cost S&P 500 index fund (FXAIX) at the other end which to me is a high yield bond with infinity maturity and coupons.

Buffetts barbell:
https://seekingalpha.com/article/423945 ... e-retirees

Buffetts how stocks are similar to bonds:
https://medium.com/the-river-delta/stoc ... 61e5b9aa01

I also realize my viewpoint is not mainstream.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Prime Money Market or Total Bond Market

Post by Thesaints » Fri Jul 05, 2019 4:30 pm

Stocks are not bonds.

Bonds are a covenant, stating "you'll receive this much money on this date". Stocks are a contract certifying fractional ownership of a certain company.

If a company performs very well (in excess of expectations, more properly) stock price will likely go up a lot. If they perform badly, it will likely plunge. If they perform as expected, price will probably be confined within a narrow range.
If you own stocks, performance of the issuing company is of paramount importance.

If you instead own bonds from that same company, it does not matter at all whether they perform surprisingly well, just ok, or mediocrely: You'll still receive the very same amount of money. Performance does not matter as longas it does not become so terrible that money owed to you cannot be repaid.

This is the essential difference between stocks and bonds and the reason why stocks have a higher expected return.

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Re: Prime Money Market or Total Bond Market

Post by welderwannabe » Fri Jul 05, 2019 4:57 pm

RobG wrote:
Thu Jul 04, 2019 4:24 pm
The yields of vanguard's prime money market and total bond index are very close (2.30% and 2.55% respectively), yet the total bond market fund has a duration of 6 years. Since your bonds are supposed to minimize risk, am I right in thinking I ought to move my total bond fund to prime money market?

rg
In the short term based on the state of the market at this time, yes. However, over the long term Intermediate Term Bonds should be the better choice. What you are effectively suggesting is to yield chase/market time. If the Fed ends up cutting a bunch and we end up with the FFR at .5%, you are going to wish you stayed in total bond. Plenty of people made this same suggestion last year when the conventional wisdom was that rates were going to climb. People that held firm on the Intermediate Bond allocation have done well this year. BND is up nicely this year and people that moved their bond allocation into money markets last year worried about rising rate have missed out.

With my cash allocations I do move things around a bit to chase yield, including ultra/short bond funds but the durations are short enough that it makes sense to me. My AA dictates to keep a 5% cash position because cash makes me happy and makes me less likely to play around with the longer term portions of my investments. Therefore the portion of my AA that is for intermediate term bonds stays put.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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