Is it time to hold cash instead of Bonds?

[stocknoob4111]

VBTLX has a SEC yield of 1.14% and heading lower daily, VBILX has a SEC yield of 0.99%.

Marcus high yield (and other high yield savings) has a rate of 0.8%. However the cash position does not have term risk. The bonds have significant interest rate risk if rates rise due to higher inflation. Why does it make sense to hold Intermediate term bonds vs cash? Have bond funds like VBTLX which are Intermediate term become obsolete in the new era? Is it perhaps better to just hold cash as the yield spread is very close. The risk adjusted return of VBTLX seems to be less than cash now. It is dysfunctional and trying to make sense of it.

If we return to an era of reasonable rates one could always head back to to Intermediate bonds but for now it does not seem to make much sense to me other than following some historical advice that is possibly irrelevant to the new era.

[000]

I am currently choosing to hold cash and no bonds right now.

But to play devil's advocate: what if real interest rates continue to drop? Bond holders will still get the higher yields, the yield on cash will go down immediately.

[anon_investor]

VBTLX has a SEC yield of 1.14% and heading lower daily, VBILX has a SEC yield of 0.99%.

Marcus high yield (and other high yield savings) has a rate of 0.8%. However the cash position does not have term risk. The bonds have significant interest rate risk if rates rise due to higher inflation. Why does it make sense to hold Intermediate term bonds vs cash? Have bond funds like VBTLX which are Intermediate term become obsolete in the new era? Is it perhaps better to just hold cash as the yield spread is very close. The risk adjusted return of VBTLX seems to be less than cash now. It is dysfunctional and trying to make sense of it.

If we return to an era of reasonable rates one could always head back to to Intermediate bonds but for now it does not seem to make much sense to me other than following some historical advice that is possibly irrelevant to the new era.

The question is really WHEN will interest rates increase. It may take YEARS, in which case the additional yield offered by bonds over cash may add up. Something similar happened after the Great Financial Crisis, where holding intermediate bonds significantly out performed cash as interest rates did not go up for YEARS.

[Leif]

I was wondering about that as well. Most of my fixed income is in TBM. I guess leave it there. I have a 3%+ CD due 2023. I'll worry about it then, but I'll probably put it in the TBM at that time, assuming things remain about the same. Actually I wish rates would go up. Although a hit to my bond funds, they could start to have a decent yield.

I think the important question is "When do I need the money". If the answer is 5+ years I'll go with the TBM. I have some money in short term bonds, so if rates start going up, and prices drop on my TBM I can take a look at the ST bonds. If inflation hits I have some TIPS.

Nice to have choices.

[Jerry55]

I've been wondering about this conundrum as well. I was happily moving in and out of 26 wk Treasuries (6 of them, one every month) up until March or April, and my yield plummeted down to ~ 0.14%, down from around 1.5 to 1.9%. I'm now moving out into Capitol One 360 that is at 1%. Better safe than sorry. This is an emergency fund, so no hurry.

I hope things change, but, my other investments are going well, so far, and I'll be watching this thread to follow.....

[Doctor Rhythm]

I'm now moving out into Capitol One 360 that is at 1%.

Sadly - it’s down to 0.8% now.

[milktoast]

I’ve been thinking this way for a few weeks. Would like to go to a shorter duration.

One wrinkle is taxes. My 401k offers VBTLX (total bond) and PHIYX (high yield) and a money market. I could reduce duration by switching to high yield. But money market is under 0.1%

So that means taxable. And at a 37% + 3.7% marginal rate, a 0.8% savings account or CD is down to 0.48%.

So... still in total bond. Can’t figure out a way to get to shorter duration without taking a more default risk or giving up yield.

[CurlyDave]

Right now I am holding ICSH (ultra short term bond). Looks like it is getting slightly better return than any of the proposed alternatives.

Can anyone tell me if this is a bad idea?

[RetiredAL]

Don't be so quick to make snap judgement based only on the SEC 30 day data. There is more going on in bonds.

The most recent payouts to my FXNAX ( Fido Total Bond ) was 2.7% (annualized) and my ISTB ( I-Share 1 - 5yr bond) was 2.1% (annualized) vs their listed SEC 30Day of 1.2 and 1.1 respectively. I assume the reason they are higher is because some bonds were sold, which I know can't go on forever, but I'll take it for now.

I would think VG's Tot Bond should be acting similar, but I don't own any.

So I'm ok with my bonds, but I will admit I'm apprehensive over bond rates if they ever start climbing quickly, but that worry has been there much discussed since 2008 and has not materialized yet.

I too lament that my 2.8 -3% CD's have or are coming due soon. In hindsight, I should have bought more, but that 3% spike didn't last long.

[annu]

I have been moving to long term treasuries gradually, currently @ 70/30, 40% LT, 70% TBM. All new only LT, it really work opposite to Stocks, days, stocks go up, it goes down and otherway around.

[anoop]

boglehead answer: check your IPS.
market timer answer: it depends on where you think rates are headed. up -> cash. down -> stay in bonds.

[grabiner]

Don't be so quick to make snap judgement based only on the SEC 30 day data. There is more going on in bonds.

The most recent payouts to my FXNAX ( Fido Total Bond ) was 2.7% (annualized) and my ISTB ( I-Share 1 - 5yr bond) was 2.1% (annualized) vs their listed SEC 30Day of 1.2 and 1.1 respectively. I assume the reason they are higher is because some bonds were sold, which I know can't go on forever, but I'll take it for now.

The payments were higher because the distributions on a bond are based on the yield when the bond was purchased, not the current yield. If a bond's coupon payments are more than the market rate, the bond is currently worth more than its par value, and the value will decline over time.

SEC Yield on the wiki has examples which show how this works. A bond with ten years to maturity, a par value of $1000, a current value of $1090.23, and a $15 coupon payment every six months, is guaranteed to lose $90.23 in value over the next ten years. It has a 2.75% distribution yield ($30/1090.23) but a 2.00% yield to maturity. A bond with ten years to maturity, a par value of $1000, and a $10 coupon payment every six months, would be priced at $1000, and would have no loss in value but a smaller annual payment for the same 2.00% yield.

If bonds are sold, you may also get a distribution; that distribution would be a capital gain rather than a dividend.

[gmaynardkrebs]

I'm sticking with Vanguard's Treasury MM for now, and a CapitalOne savings account that was 1.2% when I opened it and is at .8% now and headed down I am sure. Not the golden age for savers...

[whodidntante]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now. I also chase bank bonuses with money in taxable. It's pretty easy to get over 4% but is not fully passive. For example, I am currently doing a bonus that pays $500 for a 10k deposit for 30 days. That's 60% interest although I won't run it that close to the edge so call it 50% interest. Yes, please.

[Kookaburra]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now. I also chase bank bonuses with money in taxable. It's pretty easy to get over 4% but is not fully passive. For example, I am currently doing a bonus that pays $500 for a 10k deposit for 30 days. That's 60% interest although I won't run it that close to the edge so call it 50% interest. Yes, please.

Sweet deal! Which bank is it?

[whodidntante]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now. I also chase bank bonuses with money in taxable. It's pretty easy to get over 4% but is not fully passive. For example, I am currently doing a bonus that pays $500 for a 10k deposit for 30 days. That's 60% interest although I won't run it that close to the edge so call it 50% interest. Yes, please.

Sweet deal! Which bank is it?

It's a regional bank. Check doctorofcredit for deals that are available to you.

[gmaynardkrebs]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now.

Would you still use the SVF if there were a Treasury MM option in your 401K paying .10% ? Just curious...we use a SVF in in my wife's 401K, and I'm almost glad there's no Treasury MM option, because I'd probably go with it because I'm...well, crazy.

[whodidntante]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now.

Would you still use the SVF if there were a Treasury MM option in your 401K paying .10% ? Just curious...we use a SVF in in my wife's 401K, and I'm almost glad there's no Treasury MM option, because I'd probably go with it because I'm...well, crazy.

I would. The SVF I'm using is conservatively managed and has full liquidity. It uses a synthetic GIC structure with multiple insurers. I doubt I would drop a couple million into a SVF that is based on the pinky swear of a single insurance company or requires annuitization, however.

[BolderBoy]

VBTLX has a SEC yield of 1.14% and heading lower daily, VBILX has a SEC yield of 0.99%.

VBTLX's total return YTD is >7%.

Does that matter to you?

[whodidntante]

VBTLX has a SEC yield of 1.14% and heading lower daily, VBILX has a SEC yield of 0.99%.

VBTLX's total return YTD is >7%.

Does that matter to you?

Maybe. How does one purchase the YTD return after it happened?

[RetiredAL]

I moved all the money from an aggregate bond fund to the stable value fund of my 401k, which at least yields over 2% for now. I also chase bank bonuses with money in taxable. It's pretty easy to get over 4% but is not fully passive. For example, I am currently doing a bonus that pays $500 for a 10k deposit for 30 days. That's 60% interest although I won't run it that close to the edge so call it 50% interest. Yes, please.

Unfortunately, when I retired and roll-over the 401K, I lost the opportunity to use a "Stable Value" fund.

Just for giggles, I looked at the 401K NetBenefits screens, and the old "Stable Value" from an insurance company is no longer offered, it's now a CIT and does not have a guaranteed fixed rate for the year. So, it's about the same as what I get with Fido's FXNAX fund.

[RetiredAL]

Don't be so quick to make snap judgement based only on the SEC 30 day data. There is more going on in bonds.

The most recent payouts to my FXNAX ( Fido Total Bond ) was 2.7% (annualized) and my ISTB ( I-Share 1 - 5yr bond) was 2.1% (annualized) vs their listed SEC 30Day of 1.2 and 1.1 respectively. I assume the reason they are higher is because some bonds were sold, which I know can't go on forever, but I'll take it for now.

The payments were higher because the distributions on a bond are based on the yield when the bond was purchased, not the current yield. If a bond's coupon payments are more than the market rate, the bond is currently worth more than its par value, and the value will decline over time.

SEC Yield on the wiki has examples which show how this works. A bond with ten years to maturity, a par value of $1000, a current value of $1090.23, and a $15 coupon payment every six months, is guaranteed to lose $90.23 in value over the next ten years. It has a 2.75% distribution yield ($30/1090.23) but a 2.00% yield to maturity. A bond with ten years to maturity, a par value of $1000, and a $10 coupon payment every six months, would be priced at $1000, and would have no loss in value but a smaller annual payment for the same 2.00% yield.

If bonds are sold, you may also get a distribution; that distribution would be a capital gain rather than a dividend.

grabiner - that is why I don't understand the many posters who are screaming about low 30day yields. I guess they are thinking that is what their payment yield is going to be. Now, at some time in the future, that it may flip as rates rise -- the doom-sayers have been saying it for 10+ years and are still waiting.

[Van]

Right now I am holding ICSH (ultra short term bond). Looks like it is getting slightly better return than any of the proposed alternatives.

Can anyone tell me if this is a bad idea?

I'm not a bond guru, so I won't attempt to offer an opinion on whether this is a bad idea or not. I sure hope some folks that are more knowledgeable do address your question. I have put quite a bit of money into the Vanguard Ultra-Short Term Bond Fund in the last couple of months.

[stocknoob4111]

Does that matter to you?

No because that is the past not the future... I only care about forecast for the future

[hudson]

Cash instead of bonds?
It depends on the definition of cash. To me, cash is actual currency, checking, or savings accounts.
For a few months, I plan to put dividends and interest into cash accounts. Otherwise, I'm not making any moves.
I like CDs, high yield savings, and Vanguard's Intermediate Muni Fund.
Bottom Line: I'm not making any changes because of low rates; when I have money to invest, I search for the best available rates.

[student]

I'm now moving out into Capitol One 360 that is at 1%.

Sadly - it’s down to 0.8% now.

Citi is still at 1.05%. (It only applies in certain areas, I think places with no citi branches.)

[grabiner]

Don't be so quick to make snap judgement based only on the SEC 30 day data. There is more going on in bonds.

The most recent payouts to my FXNAX ( Fido Total Bond ) was 2.7% (annualized) and my ISTB ( I-Share 1 - 5yr bond) was 2.1% (annualized) vs their listed SEC 30Day of 1.2 and 1.1 respectively. I assume the reason they are higher is because some bonds were sold, which I know can't go on forever, but I'll take it for now.

The payments were higher because the distributions on a bond are based on the yield when the bond was purchased, not the current yield. If a bond's coupon payments are more than the market rate, the bond is currently worth more than its par value, and the value will decline over time.

SEC Yield on the wiki has examples which show how this works. A bond with ten years to maturity, a par value of $1000, a current value of $1090.23, and a $15 coupon payment every six months, is guaranteed to lose $90.23 in value over the next ten years. It has a 2.75% distribution yield ($30/1090.23) but a 2.00% yield to maturity. A bond with ten years to maturity, a par value of $1000, and a $10 coupon payment every six months, would be priced at $1000, and would have no loss in value but a smaller annual payment for the same 2.00% yield.

If bonds are sold, you may also get a distribution; that distribution would be a capital gain rather than a dividend.

grabiner - that is why I don't understand the many posters who are screaming about low 30day yields. I guess they are thinking that is what their payment yield is going to be. Now, at some time in the future, that it may flip as rates rise -- the doom-sayers have been saying it for 10+ years and are still waiting.

And my point is that SEC yield is that it corresponds to the total expected return of your fund, not the distributions, which is the more relevant number. In the web example, the bond worth $1090.23 will pay a $15 dividend in six months, but will be worth $1086.13 if rates don't change, so your six-month return is 1%, the same as for the par bond.

The distribution yield measures the type of returns (dividends versus capital gains; if rates fall, all bonds will have capital gains, but premium bonds will have smaller gains), which matters in a taxable account.

[22twain]

There's still some runway left before Total Bond Market (VBTLX) careens off the end and into the ditch. Its distribution yield was 2.14% last month, down from about 2.6% at the beginning of the year. At this rate it might hit 1% sometime late next year.

https://investor.vanguard.com/mutual-fu ... ions/vbtlx

It still has all those older bonds that haven't matured yet.

[protagonist]

FWIW, as my CD's mature I am holding cash in an online bank account that the last I checked (2 days ago) was still offering 1.01%.
I figure that is probably beating inflation by 1% or so annualized and offers maximum flexibility in case rates go up or a great CD promo appears on the market.
I would not invest in any bonds today, other than I-bonds.

[ChiKid24]

I've been playing the bank bonus game as a way to guarantee higher yield than CDs and HY Savings accounts.

Example: I put $50k into Cap One Savings that pays a $500 bonus by keeping the money there for three months. Its FDIC insured, doesn't impact my credit and the interest rate was at 1.3% when I opened it (though now down to 0.8%). Once the bonus pays, I'll close the account and chase a bonus else where.

Year to date I've earned $1,700 in bonuses alone through Chase, Simple, Citi, PNC, Marcus. Will be $2,200 once the Capital One bonus pays out next year. It's a little work, but all of it is done from the comfort of my home using my laptop.

[Doctor Rhythm]

I'm now moving out into Capitol One 360 that is at 1%.

Sadly - it’s down to 0.8% now.

Citi is still at 1.05%. (It only applies in certain areas, I think places with no citi branches.)

Citibank also offers a $400 bonus on a $15000 deposit x 60 days with no direct deposit required. We opened two accounts last month. The interest was something trivial though, so we’ll bail out after the bonus materializes.

[Stef]

The question is really WHEN will interest rates increase. It may take YEARS, in which case the additional yield offered by bonds over cash may add up. Something similar happened after the Great Financial Crisis, where holding intermediate bonds significantly out performed cash as interest rates did not go up for YEARS.

Aren't you holding bonds for reducing risk of your portfolio?

What's the point of the possible return if interest rates keep dropping when an increase of interest rates might crush your portfolio?

[palanzo]

The question is really WHEN will interest rates increase. It may take YEARS, in which case the additional yield offered by bonds over cash may add up. Something similar happened after the Great Financial Crisis, where holding intermediate bonds significantly out performed cash as interest rates did not go up for YEARS.

Aren't you holding bonds for reducing risk of your portfolio?

What's the point of the possible return if interest rates keep dropping when an increase of interest rates might crush your portfolio?

In say a 60:40 portfolio, rising rates are not going to "crush" your portfolio.

[Stef]

In say a 60:40 portfolio, rising rates are not going to "crush" your portfolio.

A sudden increase in interest rates would lead to a selloff in stocks due to higher demand in bonds and your existing bonds would lose value. You lose on both sides.

[000]

In say a 60:40 portfolio, rising rates are not going to "crush" your portfolio.

A sudden increase in interest rates would lead to a selloff in stocks due to higher demand in bonds and your existing bonds would lose value. You lose on both sides.

Yep. But most seem to think a rising rate scenario cannot happen.

[palanzo]

In say a 60:40 portfolio, rising rates are not going to "crush" your portfolio.

A sudden increase in interest rates would lead to a selloff in stocks due to higher demand in bonds and your existing bonds would lose value. You lose on both sides.

A sudden and very large increase might do that. I agree. How likely is that? A slow increase in rates will not crush your portfolio. Look back over the last 20 years. We have had rising rates before.

[Stef]

In say a 60:40 portfolio, rising rates are not going to "crush" your portfolio.

A sudden increase in interest rates would lead to a selloff in stocks due to higher demand in bonds and your existing bonds would lose value. You lose on both sides.

A sudden and very large increase might do that. I agree. How likely is that? A slow increase in rates will not crush your portfolio. Look back over the last 20 years. We have had rising rates before.

Yeah 1940-1980 wasn't really a great time to be an investor? Rising interest rates suck.

[jschert]

I have about a million in cash in the money market. Is that a wise thing to do? I invested about $180,000 in Vanguard Index Funds when the market dropped in March. I am up by almost $50,000 approaching a total of $230,000. 180,000 turning into 230,000. All in safe investments. I keep waiting for another dip to jump in and buy in a bear market. Any thoughts? I have about $1.1M in my TIAA account which is doing great. I don't have any debt.

[Jerry55]

Citibank also offers a $400 bonus on a $15000 deposit x 60 days with no direct deposit required. We opened two accounts last month. The interest was something trivial though, so we’ll bail out after the bonus materializes.

Thanks. I input my Zip code and Citi says I'm ineligible. (Chicago area)

Not worth chasing a 0.25% rate increase anymore now. Guess I'll stand pat.

[MikeG62]

I hold a variety of fixed income investments, ranging from bond funds, to individual muni bonds to CD's. I have not added to my bond holdings in a long while. All additions to fixed income have been going into CD's (for well over the last year). I search for and wait out promotional rate CD's and swiftly move funds in before the promotions end.

[whodidntante]

I'm now moving out into Capitol One 360 that is at 1%.

Sadly - it’s down to 0.8% now.

Citi is still at 1.05%. (It only applies in certain areas, I think places with no citi branches.)

Citibank also offers a $400 bonus on a $15000 deposit x 60 days with no direct deposit required. We opened two accounts last month. The interest was something trivial though, so we’ll bail out after the bonus materializes.

I just completed this bonus. It went fine for me. People seem to have various complaints about Citi. I just went in assuming they are the worst bank in the world. Low expectations are the key to happiness.

Currently executing a scheme to rescue my 10k (avoid fees) and close the account without visiting a branch. This has been easy at every bank I've dealt with except for a few regionals, but with Citi, you need a plan.

[atdharris]

I still allocate about 10% of my portfolio to LTTs, but I am also considering moving to cash as well. They're up nearly 30% for me, but I wonder how much longer they have to run with yields so low.

[Doctor Rhythm]

I'm now moving out into Capitol One 360 that is at 1%.

Sadly - it’s down to 0.8% now.

Citi is still at 1.05%. (It only applies in certain areas, I think places with no citi branches.)

Citibank also offers a $400 bonus on a $15000 deposit x 60 days with no direct deposit required. We opened two accounts last month. The interest was something trivial though, so we’ll bail out after the bonus materializes.

I just completed this bonus. It went fine for me. People seem to have various complaints about Citi. I just went in assuming they are the worst bank in the world. Low expectations are the key to happiness.

Currently executing a scheme to rescue my 10k (avoid fees) and close the account without visiting a branch. This has been easy at every bank I've dealt with except for a few regionals, but with Citi, you need a plan.

Don’t they simply let you withdraw your remaining balance via ACh after the bonus shows up and then request the account be closed? My plan was just to pull (as opposed to push) the balance back into the CapOne360 account that I originally used to fund the Citi accounts. Would be annoying to have to show face in a branch.

[whodidntante]

Don’t they simply let you withdraw your remaining balance via ACh after the bonus shows up and then request the account be closed? My plan was just to pull (as opposed to push) the balance back into the CapOne360 account that I originally used to fund the Citi accounts. Would be annoying to have to show face in a branch.

Yeah, you can try that. It would work if you were not dealing with the worst bank in the world.

I have seen reports similar to the following:
1. Hero withdraws his/her/their money.
2. Hero closes account.
3. Villain posts interest to account and reopens it.
4. Villain charges low balance fee because account only has 20 cents in it.
5. Villain charges overdraft fee.
6. Hero goes on with life, blissfully unaware of any problem.

Like I said, you need a plan.

[AerialWombat]

We are literally seeing this exact same thread being re-born every few days now. Is this how long-term BH members felt in 2008?

I will continue to carry the pro-bond banner. Nobody can predict the future. Whatever your AA was yesterday is what it should be tomorrow. Stay the course. This time is NOT different. Etc., etc.

[AerialWombat]

Does that matter to you?

No because that is the past not the future... I only care about forecast for the future

But neither you, nor I, can forecast the future.

[Doctor Rhythm]

I have seen reports similar to the following:
1. Hero withdraws his/her/their money.
2. Hero closes account.
3. Villain posts interest to account and reopens it.
4. Villain charges low balance fee because account only has 20 cents in it.
5. Villain charges overdraft fee.
6. Hero goes on with life, blissfully unaware of any problem.

Like I said, you need a plan.

Thanks! In your example, though, could villain collect a $25 low balance fee if hero only had 20 cents in their account? What’s the harm to hero in step 6?

[whodidntante]

I have seen reports similar to the following:
1. Hero withdraws his/her/their money.
2. Hero closes account.
3. Villain posts interest to account and reopens it.
4. Villain charges low balance fee because account only has 20 cents in it.
5. Villain charges overdraft fee.
6. Hero goes on with life, blissfully unaware of any problem.

Like I said, you need a plan.

Thanks! In your example, though, could villain collect a $25 low balance fee if hero only had 20 cents in their account? What’s the harm to hero in step 6?

A derogatory remark on your ChexSystems report, which is pretty much bonus game over for Hero. Blissfully unaware of impending doom would have been a better choice of words.

[stocknoob4111]

But neither you, nor I, can forecast the future.

true, we are only assessing likelihoods... at 0.5% yield for the 10 year, assuming the ultimate downside for rates is near zero, the upside is limited. If rates stay constant you don't get any yield and lose money, if rates go even lower to zero the upside is limited, if rates go up you lose. Those are the only options possible - and none of those are very good.

[Stef]

But neither you, nor I, can forecast the future.

true, we are only assessing likelihoods... at 0.5% yield for the 10 year, assuming the ultimate downside for rates is near zero, the upside is limited. If rates stay constant you don't get any yield and lose money, if rates go even lower to zero the upside is limited, if rates go up you lose. Those are the only options possible - and none of those are very good.

Rates could go negative. Nobody knows how far. Maybe we'll be at -2.0% in 10 years?