Move from bonds to Money Market,CDs, savings acct, etc.?[UPDATE]

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Watty
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Move from bonds to Money Market,CDs, savings acct, etc.?[UPDATE]

Post by Watty »

I posted an update about what I decided to do at the end of this thread.


I am retired and very much an advocate of using target date funds or a simple three fund portfolio.

In watching the current markets I am not too concerned about my stock index funds because even though they are not performing well they are basically doing what they do and big dips or bear markets are to be expected.

What concerns me is they way interest rates have dropped so much. As interest rates dropped the bond index funds have gone up as I would have expected but with interest rates so low I do not see that they have much room left to go up if rates drop further. As I type this the 10 year treasury is has a yield of about 0.75% so even if it goes to zero or slightly negative there is little upside left. Eventually rates will likely start going up again or if they don't then they would stay near zero for a long time. There seems to be a lot of risk with little chance of getting much reward.

I am thinking about moving away from the bond index funds and basically parking that money in some other sort of fixed income investment like a money market fund, CDs, or savings accounts.

My basic plan has always been to just "stay the course" no matter what but I am having a hard time seeing why it makes sense to stay in bonds right now. As rates get to be near zero maybe it really is "different this time."

Any suggestions about why I should keep my money in bond index funds?
Last edited by Watty on Wed Mar 11, 2020 11:57 am, edited 1 time in total.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by retired@50 »

I understand your concern, and I suppose I share it. However, I'm not ready to act. Since I plan on being an investor in both stocks and bonds for another 30 years or more, the problem is: When would you get back in to bonds?

If you can say when you'd get back in, and actually stick to that, then maybe you have the beginning of a plan...

Regards,
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Third Son »

Rates have been near zero before. What did you do during 2008-2015? I am asking sincerely. I assume that you were working and didn't think about it too much.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by moneyman11 »

If 10 year treasury goes to zero, the rates on your money markets, savings accounts, and CDs won’t be far behind.

The 2008-2015 experience showed us that nimble retail investors had an edge over the big guys if they were willing to move money around chasing bank bonuses and short term teaser rate offerings. It is a hassle though, and if most of your money is in a 401k, it may well be impossible.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by bloom2708 »

Most of our bonds are in Int-Term Treasury Index at Vanguard in Rollover IRAs.

It likely wouldn't be much of a change to have that all be Prime Money Market.

I think it could be some time before rates go up, so perhaps doing nothing is still the best course.

With this loss today I'll probably hit a 5% re-balance band and should take action to right the ship.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Stinky »

Thanks for posting the question.

I’ve been wondering about the exact same thing. Haven’t done anything yet but thinking about it.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Sandtrap »

I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.

And, of course, for those inclined, physically held R/E income property.

j :happy
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by patrick013 »

Well the one year gain on BND is about 11%, part of that a capital
gain with lower tax. CD's are still paying around 2% so taking the
LTCG and using a CD for awhile makes sense. Or wait till later in
the year assuming the LTCG will still increase. Unless you sell the
BND shares you will not realize the LTCG when rates rise in the future.
People routinely sell bonds especially treasuries and treasury funds
for LTCG when market interest rates decrease drastically like this
year.
age in bonds, buy-and-hold, 10 year business cycle
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vineviz
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

Watty wrote: Fri Mar 06, 2020 10:47 am What concerns me is they way interest rates have dropped so much. As interest rates dropped the bond index funds have gone up as I would have expected but with interest rates so low I do not see that they have much room left to go up if rates drop further. As I type this the 10 year treasury is has a yield of about 0.75% so even if it goes to zero or slightly negative there is little upside left. Eventually rates will likely start going up again or if they don't then they would stay near zero for a long time. There seems to be a lot of risk with little chance of getting much reward.
Please keep in mind that everything you know about the futility of being a market timer in stocks applies equally to being a market timer in bonds.

People - even otherwise smart people - have been saying there is "little upside left" in bonds for years (possibly decades) and they've continued to be wrong. Since 2011, a 60/40 portfolio using bonds has compounded at 8.8% while a 60/40 portfolio using cash instruments has compounded at just 5.3%. That's a difference in terminal wealth of nearly 12%, or over two years worth of retirement income.

While I'm not pretending to be a better forecaster than anyone else, I can say that the best way to minimize your interest rate risk and inflation risk is to match your bond holdings to your own investment horizon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Wanderingwheelz »

I exchanged some bonds for stock today, even though it violated my IPS which states to never sell bonds to buy stocks.

This to me just seems to be way, WAY, too overdone but who knows.

But taking my 41% bond allocation to 40% seemed easier done that way than burning up $30,000 of cash that may come in handy if things get really ugly.

If Elon Musk can move the market 1.5% higher with a single 5 word tweet, we’ve got a lot of pent up buying ahead of us.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Ramjet »

Watty wrote: Fri Mar 06, 2020 10:47 am Any suggestions about why I should keep my money in bond index funds?
So you're saying you think the odds are more likely that bond yields rise in a meaningful way as opposed to stay low/fall further?
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by inbox788 »

patrick013 wrote: Fri Mar 06, 2020 3:48 pm Well the one year gain on BND is about 11%, part of that a capital
gain with lower tax. CD's are still paying around 2% so taking the
LTCG and using a CD for awhile makes sense. Or wait till later in
the year assuming the LTCG will still increase. Unless you sell the
BND shares you will not realize the LTCG when rates rise in the future.
People routinely sell bonds especially treasuries and treasury funds
for LTCG when market interest rates decrease drastically like this
year.
Yeah, I just noticed that too. I'm surprised by the double digit move and wonder what it took to get there. That is, what rate dropped suddenly? Fed rate? 10 year? What would a reversal mean? Say when the levels go back to 12 months ago?
vineviz wrote: Fri Mar 06, 2020 4:14 pmPeople - even otherwise smart people - have been saying there is "little upside left" in bonds for years (possibly decades) and they've continued to be wrong.
What would it take for another double digit year? Or simply a 3% gain? Will rates staying relatively flat help achieve that? And if rates did go negative, could that mean many years of double digit growth in bond prices?

I don't mean to go into a discussion unknowns, but I thought bond prices were a function of rates and mostly calculable or estimable. Is there a way to calculate and compare ROI of staying in BND vs buying a 5 year 2% CDs? Where would interest rates (which one) need to be for BND to break even?

Looks like we've had a year that was better for bonds than 2014, and switching to 3% CDs (if available) would have been a good thing back then. [past performance blah blah]
That was five years ago. What about now?
https://thefinancebuff.com/cd-vs-bond-f ... later.html
Last edited by inbox788 on Fri Mar 06, 2020 5:13 pm, edited 1 time in total.
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Watty
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Watty »

Thanks for the feedback. A few comments.
retired@50 wrote: Fri Mar 06, 2020 11:34 am I understand your concern, and I suppose I share it. However, I'm not ready to act. Since I plan on being an investor in both stocks and bonds for another 30 years or more, the problem is: When would you get back in to bonds?

If you can say when you'd get back in, and actually stick to that, then maybe you have the beginning of a plan...
That is a good point. I will have to think about that.
Third Son wrote: Fri Mar 06, 2020 11:37 am Rates have been near zero before. What did you do during 2008-2015? I am asking sincerely. I assume that you were working and didn't think about it too much.
You are right I was still working, I would have to look it up but I would guess that my asset allocation was something like 25% bonds back in 2008 which made it easier to ignore. I am retired now and my 2020
2015 fund is almost 65% bonds now.

https://investor.vanguard.com/mutual-fu ... olio/vtxvx
moneyman11 wrote: Fri Mar 06, 2020 11:44 am If 10 year treasury goes to zero, the rates on your money markets, savings accounts, and CDs won’t be far behind.

The 2008-2015 experience showed us that nimble retail investors had an edge over the big guys if they were willing to move money around chasing bank bonuses and short term teaser rate offerings. It is a hassle though, and if most of your money is in a 401k, it may well be impossible.
I agree that the other rates would also tend to go down but I am more concerned about what happens when interest rate eventually go up. The Vanguard total bond market index fund has a duration of 6.2% so if rates go up or down the mutual fund NAV would be expected go up or down by about 6.2% for each point in interest rate change. With the current low interest rates there is a lot of downside potential so I am not sure that I would be getting paid enough for that risk.

My funds are all in an IRA so it would be difficult to move it around to to get sign up bonuses.
Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.
More to think about. For diversification it might make sense to only move half of the bonds into other fixed income investments.
patrick013 wrote: Fri Mar 06, 2020 3:48 pm Well the one year gain on BND is about 11%, part of that a capital
gain with lower tax. CD's are still paying around 2% so taking the
LTCG and using a CD for awhile makes sense. Or wait till later in
the year assuming the LTCG will still increase. Unless you sell the
BND shares you will not realize the LTCG when rates rise in the future.
People routinely sell bonds especially treasuries and treasury funds
for LTCG when market interest rates decrease drastically like this
year.
That is a good point but my funds are in an IRA so there are not any tax issues.
vineviz wrote: Fri Mar 06, 2020 4:14 pm Please keep in mind that everything you know about the futility of being a market timer in stocks applies equally to being a market timer in bonds.

People - even otherwise smart people - have been saying there is "little upside left" in bonds for years (possibly decades) and they've continued to be wrong.
I agree about the perils of market timing but there is a limit as to how low interest rates can go.
Wanderingwheelz wrote: Fri Mar 06, 2020 4:29 pm I exchanged some bonds for stock today, even though it violated my IPS which states to never sell bonds to buy stocks.

This to me just seems to be way, WAY, too overdone but who knows.
If you have a fixed asset allocation then you would expect to routinely sell bonds to buy stocks to rebalance.

I plan to continue thinking this over and I will likely not make any decisions until at least the middle of next week.
Last edited by Watty on Sun Mar 08, 2020 5:40 pm, edited 1 time in total.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Third Son »

Watty wrote: Fri Mar 06, 2020 5:12 pm Thanks for the feedback. A few comments.
retired@50 wrote: Fri Mar 06, 2020 11:34 am I understand your concern, and I suppose I share it. However, I'm not ready to act. Since I plan on being an investor in both stocks and bonds for another 30 years or more, the problem is: When would you get back in to bonds?

If you can say when you'd get back in, and actually stick to that, then maybe you have the beginning of a plan...
That is a good point. I will have to think about that.
Third Son wrote: Fri Mar 06, 2020 11:37 am Rates have been near zero before. What did you do during 2008-2015? I am asking sincerely. I assume that you were working and didn't think about it too much.
You are right I was still working, I would have to look it up but I would guess that my asset allocation was something like 25% bonds back in 2008 which made it easier to ignore. I am retired now and my 2020 fund is almost 65% bonds now.

https://investor.vanguard.com/mutual-fu ... olio/vtxvx
moneyman11 wrote: Fri Mar 06, 2020 11:44 am If 10 year treasury goes to zero, the rates on your money markets, savings accounts, and CDs won’t be far behind.

The 2008-2015 experience showed us that nimble retail investors had an edge over the big guys if they were willing to move money around chasing bank bonuses and short term teaser rate offerings. It is a hassle though, and if most of your money is in a 401k, it may well be impossible.
I agree that the other rates would also tend to go down but I am more concerned about what happens when interest rate eventually go up. The Vanguard total bond market index fund has a duration of 6.2% so if rates go up or down the mutual fund NAV would be expected go up or down by about 6.2% for each point in interest rate change. With the current low interest rates there is a lot of downside potential so I am not sure that I would be getting paid enough for that risk.

My funds are all in an IRA so it would be difficult to move it around to to get sign up bonuses.
Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.
More to think about. For diversification it might make sense to only move half of the bonds into other fixed income investments.
patrick013 wrote: Fri Mar 06, 2020 3:48 pm Well the one year gain on BND is about 11%, part of that a capital
gain with lower tax. CD's are still paying around 2% so taking the
LTCG and using a CD for awhile makes sense. Or wait till later in
the year assuming the LTCG will still increase. Unless you sell the
BND shares you will not realize the LTCG when rates rise in the future.
People routinely sell bonds especially treasuries and treasury funds
for LTCG when market interest rates decrease drastically like this
year.
That is a good point but my funds are in an IRA so there are not any tax issues.
vineviz wrote: Fri Mar 06, 2020 4:14 pm Please keep in mind that everything you know about the futility of being a market timer in stocks applies equally to being a market timer in bonds.

People - even otherwise smart people - have been saying there is "little upside left" in bonds for years (possibly decades) and they've continued to be wrong.
I agree about the perils of market timing but there is a limit as to how low interest rates can go.
Wanderingwheelz wrote: Fri Mar 06, 2020 4:29 pm I exchanged some bonds for stock today, even though it violated my IPS which states to never sell bonds to buy stocks.

This to me just seems to be way, WAY, too overdone but who knows.
If you have a fixed asset allocation then you would expect to routinely sell bonds to buy stocks to rebalance.

I plan to continue thinking this over and I will likely not make any decisions until at least the middle of next week.
I would be interested in what you do. Please let us know.... 8-)
"A part of all you earn is yours to keep" | | -The Richest Man in Babylon
inbox788
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by inbox788 »

Watty wrote: Fri Mar 06, 2020 5:12 pm
moneyman11 wrote: Fri Mar 06, 2020 11:44 am If 10 year treasury goes to zero, the rates on your money markets, savings accounts, and CDs won’t be far behind.

The 2008-2015 experience showed us that nimble retail investors had an edge over the big guys if they were willing to move money around chasing bank bonuses and short term teaser rate offerings. It is a hassle though, and if most of your money is in a 401k, it may well be impossible.
I agree that the other rates would also tend to go down but I am more concerned about what happens when interest rate eventually go up. The Vanguard total bond market index fund has a duration of 6.2% so if rates go up or down the mutual fund NAV would be expected go up or down by about 6.2% for each point in interest rate change. With the current low interest rates there is a lot of downside potential so I am not sure that I would be getting paid enough for that risk.
In the short term, survey reports the fed funds rate is expected to fall another 0.5 at this month's meeting. Wouldn't that raise bond prices and lower CD rates? If so, switch now, after it's announced, or some time after that? Do the rate anticipate, adjust at announcement or take some time to react before they stabilize at the new equilibrium? How much time?
I agree about the perils of market timing but there is a limit as to how low interest rates can go.
That used to be the thinking, but it's being challenged with negative interest rates. Negative numbers can go to negative infinity, but there must be something stopping that before it get's near there, but -1% has been tested and isn't the limit.

https://www.weforum.org/agenda/2016/11/ ... d-to-know/

Anyway, I'm tempted to lock in an 11% gain for a few years, if not for the hassle of figuring out what, paying taxes, being greedy of maybe repeating or even half that in the next few years, and most of all pure lazyness.
Last edited by inbox788 on Fri Mar 06, 2020 5:27 pm, edited 1 time in total.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

inbox788 wrote: Fri Mar 06, 2020 5:12 pm What would it take for another double digit year? Or simply a 3% gain? Will rates staying relatively flat help achieve that? And if rates did go negative, could that mean many years of double digit growth in bond prices?

I don't mean to go into a discussion unknowns, but I thought bond prices were a function of rates and mostly calculable or estimable. Is there a way to calculate and compare ROI of staying in BND vs buying a 5 year 2% CDs? Where would interest rates (which one) need to be for BND to break even?
Bond prices and bond yield are inextricably linked, for sure. The problem is that accurately predicting changes in either one is pretty much impossible.

So rather than building a portfolio based on guessing the future, why not build it based on things you do you know? Like your investment horizon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Watty »

inbox788 wrote: Fri Mar 06, 2020 5:12 pm What would it take for another double digit year? Or simply a 3% gain? Will rates staying relatively flat help achieve that? And if rates did go negative, could that mean many years of double digit growth in bond prices?

I don't mean to go into a discussion unknowns, but I thought bond prices were a function of rates and mostly calculable or estimable. Is there a way to calculate and compare ROI of staying in BND vs buying a 5 year 2% CDs? Where would interest rates (which one) need to be for BND to break even?
My understanding is that you can estimate how much a bond mutual fund would change in value by looking at the duration of the mutual fund.

The Vanguard Total Bond market index fund has a duration of 6.2 year so if interest rates go down by 1% you would expect a 6.2% gain. If rates go up by 1% then you would expect a 6.2% loss but you would than be getting paid a higher interest rate and would break even in 6.2% years.

In practice it is more complicated since if short term interest rates go down then that might fuel inflation fears so longer term interest rates might actually go up. Inflation in general complicates this since even if inflation is steady if the inflation rate is higher than an interest rate then you would have a negative real interest rate.

Here is an explanation of duration, the first couple of paragraphs seem pretty good but then it get technical and I can't follow the details of what they are saying.

https://www.investopedia.com/terms/d/duration.asp
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by ruralavalon »

What concerns me is they way interest rates have dropped so much. As interest rates dropped the bond index funds have gone up as I would have expected but with interest rates so low I do not see that they have much room left to go up if rates drop further. As I type this the 10 year treasury is has a yield of about 0.75% so even if it goes to zero or slightly negative there is little upside left. Eventually rates will likely start going up again or if they don't then they would stay near zero for a long time. There seems to be a lot of risk with little chance of getting much reward.
This was a similar concern in 2009, low interest rates, the belief that there was not much room to go lower, and the fear of loss when rates eventually rose.

The better choice in my opinion is to stay with a bond fund of your chosen duration, in my case intermediate-term, and not trying to time the bond market.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by inbox788 »

Watty wrote: Fri Mar 06, 2020 5:27 pmThe Vanguard Total Bond market index fund has a duration of 6.2 year so if interest rates go down by 1% you would expect a 6.2% gain. If rates go up by 1% then you would expect a 6.2% loss but you would than be getting paid a higher interest rate and would break even in 6.2% years.

In practice it is more complicated since if short term interest rates go down then that might fuel inflation fears so longer term interest rates might actually go up. Inflation in general complicates this since even if inflation is steady if the inflation rate is higher than an interest rate then you would have a negative real interest rate.
The feds fund rate was about 1% higher a year ago, so that would only suggest a 6% gain, not the 11% we got. Is there a 5% inefficiency that could adjust overnight? Or is something rational that can be attributed to that difference? That's what's puzzling me. I think it's possible the funds rate goes to zero or close to it, so another 1% down, so does that mean BND goes up 6% more? Or maybe that extra 5% is already anticipating that result. Numbers and estimates don't add up for me.

Anyway, if the 0.5 cut is already built in, then when they make the change, the bond prices won't change, but CD rates may go down, so now is the time to switch horses if you're doing it and agree with this line of thinking. Too complicated and risky for me to worry about. Not risk on the return side, since it looks like it might be less risk, but risk in being wrong in many ways.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Lookingforanswers »

This was a similar concern in 2009, low interest rates, the belief that there was not much room to go lower, and the fear of loss when rates eventually rose.The better choice in my opinion is to stay with a bond fund of your chosen duration, in my case intermediate-term, and not trying to time the bond market.
I have been thinking about this as well. One difference from 2009 is that back then we had a normal yield curve -- 10-year rates were longer than short term rates. (https://www.treasury.gov/resource-cente ... &year=2009 ). So, while there was a risk in investing in bonds, you got paid for the risk.

Today, we have an inverted curve -- short term government bond rates are low, but still slightly higher than 10-year rates. And 12-month CD rates are even higher if you look at some of the leading online banks.

So I am not sure I am getting paid for the interest rate risk if I invest in intermediate term bond funds. Instead it seems that one could instead put any excess cash in 12-month CD's, and wait for the yield curve to revert to its normal shape (long-term rates higher than shorter-term rates). That would be the signal that it's OK to go with bonds (answering the question above, 'When do you move back to bonds?').
Last edited by Lookingforanswers on Sun Mar 29, 2020 6:39 pm, edited 1 time in total.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by rossington »

inbox788 wrote: Fri Mar 06, 2020 5:37 pm
Watty wrote: Fri Mar 06, 2020 5:27 pmThe Vanguard Total Bond market index fund has a duration of 6.2 year so if interest rates go down by 1% you would expect a 6.2% gain. If rates go up by 1% then you would expect a 6.2% loss but you would than be getting paid a higher interest rate and would break even in 6.2% years.

In practice it is more complicated since if short term interest rates go down then that might fuel inflation fears so longer term interest rates might actually go up. Inflation in general complicates this since even if inflation is steady if the inflation rate is higher than an interest rate then you would have a negative real interest rate.
The feds fund rate was about 1% higher a year ago, so that would only suggest a 6% gain, not the 11% we got. Is there a 5% inefficiency that could adjust overnight? Or is something rational that can be attributed to that difference? That's what's puzzling me. I think it's possible the funds rate goes to zero or close to it, so another 1% down, so does that mean BND goes up 6% more? Or maybe that extra 5% is already anticipating that result. Numbers and estimates don't add up for me.
Don't forget that 11%+ average annual return includes reinvested dividends and the increase in share price.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by rossington »

Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.

And, of course, for those inclined, physically held R/E income property.

j :happy
As far as the bonds are concerned I agree with Sandtrap here. As Fed rates continue to go lower Investment Grade Corporate Bond funds with higher total returns than treasuries are more attractive for many.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by rossington »

Watty wrote: Fri Mar 06, 2020 10:47 am Eventually rates will likely start going up again or if they don't then they would stay near zero for a long time. There seems to be a lot of risk with little chance of getting much reward.
This recent surprise rate cut could be temporary giving the Fed a little wiggle room.
Once things settle down they could bring the rate back to where it was... gradually or all at once and leave it there. I don't think such a move would rattle the markets for long if at all.
Beyond that the underlying economy is doing well and although it could happen I can't see really any reason for an additional even 1% increase. That would be huge.
I am thinking about moving away from the bond index funds and basically parking that money in some other sort of fixed income investment like a money market fund, CDs, or savings accounts.
At this point total bond should still give a better return in the forseeable future, but maybe move a % to a MM or CD for what it is worth to you.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Phineas J. Whoopee »

Fixed income's role in a portfolio is unchanged. It likely will make little difference, in terms of long-run portfolio value. CDs et al. dampen the portfolio's equity swings just as much as other investment-grade intermediate-term fixed income does.

If your purpose is going for maximum fixed income returns in a short time none of us knows the outcome until it's already happened. You're aware of that. I wrote it for lurkers.

PJW
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by patrick »

Third Son wrote: Fri Mar 06, 2020 11:37 am Rates have been near zero before. What did you do during 2008-2015? I am asking sincerely. I assume that you were working and didn't think about it too much.
Bond yields have never been this low before. The 10-year treasury bond now yields 0.74%, well below the previous low of 1.37% on July 5, 2016. Short-term rates are not at all-time lows -- 1 month treasury bills now yield 0.79% versus 0.27% back then.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by patrick »

vineviz wrote: Fri Mar 06, 2020 4:14 pmPlease keep in mind that everything you know about the futility of being a market timer in stocks applies equally to being a market timer in bonds.

People - even otherwise smart people - have been saying there is "little upside left" in bonds for years (possibly decades) and they've continued to be wrong. Since 2011, a 60/40 portfolio using bonds has compounded at 8.8% while a 60/40 portfolio using cash instruments has compounded at just 5.3%. That's a difference in terminal wealth of nearly 12%, or over two years worth of retirement income.

While I'm not pretending to be a better forecaster than anyone else, I can say that the best way to minimize your interest rate risk and inflation risk is to match your bond holdings to your own investment horizon.
Bonds yielded more than cash until very recently, and so would have won if interest rates merely stayed flat. Back in 2015 I wrote this comment:
The 2% yield on bonds is indeed disastrously low. But the 1% on the savings account is even worse!
Now that situation has reversed. The 10-year treasury bond is yielding only 0.74% while the best bank accounts are up to around 2%. Even if the banks pass through the 0.5% rate cut tomorrow they'll still be paying much more than bonds. At this point bonds will lose if interest rates simply stay where they are.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

patrick wrote: Fri Mar 06, 2020 7:47 pm The 10-year treasury bond is yielding only 0.74% while the best bank accounts are up to around 2%. Even if the banks pass through the 0.5% rate cut tomorrow they'll still be paying much more than bonds. At this point bonds will lose if interest rates simply stay where they are.
There's no way of knowing this, of course, because not only do we not know whether "interest rates simply stay where they are": we also don't know what the banks will do in the future.

When I moved my bond allocation to Vanguard Extended Duration Treasury ETF (EDV) in 2018, this forum was full of people willing to "park" their cash in CDs until bond yields "improved". I have no way of knowing whether what has transpired over the past 15 months will repeat, obviously, but I'd have thought that so many people being so wrong would serve as a wake-up call the bond market timers amongst us.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by patrick »

vineviz wrote: Fri Mar 06, 2020 8:22 pm
patrick wrote: Fri Mar 06, 2020 7:47 pm The 10-year treasury bond is yielding only 0.74% while the best bank accounts are up to around 2%. Even if the banks pass through the 0.5% rate cut tomorrow they'll still be paying much more than bonds. At this point bonds will lose if interest rates simply stay where they are.
There's no way of knowing this, of course, because not only do we not know whether "interest rates simply stay where they are": we also don't know what the banks will do in the future.

When I moved my bond allocation to Vanguard Extended Duration Treasury ETF (EDV) in 2018, this forum was full of people willing to "park" their cash in CDs until bond yields "improved". I have no way of knowing whether what has transpired over the past 15 months will repeat, obviously, but I'd have thought that so many people being so wrong would serve as a wake-up call the bond market timers amongst us.
There is no particular reason to assume interest rates will stay where they are. They could move in either direction. Absent a special ability to see into the bond market's future, current interest rates are all we know.

15 months ago, treasury bonds yielded more than cash. Anyone advocating cash then was advocating the lower-yielding investment.

Today, cash yields more than treasury bonds. Anyone advocating treasury bonds today is doing the same thing.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

patrick wrote: Fri Mar 06, 2020 9:06 pm There is no particular reason to assume interest rates will stay where they are. They could move in either direction. Absent a special ability to see into the bond market's future, current interest rates are all we know.
Focusing solely on current rates is only appropriate if you're matching your asset duration with your investment horizon.

If you're buying a 5-year CD to fund (nominal) expenses you'll incur in precisely 5-years, then you're right.

Otherwise, it's unwise assume (absent a crystal ball) that the CDs will beat bonds over the length of the investment horizon but you DO know that you're taking on more interest rate risk and inflation risk with the CDs.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by patrick »

vineviz wrote: Fri Mar 06, 2020 9:31 pm
patrick wrote: Fri Mar 06, 2020 9:06 pm There is no particular reason to assume interest rates will stay where they are. They could move in either direction. Absent a special ability to see into the bond market's future, current interest rates are all we know.
Focusing solely on current rates is only appropriate if you're matching your asset duration with your investment horizon.

If you're buying a 5-year CD to fund (nominal) expenses you'll incur in precisely 5-years, then you're right.
What if I were funding nominal expenses that I'll incur in precisely 10 years? Choosing the 10-year treasury bond yielding 0.74% is giving up a notable amount of yield in the name of certainty when compared to a 2% deposit account.
Otherwise, it's unwise assume (absent a crystal ball) that the CDs will beat bonds over the length of the investment horizon but you DO know that you're taking on more interest rate risk and inflation risk with the CDs.
Absent a crystal ball, interest rate increases and interest rate decreases both seem possible. Without a crystal ball telling me to weight one more likely than the other, these two possibilities should average out to the current interest rates.

Unless the bonds in question are inflation indexed, they shouldn't be counted on to protect from inflation risk.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by aristotelian »

Moving to MM, CDs, and ST Treasuries seems like the smart play for now, but just a band-aid move. If indeed interest rates are headed to zero, eventually the short end of the curve will catch up. That seems to be what the yield curve is expecting, with 2Y Treasuries even lower than 10Y. With the 2Y having dropped all the way under .5%, that suggests the market must think cash is going to zero.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by anon_investor »

vineviz wrote: Fri Mar 06, 2020 8:22 pm
patrick wrote: Fri Mar 06, 2020 7:47 pm The 10-year treasury bond is yielding only 0.74% while the best bank accounts are up to around 2%. Even if the banks pass through the 0.5% rate cut tomorrow they'll still be paying much more than bonds. At this point bonds will lose if interest rates simply stay where they are.
There's no way of knowing this, of course, because not only do we not know whether "interest rates simply stay where they are": we also don't know what the banks will do in the future.

When I moved my bond allocation to Vanguard Extended Duration Treasury ETF (EDV) in 2018, this forum was full of people willing to "park" their cash in CDs until bond yields "improved". I have no way of knowing whether what has transpired over the past 15 months will repeat, obviously, but I'd have thought that so many people being so wrong would serve as a wake-up call the bond market timers amongst us.
EDV is probably sure helping you sleep well at night right now. :beer
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Watty »

rossington wrote: Fri Mar 06, 2020 6:30 pm
Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.

And, of course, for those inclined, physically held R/E income property.

j :happy
As far as the bonds are concerned I agree with Sandtrap here. As Fed rates continue to go lower Investment Grade Corporate Bond funds with higher total returns than treasuries are more attractive for many.
I don't know how big the risk is but if there are extended shutdowns then it is possible that some corporate bonds will be downgraded or even default. For example corporate bonds issued by airlines or cruise ship companies have additional risk now. A severe recession could hurt bonds in general.

In theory this would already be priced into the bonds but no one really know what the odds are.

I am only looking at buying bond mutual funds so this is not a direct factor for me but people show be aware of it.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by skepticalobserver »

The other day Buffet said on CNBC that in a 1% world you’ll have to live on 1%. I don’t know if he anticipated ZIRP! I suppose online banks will offer relatively attractive rates, but I hate sending $$ out. I like face-to-face with a bank employee should problems arise (and they often do).
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Sandtrap »

Watty wrote: Sat Mar 07, 2020 8:28 am
rossington wrote: Fri Mar 06, 2020 6:30 pm
Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.

And, of course, for those inclined, physically held R/E income property.

j :happy
As far as the bonds are concerned I agree with Sandtrap here. As Fed rates continue to go lower Investment Grade Corporate Bond funds with higher total returns than treasuries are more attractive for many.
I don't know how big the risk is but if there are extended shutdowns then it is possible that some corporate bonds will be downgraded or even default. For example corporate bonds issued by airlines or cruise ship companies have additional risk now. A severe recession could hurt bonds in general.

In theory this would already be priced into the bonds but no one really know what the odds are.

I am only looking at buying bond mutual funds so this is not a direct factor for me but people show be aware of it.
+1
My thoughts as well.
So. . . . .
. . . . where is the "safe harbor" for investments?

j :happy
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by exoilman »

Treasuries are fed and state tax free? If so should one factor that in on purchases of CD's?

Thanks
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by skepticalobserver »

exoilman wrote: Sat Mar 07, 2020 9:12 am Treasuries are fed and state tax free?
Only free of state tax.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by dknightd »

Watty wrote: Fri Mar 06, 2020 5:12 pm
More to think about. For diversification it might make sense to only move half of the bonds into other fixed income investments.
I am also recently retired. Before I retired I realized I was going to have to transition from a saver to a spender. This meant that my investment horizon was changing. Instead of planning for 20-50 years, I was now planning for 0-30 years.

Actually, I realized I had two well defined investment horizons. The time between when I retired and when I claimed SS, and the time between when I retired and when both wife and I were dead (which could be more or less than 30 years. . .)

So I sold some of my stock and bond funds and put the money in short term bonds and Money market (I was also lucky enough to be able to put some of it in a flexible version of the TIAA traditional fund - for now at least, it is hard to beat safe 3% tax deferred). So now I have 2 virtual buckets. One for "short" term needs (getting me to SS) and one for longer term needs.

My short term bucket is invested as though I was saving to buy a house (except it is tax deferred, and I'll be taking money out instead of putting money in). My long term bucket is invested the same way it was before (some stocks, some bonds).

I do not know if this will help with your decision making, but it helped me sort out how to redeploy my retirement savings now that I was actually going have to spend them.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by MikeG62 »

Watty wrote: Fri Mar 06, 2020 10:47 am I am retired and very much an advocate of using target date funds or a simple three fund portfolio.

In watching the current markets I am not too concerned about my stock index funds because even though they are not performing well they are basically doing what they do and big dips or bear markets are to be expected.

What concerns me is they way interest rates have dropped so much. As interest rates dropped the bond index funds have gone up as I would have expected but with interest rates so low I do not see that they have much room left to go up if rates drop further. As I type this the 10 year treasury is has a yield of about 0.75% so even if it goes to zero or slightly negative there is little upside left. Eventually rates will likely start going up again or if they don't then they would stay near zero for a long time. There seems to be a lot of risk with little chance of getting much reward.

I am thinking about moving away from the bond index funds and basically parking that money in some other sort of fixed income investment like a money market fund, CDs, or savings accounts.

My basic plan has always been to just "stay the course" no matter what but I am having a hard time seeing why it makes sense to stay in bonds right now. As rates get to be near zero maybe it really is "different this time."

Any suggestions about why I should keep my money in bond index funds?
Why not move some of the funds you have in the bond index fund to CD's - not all, but some. I look at CD's as the short-end of my Fixed Income exposure (and not cash). Have lot's of them (> $1.0 million worth) at yields ranging from 2.40% to 3.25% (most having been purchased in the last 12-months). In the process of opening an IRA CD at Navy Federal to get in on their 37-month IRA CD special (rate is currently 3.0%). For full disclosure, most of the funds I now have in CD's came from maturing Treasuries (not necessarily from swapping LT for ST fixed income).
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by Jebediah »

patrick wrote: Fri Mar 06, 2020 9:58 pm
vineviz wrote: Fri Mar 06, 2020 9:31 pm
patrick wrote: Fri Mar 06, 2020 9:06 pm There is no particular reason to assume interest rates will stay where they are. They could move in either direction. Absent a special ability to see into the bond market's future, current interest rates are all we know.
Focusing solely on current rates is only appropriate if you're matching your asset duration with your investment horizon.

If you're buying a 5-year CD to fund (nominal) expenses you'll incur in precisely 5-years, then you're right.
What if I were funding nominal expenses that I'll incur in precisely 10 years? Choosing the 10-year treasury bond yielding 0.74% is giving up a notable amount of yield in the name of certainty when compared to a 2% deposit account.
Otherwise, it's unwise assume (absent a crystal ball) that the CDs will beat bonds over the length of the investment horizon but you DO know that you're taking on more interest rate risk and inflation risk with the CDs.
Absent a crystal ball, interest rate increases and interest rate decreases both seem possible. Without a crystal ball telling me to weight one more likely than the other, these two possibilities should average out to the current interest rates.
Correct. It's called expected returns. Expected return of bonds = the coupon. CDs now have higher expected returns at equivalent duration. But they are illiquid. Consider it an illiquidity and hassle premium.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by sabtastic »

While it might be tempting to move $$ to chase short term yields like CDs or MM (my local credit union is offering 2.25 for 14 months!) you have to remember that yields may be going lower, and possibly negative. This means the bonds you are holding will be rising in price.

Also take a few minutes to evaluate risk. FDIC guarantees CDs, but we all know under the hood that the $$ goes straight into home loans/car loans/business loans/consumer credit. If we have a period of debt deflation and these banks go bust you will get your $$ back eventually but it might be months. There is no safer asset than treasuries, especially the intermediate treasuries. Why do you think German and Swiss sovereign debt is so expensive (i.e. negative yield in Euros)

In my mind, something like TBM with lots of AAA is about as risky as I would like to be with $$ needed in the immediate future.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by desiderium »

vineviz wrote: Fri Mar 06, 2020 8:22 pm
patrick wrote: Fri Mar 06, 2020 7:47 pm The 10-year treasury bond is yielding only 0.74% while the best bank accounts are up to around 2%. Even if the banks pass through the 0.5% rate cut tomorrow they'll still be paying much more than bonds. At this point bonds will lose if interest rates simply stay where they are.
There's no way of knowing this, of course, because not only do we not know whether "interest rates simply stay where they are": we also don't know what the banks will do in the future.

When I moved my bond allocation to Vanguard Extended Duration Treasury ETF (EDV) in 2018, this forum was full of people willing to "park" their cash in CDs until bond yields "improved". I have no way of knowing whether what has transpired over the past 15 months will repeat, obviously, but I'd have thought that so many people being so wrong would serve as a wake-up call the bond market timers amongst us.
VIneviz,

Your agnostic perspective on the future yields for bonds, as expressed over the past year or two has proved prescient, and a valuable lesson. With 10 year bond yields at ~2-3 percent, many people thought (incorrectly, it turns out) rates didn't have much room to go down. Can you specifically address the sentiment that with the 10-year at 0.74%, there should now be asymmetry in outcomes, with much less room for rates to to go down vs go up? Thanks.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

desiderium wrote: Sat Mar 07, 2020 10:58 am Can you specifically address the sentiment that with the 10-year at 0.74%, there should now be asymmetry in outcomes, with much less room for rates to to go down vs go up? Thanks.
I'd be reluctant to rush to the conclusion that there is now "asymmetry in outcomes".

I'm wasn't a very good student of macroeconomics, but my view is that economists had historically assumed (rather than substantiated) a so-called zero nominal lower bound (ZNLB) simply because such low interest rates were rare in modern times. I can definitely imagine scenarios in which inflation could either increase or decrease from here, as well as scenarios in which US economic growth accelerates or decelerates from here.

Is the combination of lower inflation (or even outright deflation) and/or an economic recession likely in the US? I have no idea. Is such a thing possible? Absolutely. Do I think I have an informational advantage over the world's investors that I'd be betting against if I tried to time the bond markets? Absolutely not.

So, for me, the best strategy is to minimize my interest rate and inflation risks by matching my portfolio's interest rate and inflation durations as closely as I can. If I do that successfully, I'm in the lucky position of not caring what happens to interest rates in the future.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by abuss368 »

Phineas J. Whoopee wrote: Fri Mar 06, 2020 6:59 pm Fixed income's role in a portfolio is unchanged. It likely will make little difference, in terms of long-run portfolio value. CDs et al. dampen the portfolio's equity swings just as much as other investment-grade intermediate-term fixed income does.

If your purpose is going for maximum fixed income returns in a short time none of us knows the outcome until it's already happened. You're aware of that. I wrote it for lurkers.

PJW
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by exoilman »

skepticalobserver wrote: Sat Mar 07, 2020 9:46 am
exoilman wrote: Sat Mar 07, 2020 9:12 am Treasuries are fed and state tax free?
Only free of state tax.
Thanks, all I needed to do was google it :oops:
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by rossington »

Watty wrote: Sat Mar 07, 2020 8:28 am
rossington wrote: Fri Mar 06, 2020 6:30 pm
Sandtrap wrote: Fri Mar 06, 2020 12:01 pm I'm an advocate for diversification of "fixed" assets in underlying funds and elsewhere.
There are many ways to "ground" a portfolio, everyone is different about that.

IE: Yes. Money Market, CD's, CD Ladders, etc, as well as a diversification of underlying funds to include Investment Grade Corporate Bond Index Funds, etc.

And, of course, for those inclined, physically held R/E income property.

j :happy
As far as the bonds are concerned I agree with Sandtrap here. As Fed rates continue to go lower Investment Grade Corporate Bond funds with higher total returns than treasuries are more attractive for many.
I don't know how big the risk is but if there are extended shutdowns then it is possible that some corporate bonds will be downgraded or even default. For example corporate bonds issued by airlines or cruise ship companies have additional risk now. A severe recession could hurt bonds in general.

In theory this would already be priced into the bonds but no one really know what the odds are.

I am only looking at buying bond mutual funds so this is not a direct factor for me but people show be aware of it.

I just don't understand why you would be worried about a severe recession. The economy is in the best shape it has been in decades.
FWIW defaults have not severly affected the returns of VWETX/VWESX ever as far as I can determine.
I don't see any compelling reason to switch out of TBM.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by mailman781 »

As previously stated many times, as interest rates go down the bond funds share price goes up. So if interest rates continue down and go negative, what will the bond price do then? Surely the price can not still go up.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by inbox788 »

rossington wrote: Fri Mar 06, 2020 6:14 pm
inbox788 wrote: Fri Mar 06, 2020 5:37 pm
Watty wrote: Fri Mar 06, 2020 5:27 pmThe Vanguard Total Bond market index fund has a duration of 6.2 year so if interest rates go down by 1% you would expect a 6.2% gain. If rates go up by 1% then you would expect a 6.2% loss but you would than be getting paid a higher interest rate and would break even in 6.2% years.

In practice it is more complicated since if short term interest rates go down then that might fuel inflation fears so longer term interest rates might actually go up. Inflation in general complicates this since even if inflation is steady if the inflation rate is higher than an interest rate then you would have a negative real interest rate.
The feds fund rate was about 1% higher a year ago, so that would only suggest a 6% gain, not the 11% we got. Is there a 5% inefficiency that could adjust overnight? Or is something rational that can be attributed to that difference? That's what's puzzling me. I think it's possible the funds rate goes to zero or close to it, so another 1% down, so does that mean BND goes up 6% more? Or maybe that extra 5% is already anticipating that result. Numbers and estimates don't add up for me.
Don't forget that 11%+ average annual return includes reinvested dividends and the increase in share price.
I think the reinvested dividends only accounts for 2%. The dividend yield is about 2.5% per Google Finance and probably falling, 2% at Vanguard. There's still a large gap from something else in the increase in share price that's not accounted by the duration estimate/rule of thumb.

https://investor.vanguard.com/etf/profile/BND

Anyway, currently BND is $88 with feds fund rate at 1-1.25%. If they drop the rate 0.5 to 0.5-.075% later this month, does that mean that BND would rise by 3.1% to $90.73? But even if you're right and wait for the price to go up, the CD rates might go down at the same time.

viewtopic.php?f=10&t=292085&start=500
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by sycamore »

mailman781 wrote: Sat Mar 07, 2020 2:40 pm As previously stated many times, as interest rates go down the bond funds share price goes up. So if interest rates continue down and go negative, what will the bond price do then? Surely the price can not still go up.
Yes, it can. And don't call me Shirley.
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Re: Move from bonds to Money Market,CDs, savings acct, etc.?

Post by vineviz »

Jebediah wrote: Sat Mar 07, 2020 10:31 am Correct. It's called expected returns. Expected return of bonds = the coupon. CDs now have higher expected returns at equivalent duration. But they are illiquid. Consider it an illiquidity and hassle premium.
I think I mentioned earlier that this is the case, but it's really only relevant if the duration of the asset (CD or bond) matches the duration of the liability. If the liability is in 10 years, as we were hypothesizing, then the yield on a 5-year CD isn't entirely relevant.

Cash instruments like CDs have an important role in many portfolios, but they don't share all the characteristics of bonds and therefore exchanging from one to the other should be done with full awareness of the many ways that cash instruments are inferior to bonds. Not just the ways they are superior.
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