Bonds for short-term safety & bonds for longterm

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JimmyJammy
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Joined: Sat Oct 26, 2013 1:08 pm

Bonds for short-term safety & bonds for longterm

Post by JimmyJammy »

I’ve trying to decide on which bond funds to get to fulfill the following two needs:

1) Low risk fund for taxable account that is a good alternative to just plain cash.Similar to emergency fund but higher risk is ok.

My default for this has been SHY (short term treasuries)
or Vanguard’s muni money market fund.

I think I need to have about 1 or 2 years salary in such a fund since I’m furloughed and probably won’t go back to a full time job for another year. (Though I can freelance)

Should I consider VGIT (short corporate) or VTIP?
Or how about SUB? (short munis).

2) Longer term fund for tax-protected account
My default for this has been AGG.
I’m 44 and don’t plan to touch it til 70.

Should I consider VGLT? (long term treasuries?)

Should I consider anything else?
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anon_investor
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Re: Bonds for short-term safety & bonds for longterm

Post by anon_investor »

JimmyJammy wrote: Tue Jun 16, 2020 1:52 pm I’ve trying to decide on which bond funds to get to fulfill the following two needs:

1) Low risk fund for taxable account that is a good alternative to just plain cash.Similar to emergency fund but higher risk is ok.

My default for this has been SHY (short term treasuries)
or Vanguard’s muni money market fund.

I think I need to have about 1 or 2 years salary in such a fund since I’m furloughed and probably won’t go back to a full time job for another year. (Though I can freelance)

Should I consider VGIT (short corporate) or VTIP?
Or how about SUB? (short munis).

2) Longer term fund for tax-protected account
My default for this has been AGG.
I’m 44 and don’t plan to touch it til 70.

Should I consider VGLT? (long term treasuries?)

Should I consider anything else?
At today's historically low interest rates, a combination of high yield savings accounts and no penalty CDs at a reputable online bank like Ally, Marcus or CIT would probably be your best bet for you emergency fund. Those will give you FDIC insured 1%+ interest. Short term treasuries (SHY) and even intermediate term treasuries (VGIT) and money market funds are going to only offer you near 0% interest (think 0.1%-0.3%). For an emergency fund, especially if you are furloughed, I would not play around with anything that might fluctuate in value like corporates, VTIP or SUB. It is not like you are getting significantly more interest for the risk you are taking.

AGG is probably fine for your longer term holdings. Personally, I prefer long term treasuries, but I am okay with their volitlity and I have a very equity heavy portfolio (target AA of 90/10).
Topic Author
JimmyJammy
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Joined: Sat Oct 26, 2013 1:08 pm

Re: Bonds for short-term safety & bonds for longterm

Post by JimmyJammy »

Thanks!

Am I misreading the fund stats?

On Yahoo finance it says the Yield on SHY is 1.85%.

That does seem crazy high.

On Bloomberg it says the gross dividend yield is .97%

On Fidelity it says the annualized dividend yield is 1.78%

On Market Watch it says the dividend yield in 1.74%

I’m confused.
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Leif
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Re: Bonds for short-term safety & bonds for longterm

Post by Leif »

30 day SEC yield for SHY is 0.06%. You are probably looking at something like a 12 month trailing yield.
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Ben Mathew
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Re: Bonds for short-term safety & bonds for longterm

Post by Ben Mathew »

If you have a lot of long term bonds, you might want to consider TIPS for inflation protection. Since TIPS are available at roughly the same yield (after inflation adjustment) as nominal treasuries, eliminating inflation and duration risk is basically a free lunch.

Consider the fact that small differences in inflation leads to large differences in the real payout after 30 years. A nominal bond paying out $1000 in 30 years is really paying out, after inflation:

$742 @ 1% inflation per year
$552 @ 2% inflation per year
$412 @ 3% inflation per year

Why take that risk when you don't have to and you aren't being compensated for it?
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anon_investor
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Re: Bonds for short-term safety & bonds for longterm

Post by anon_investor »

JimmyJammy wrote: Tue Jun 16, 2020 2:43 pm Thanks!

Am I misreading the fund stats?

On Yahoo finance it says the Yield on SHY is 1.85%.

That does seem crazy high.

On Bloomberg it says the gross dividend yield is .97%

On Fidelity it says the annualized dividend yield is 1.78%

On Market Watch it says the dividend yield in 1.74%

I’m confused.
You need to look at 30 day SEC yields. That will give you a better idea of what the funds will yield going forward. The yields you are looking at are likely trailing 12 months yields which are going to be much much higher than yields going forward since interest rates have dropped significantly since the start of recent crash.

Yikes, iShares own website is listing the 30 day SEC yield for SHV as of June 15, 2020 as 0.00%. I guess after their 0.15% expense ratio the investor gets nothing...
https://www.ishares.com/us/products/239 ... y-bond-etf
NewBie75
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Re: Bonds for short-term safety & bonds for longterm

Post by NewBie75 »

I am new to this investing and forum. How can I buy these whats the TICKER I need to buy
Ben Mathew wrote: Tue Jun 16, 2020 3:26 pm If you have a lot of long term bonds, you might want to consider TIPS for inflation protection. Since TIPS are available at roughly the same yield (after inflation adjustment) as nominal treasuries, eliminating inflation and duration risk is basically a free lunch.

Consider the fact that small differences in inflation leads to large differences in the real payout after 30 years. A nominal bond paying out $1000 in 30 years is really paying out, after inflation:

$742 @ 1% inflation per year
$552 @ 2% inflation per year
$412 @ 3% inflation per year

Why take that risk when you don't have to and you aren't being compensated for it?
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Ben Mathew
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Re: Bonds for short-term safety & bonds for longterm

Post by Ben Mathew »

NewBie75 wrote: Tue Jun 16, 2020 4:28 pm I am new to this investing and forum. How can I buy these whats the TICKER I need to buy
Ben Mathew wrote: Tue Jun 16, 2020 3:26 pm If you have a lot of long term bonds, you might want to consider TIPS for inflation protection. Since TIPS are available at roughly the same yield (after inflation adjustment) as nominal treasuries, eliminating inflation and duration risk is basically a free lunch.

Consider the fact that small differences in inflation leads to large differences in the real payout after 30 years. A nominal bond paying out $1000 in 30 years is really paying out, after inflation:

$742 @ 1% inflation per year
$552 @ 2% inflation per year
$412 @ 3% inflation per year

Why take that risk when you don't have to and you aren't being compensated for it?
More about TIPS in the Wiki: Treasury Inflation Protected Security
fingoals
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Re: Bonds for short-term safety & bonds for longterm

Post by fingoals »

VBTLX's 30-day SEC yield is currently 1.42%. I realize that it has slightly higher risk than safer options like money market funds, CDs or savings accounts, but it seems to me like a decent option in terms of risk/reward. Based on some recommendations here, I have recently moved my EF from VMFXX to VBTLX. Should I see downward trend somewhere between 2% and 3%, I will switch back to VMFXX or VMMXX. Hope it makes sense.
hudson
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Re: Bonds for short-term safety & bonds for longterm

Post by hudson »

JimmyJammy,

Consider reading 3 books: Bernstein's Four Pillars and Ages of the Investor...also Swedroe's bond book....if you haven't already.
Why? When you're finished you'll have a good feel about what type of fixed income fits your situation.

I think that long bonds can have a place....but for the experienced and advanced investor.
dbr
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Re: Bonds for short-term safety & bonds for longterm

Post by dbr »

There is little to gain by changing anything. You don't need to fish around for a "better" place for your short term savings and you already have a perfectly serviceable choice in your longer term portfolio.

There are more choices in bonds than there are sufficient grounds for preferring some choices over others so you will never be able to be comfortable that you can prove that your choice is right. The upside is that you won't be able to show that your choice is wrong.
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