Bonds vs Cash in a very low interest rate world

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db55
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Bonds vs Cash in a very low interest rate world

Post by db55 »

Hi,
A typical asset allocation breakdown for someone in my age group (I'm in my 50s) is 60% equity, 30% bond, and 10% cash. My question is regarding the relative weighting of the non-equity portion of my portfolio in this very low interest rate environment. Because I live in high-tax California and my tax bracket is not low, my bond fund of choice for my taxable portfolio is Vanguard California Intermediate-Term Bond. The current 30-day SEC yield is .9%. My cash is distributed in bank savings accounts (0.5% interest) and 18-month CDs (0.65%).

My question is whether with these very low interest rates it still make sense to have 3 times as much money in my CA intermediate bond fund vs the money in cash.
-The argument for 3x is that bonds have historically returned more than cash and the bond yield is currently higher than cash accounts.
-The argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).

I'm not terribly concerned about the risk to money in my bond fund - I know that any losses won't be huge. I've gotten through major market crashes without any selling of equities, so my risk tolerance is not low. But I don't want to take risks if the reward for taking that risk is unacceptably low. Risk & reward need to balance. Are they currently balanced for bond funds?

What ratio of bonds to cash makes the most sense given these low interest rates (3x, less than 3x, 0?) - and why? What ratio of bonds to cash do other Bogleheads have within their portfolio?

This question only pertains to my taxable portfolio. Also, I already have enough in cash for any shorter term needs. No issue there.

Thanks!
Last edited by db55 on Sun Apr 04, 2021 7:25 pm, edited 1 time in total.
jimkinny
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Re: Bonds vs Cash in a very low interest rate world

Post by jimkinny »

I decided that the risk of bonds outweighed any potential ahort term to intermediate term reward. I no longer own any bonds or bond funds. I think a good case could be made for I bonds and EE bonds if the limits to purchases doesn't matter to you.

I will pay attention to what the Federal Reserve is doing regardng bond purchases and the economic situation as the pandemic ebbs. I am not fearful of high inflation any more than I was 2 years ago. I don't want to take term risk for a return of maybe 0.5% above a savings account rate.
chw
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Re: Bonds vs Cash in a very low interest rate world

Post by chw »

60% of my bond allocation is held in a stable value fund in my old 401k plan yielding 2.5-3%. This allocation is usually held in an IT bond fund- I will likely revert to that fund when I see the yield for the IT bond fund for 2 quarters rise above 2.5%. The remainder of my bond allocation is split evenly between a high yield bond fund, and Ibonds. We are retirees in our 60s using this allocation.

If I didn’t have the stable value fund available, I would likely be using a high yield savings account for that allocation until IT yields rise for the period previously mentioned. I know this is timing, but when I converted my IT holdings in October of 2020, the risk of principal erosion seemed greater using the IT fund, as opposed to using the stable value fund.
Last edited by chw on Sun Apr 04, 2021 6:03 pm, edited 1 time in total.
Seasonal
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Re: Bonds vs Cash in a very low interest rate world

Post by Seasonal »

db55 wrote: Sun Apr 04, 2021 4:09 am Hi,
A typical asset allocation breakdown for someone in my age group (I'm in my 50s) is 60% equity, 30% bond, and 10% cash.
What I usually see recommended on the bond/cash side is to hold enough cash to meet emergencies, with the rest in bonds.
db55 wrote: Sun Apr 04, 2021 4:09 amThe argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.

Interest rates have been this low, for example, real 10 year rates were this low within the past decade.

We've been hearing that US govt debt will lead to soaring inflation and rates for a long time. The great recession and response being a prominent recent example. Things haven't worked well for those who acted on that notion, but as always the future is cloudy.

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UpperNwGuy
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Re: Bonds vs Cash in a very low interest rate world

Post by UpperNwGuy »

I’m sticking with my intermediate-term bonds. I plan to hold them for longer than the durations of the funds.
Dandy
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Re: Bonds vs Cash in a very low interest rate world

Post by Dandy »

I retired and my fixed income is allocated 1/4 No loss (FDIC products/money market funds), 1/4 short term bond funds, and 1/2 intermediate bond funds. In the mix are treasuries, inflation protection, tax free and some intermediate are part of balanced funds.

My overall allocation is about 48/52.
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Re: Bonds vs Cash in a very low interest rate world

Post by Call_Me_Op »

I don't make a firm distinction between bonds and cash. Cash is a limiting case along the bond continuum - essentially a zero-duration bond. You can access cash without triggering taxation, so it is not a bad idea to have a small bucket of cash to support any near-term spending needs.

To more directly address your specific question, I would not worry about having cash occupy a larger or smaller fraction of my "bond" allocation as I feel appropriate. There is not a lot of reason to hold a 2 year bond at 0.1% yield if you can get the same yield on cash. Also, you may not think it wise to hold a 5 year bond at 0.5% under the same assumption on cash yield.

There is no question - the yield on safe bonds is pathetic right now. But I don't think this justifies taking a lot more equity risk. I think it is more prudent to just expect a lower return in the near-term.
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db55
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Re: Bonds vs Cash in a very low interest rate world

Post by db55 »

chw wrote: Sun Apr 04, 2021 5:19 am 60% of my bond allocation is held in a stable value fund in my old 401k plan yielding 2.5-3%. This allocation is usually held in an IT bond fund- I will likely revert to that fund when I see the yield for the IT bond fund for 2 quarters. The remainder of my bond allocation is split evenly between a high yield bond fund, and Ibonds. We are retirees in our 60s using this allocation.

If I didn’t have the stable value fund available, I would likely be using a high yield savings account for that allocation until IT yields rise for the period previously mentioned. I know this is timing, but when I converted my IT holdings in October of 2020, the risk of principal erosion seemed greater using the IT fund, as opposed to using the stable value fund.
Your stable value fund sounds like a great alternative. Since I'm retired and only have my taxable and IRA accounts, I don't think that option is available to me. So instead, I've been more heavily invested in my bank accounts than the typical bond/cash allocation recommendation. So yeah - I'm also doing market timing.

I have no idea how long this low interest rate world will last - but I'm highly confident is isn't forever and I'm pretty sure I know which direction has the highest risk. Bubbles aren't always obvious - but this certainly looks like one. The effective P/E on my Vngd CA IT fund is 111.
7eight9
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Re: Bonds vs Cash in a very low interest rate world

Post by 7eight9 »

You might want to consider fixed annuities. They are currently offering much better rates than similar term CDs. And better than your bond fund.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
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ivgrivchuck
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Re: Bonds vs Cash in a very low interest rate world

Post by ivgrivchuck »

7eight9 wrote: Sun Apr 04, 2021 4:58 pm You might want to consider fixed annuities. They are currently offering much better rates than similar term CDs. And better than your bond fund.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
+1.

I'm personally pretty convinced that in the current market environment, individual should be putting their bond money into:
- MYGAs
- I-bonds
- EE-bonds
(depending on their individual circumstances)
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RedDog
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Re: Bonds vs Cash in a very low interest rate world

Post by RedDog »

UpperNwGuy wrote: Sun Apr 04, 2021 6:38 am I’m sticking with my intermediate-term bonds. I plan to hold them for longer than the durations of the funds.
Ditto...others are setting themselves up to sell bonds low now and buy high later.

Thursday BND traded closed at $84.80 versus it’s 52 week high of $89.59.
RedDog
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Re: Bonds vs Cash in a very low interest rate world

Post by RedDog »

RedDog wrote: Sun Apr 04, 2021 5:30 pm
UpperNwGuy wrote: Sun Apr 04, 2021 6:38 am I’m sticking with my intermediate-term bonds. I plan to hold them for longer than the durations of the funds.
Ditto...others are setting themselves up to sell bonds low now and buy high later.

Thursday BND closed at $84.80 versus it’s 52 week high of $89.59.
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

db55 wrote: Sun Apr 04, 2021 4:09 am Hi,
A typical asset allocation breakdown for someone in my age group (I'm in my 50s) is 60% equity, 30% bond, and 10% cash. My question is regarding the relative weighting of the non-equity portion of my portfolio in this very low interest rate environment. Because I live in high-tax California and my tax bracket is not low, my bond fund of choice for my taxable portfolio is Vanguard California Intermediate-Term Bond. The current 30-day SEC yield is .9%. My cash is distributed in bank savings accounts (0.5% interest) and 18-month CDs (0.65%).
51 here.

32-35% tax bracket (varies by year).

Our AA is similar, but different, from what you mention (see signature).

We don't hold munis any longer because we've basically given up on using bonds for meaningful income at all.

We thus view bonds as either negatively correlated equity balancers / deflation hedges (LTT) or inflation hedges (TIPS).

(Munis aren't very good in an anti-equity role and do nothing for unexpected inflation.)

Cash also has 0 duration, lowering our overall barbell average duration, provides additional optionality and does reasonably well for short term expected inflation, but not so well for unexpected inflation. But that's what the short TIPS are for.
Last edited by watchnerd on Sun Apr 04, 2021 5:54 pm, edited 1 time in total.
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Re: Bonds vs Cash in a very low interest rate world

Post by renegade06 »

My bonds are in the TSP G fund. Not much of a yield, but I guess it could be worse.
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

FWIW, the report is from 2019, but:
Cash and cash equivalents replaced equities to become the most signifcant asset class in Q1 2019 at nearly 28% of HNWI
fnancial wealth, while equities slipped to the second position at nearly 26% (down more than five percentage points).
https://worldwealthreport.com/wp-conten ... t-2019.pdf
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midareff
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Re: Bonds vs Cash in a very low interest rate world

Post by midareff »

Right now cash held in a bank account is emergency money and a monthly float for expenses that may not coincide exactly with monthly income. High yield savings now are at .5% typically and then you deduct you tax rate from the interest.... then roughly 1.5% for inflation. At least in an inflationary environment, shout we have one, the NAV of a dollar will still be one. Bonds offer the opportunity to lose NAV, or gain... I suspect loss is more likely at this point in time than gain. Tax-Exempt bonds at least offer the opportunity to keep all the dividends. Bond funds in an IRA do double duty of both tax when the money is withdrawn and inflation.

At the end of the day I have to look it it this way... there is no emergency that can't be handled on a credit card and assets liquidated to cover the charge when they comes in. 3 months of cash needs max at this time. Very upside down world when the SEC of the Total Stock Market is higher than the Total Bond Market.
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Re: Bonds vs Cash in a very low interest rate world

Post by jimkinny »

RedDog wrote: Sun Apr 04, 2021 5:30 pm
UpperNwGuy wrote: Sun Apr 04, 2021 6:38 am I’m sticking with my intermediate-term bonds. I plan to hold them for longer than the durations of the funds.
Ditto...others are setting themselves up to sell bonds low now and buy high later.

Thursday BND traded closed at $84.80 versus it’s 52 week high of $89.59.
Actually you have this a bit backwards. Bond prices are relatively quite high, not as high as last summer but still.
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Re: Bonds vs Cash in a very low interest rate world

Post by jimkinny »

Call_Me_Op wrote: Sun Apr 04, 2021 7:37 am I don't make a firm distinction between bonds and cash. Cash is a limiting case along the bond continuum - essentially a zero-duration bond. You can access cash without triggering taxation, so it is not a bad idea to have a small bucket of cash to support any near-term spending needs.

To more directly address your specific question, I would not worry about having cash occupy a larger or smaller fraction of my "bond" allocation as I feel appropriate. There is not a lot of reason to hold a 2 year bond at 0.1% yield if you can get the same yield on cash. Also, you may not think it wise to hold a 5 year bond at 0.5% under the same assumption on cash yield.

There is no question - the yield on safe bonds is pathetic right now. But I don't think this justifies taking a lot more equity risk. I think it is more prudent to just expect a lower return in the near-term.
Since bonds interest rates have been going down since the 1980s, the assumption that this years rates are going to be significantly higher next year seems unwarranted. I will accept that the pandemic made a difference in the short term but unless some scince/tech and demogphics change much I don't see a return of a real return being much over 1-2% but who knows, maybe productivity will take a leap upwards with AI but otherwise bonds may get better near term but later there is no reason to expect it.
I agree, a shsort term change in an equity allocation isn't warranted but maybe in the longer term. Work longer, get higher pay, spend less and take more risk. Choose any that you deem necessary for the long term.
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

jimkinny wrote: Sun Apr 04, 2021 7:05 pm I agree, a shsort term change in an equity allocation isn't warranted but maybe in the longer term. Work longer, get higher pay, spend less and take more risk. Choose any that you deem necessary for the long term.
The world has such a vast supply of capital right now, there is no reason for the markets to give a real return for capital that is not taking risk.
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Re: Bonds vs Cash in a very low interest rate world

Post by jimkinny »

midareff wrote: Sun Apr 04, 2021 6:16 pm Right now cash held in a bank account is emergency money and a monthly float for expenses that may not coincide exactly with monthly income. High yield savings now are at .5% typically and then you deduct you tax rate from the interest.... then roughly 1.5% for inflation. At least in an inflationary environment, shout we have one, the NAV of a dollar will still be one. Bonds offer the opportunity to lose NAV, or gain... I suspect loss is more likely at this point in time than gain. Tax-Exempt bonds at least offer the opportunity to keep all the dividends. Bond funds in an IRA do double duty of both tax when the money is withdrawn and inflation.

At the end of the day I have to look it it this way... there is no emergency that can't be handled on a credit card and assets liquidated to cover the charge when they comes in. 3 months of cash needs max at this time. Very upside down world when the SEC of the Total Stock Market is higher than the Total Bond Market.
The fed expects a short term short term uptick in inflation. I don't know what you know that the market doesn't know but the market certainly hasn't priced in much inflation in the intermediate to long term rates. You may be right and the market is mispriced, which happens all of the time.I think you are right, the risk of loss by owning bonds is greater than chance of making money from them. I think the inflation adjusted loss is almost gauranteed in the short term, unless another black swan type of event happens.
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Re: Bonds vs Cash in a very low interest rate world

Post by RedDog »

jimkinny wrote: Sun Apr 04, 2021 6:57 pm
RedDog wrote: Sun Apr 04, 2021 5:30 pm
UpperNwGuy wrote: Sun Apr 04, 2021 6:38 am I’m sticking with my intermediate-term bonds. I plan to hold them for longer than the durations of the funds.
Ditto...others are setting themselves up to sell bonds low now and buy high later.

Thursday BND traded closed at $84.80 versus it’s 52 week high of $89.59.
Actually you have this a bit backwards. Bond prices are relatively quite high, not as high as last summer but still.
And BND is about where it was in mid-2016. I stand by my point...by not keeping a fixed allocation of bonds and chasing higher interest rates you’re likely to end up buying high and sell low.
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Re: Bonds vs Cash in a very low interest rate world

Post by Seasonal »

watchnerd wrote: Sun Apr 04, 2021 7:13 pm
jimkinny wrote: Sun Apr 04, 2021 7:05 pm I agree, a shsort term change in an equity allocation isn't warranted but maybe in the longer term. Work longer, get higher pay, spend less and take more risk. Choose any that you deem necessary for the long term.
The world has such a vast supply of capital right now, there is no reason for the markets to give a real return for capital that is not taking risk.
The world has such a vast supply of capital right now, there is no reason for the markets to give much of a real return for capital, whether or not it is taking risk. Earnings yields (interest on bonds, e/p on stocks) are very low or, equivalently, multiples have greatly expanded in the US.
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Re: Bonds vs Cash in a very low interest rate world

Post by jocdoc »

Since last march I have kept my bond bonds funds. I did not add any $ to them when the interest rates drop precipitously. My fixed income went to high yield savings account and stable value fund. Since the 10 yr rose to 1.6% I am adding once again to my bond funds in addition to the stable value fund and high yield savings.
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Re: Bonds vs Cash in a very low interest rate world

Post by Ramjet »

When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
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watchnerd
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

Ramjet wrote: Mon Apr 05, 2021 7:23 am When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
That depends on the type of bond in question.
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Re: Bonds vs Cash in a very low interest rate world

Post by midareff »

jimkinny wrote: Sun Apr 04, 2021 7:16 pm
midareff wrote: Sun Apr 04, 2021 6:16 pm Right now cash held in a bank account is emergency money and a monthly float for expenses that may not coincide exactly with monthly income. High yield savings now are at .5% typically and then you deduct you tax rate from the interest.... then roughly 1.5% for inflation. At least in an inflationary environment, shout we have one, the NAV of a dollar will still be one. Bonds offer the opportunity to lose NAV, or gain... I suspect loss is more likely at this point in time than gain. Tax-Exempt bonds at least offer the opportunity to keep all the dividends. Bond funds in an IRA do double duty of both tax when the money is withdrawn and inflation.

At the end of the day I have to look it it this way... there is no emergency that can't be handled on a credit card and assets liquidated to cover the charge when they comes in. 3 months of cash needs max at this time. Very upside down world when the SEC of the Total Stock Market is higher than the Total Bond Market.
The fed expects a short term short term uptick in inflation. I don't know what you know that the market doesn't know but the market certainly hasn't priced in much inflation in the intermediate to long term rates. You may be right and the market is mispriced, which happens all of the time.I think you are right, the risk of loss by owning bonds is greater than chance of making money from them. I think the inflation adjusted loss is almost gauranteed in the short term, unless another black swan type of event happens.
I don't know anything Jim.... I subscribe to the nobody knows nothing theory, specifically including me. OTOH, I don't see how the Fed can dump money into an economy and not create some degree or form of inflation, expected or not. The Fed hasn't raised rates but the intermediate to long bond have sure experienced something ... I'm not qualified to say exactly what but they went down measurably, in fact, of the 37 bond funds I track VG's Long Treasury funds are down >15% over the last 12 months and IT Treasuries are also down slightly for that time period, all as measured by total 12 month return (data per M*). The other 32 bond funds have a positive 12 month total return. So, while I don't know anything apparently the holders of LT Treasuries do, as well as those holding IT Treasuries.

Markets don't just keep going up forever and at some point in time there will be a rush for the door. At that time I would prefer to be holding short term bonds which are less subject to inflationary changes and drops in NAV than longer term bond funds. IMHO, if I put 4, or closer to 5 years of RMD in a short term bond fund and maybe a little slice of intermediate that will be as good as my IRA bond allocation can get for me, at 73, and as long as I can hold near 5 years RMD in short term I don't mind going close to 70% equities with the rest. Taxable side the highest yielding bonds in the house are tax-exempt munis... you can still make a few bps over inflation there, at least presently. Other than that cash is costly.... it costs money to the IRS to get it, its return is shared with the IRS and it looses ground to inflation.
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Re: Bonds vs Cash in a very low interest rate world

Post by midareff »

watchnerd wrote: Mon Apr 05, 2021 8:09 am
Ramjet wrote: Mon Apr 05, 2021 7:23 am When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
That depends on the type of bond in question.
That may depend on the cause of the crash. If it is a huge equity value drop due a combination of a jump in inflation, increased tax rates and the Fed jumping interest rates, there may be nowhere to hide. I've seen gold go to the sky and crash land and bit coin as well so I'm not going there either.
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Re: Bonds vs Cash in a very low interest rate world

Post by Seasonal »

midareff wrote: Mon Apr 05, 2021 9:19 amI don't know anything Jim.... I subscribe to the nobody knows nothing theory, specifically including me. OTOH, I don't see how the Fed can dump money into an economy and not create some degree or form of inflation, expected or not.
Velocity is the relation between the money supply and the economy. The Fed can add a lot of money into the economy without causing inflation if velocity goes down (as it has). There are also issues such as supply and demand for goods and services.

The Fed is quite capable of slamming on the brakes if inflation averages much more than 2% for a sustained period.

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Re: Bonds vs Cash in a very low interest rate world

Post by Ramjet »

watchnerd wrote: Mon Apr 05, 2021 8:09 am
Ramjet wrote: Mon Apr 05, 2021 7:23 am When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
That depends on the type of bond in question.
I must be missing something. In general most bonds will do better than cash in most crash scenarios, no?

2002
S&P 500: -22%
LTT: 16%
Total Bond: 8%
STT: 8%

2008
S&P 500: -37%
LTT: 22%
Total Bond: 5%
STT: 6%
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Re: Bonds vs Cash in a very low interest rate world

Post by AnEngineer »

Seasonal wrote: Sun Apr 04, 2021 5:31 am
db55 wrote: Sun Apr 04, 2021 4:09 amThe argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.
Yes, bonds would do better over the long term if interest rates rise. However, you'd do even better if you had been sitting on the sidelines with cash earning almost as much interest and buy bonds with the higher interest rates, instead of having your bonds all drop in value when the interest rates tick up.

It all depends on the numbers, but given the low yield difference between cash and bonds, it's not hard to imagine interest-rate risk being dominant and thus cash makes most sense right now.

I-bonds (especially) and EE-bonds are relatively attractive in this environment.
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Re: Bonds vs Cash in a very low interest rate world

Post by midareff »

Seasonal wrote: Mon Apr 05, 2021 10:12 am
midareff wrote: Mon Apr 05, 2021 9:19 amI don't know anything Jim.... I subscribe to the nobody knows nothing theory, specifically including me. OTOH, I don't see how the Fed can dump money into an economy and not create some degree or form of inflation, expected or not.
Velocity is the relation between the money supply and the economy. The Fed can add a lot of money into the economy without causing inflation if velocity goes down (as it has). There are also issues such as supply and demand for goods and services.

The Fed is quite capable of slamming on the brakes if inflation averages much more than 2% for a sustained period.

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Re: Bonds vs Cash in a very low interest rate world

Post by diabelli »

Someone help me understand a very basic thing, please.
If bond funds are taking a beating now due to rising interest rates, wouldn't that be a reason to keep on buying them in proportion at least to your AA, if not more vigorously now? After all, if stocks have taken a dive I'm more likely to throw a bit more of any extra income at them.

Asking in part because we're sitting on a cash pile amounting to about 1/5th of our portfolio, which is otherwise almost all stocks. I think that our jobs are as secure as jobs can be so we're using this less as an EF than as a theoretical down payment on a new house...if we decide to move...in maybe 2 or 3 or 4 years (it's obviously up in the air somewhat).

I've not put this into treasury or municipal bonds despite the several-year horizon because of all this talk lately of bonds being terrible (well and I'd be doing it in a taxable account). But if there's greater inflation on the way I don't feel good about the cash either.
Seasonal
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Re: Bonds vs Cash in a very low interest rate world

Post by Seasonal »

AnEngineer wrote: Mon Apr 05, 2021 10:49 am
Seasonal wrote: Sun Apr 04, 2021 5:31 am
db55 wrote: Sun Apr 04, 2021 4:09 amThe argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.
Yes, bonds would do better over the long term if interest rates rise. However, you'd do even better if you had been sitting on the sidelines with cash earning almost as much interest and buy bonds with the higher interest rates, instead of having your bonds all drop in value when the interest rates tick up. ...
Yes, if you could successfully time the market you'd do better than buy and hold. :P
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Re: Bonds vs Cash in a very low interest rate world

Post by RJC »

renegade06 wrote: Sun Apr 04, 2021 5:54 pm My bonds are in the TSP G fund. Not much of a yield, but I guess it could be worse.
Is that better than a Total Bond fund in this environment? I have access to TSP as well.
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Re: Bonds vs Cash in a very low interest rate world

Post by AnEngineer »

Seasonal wrote: Mon Apr 05, 2021 1:19 pm
AnEngineer wrote: Mon Apr 05, 2021 10:49 am
Seasonal wrote: Sun Apr 04, 2021 5:31 am
db55 wrote: Sun Apr 04, 2021 4:09 amThe argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.
Yes, bonds would do better over the long term if interest rates rise. However, you'd do even better if you had been sitting on the sidelines with cash earning almost as much interest and buy bonds with the higher interest rates, instead of having your bonds all drop in value when the interest rates tick up. ...
Yes, if you could successfully time the market you'd do better than buy and hold. :P
No, my point is that your comment makes it sound like rising interest rates justified the decision to hold bonds right now, but it's quite the opposite.
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Re: Bonds vs Cash in a very low interest rate world

Post by Seasonal »

AnEngineer wrote: Mon Apr 05, 2021 1:31 pm
Seasonal wrote: Mon Apr 05, 2021 1:19 pm
AnEngineer wrote: Mon Apr 05, 2021 10:49 am
Seasonal wrote: Sun Apr 04, 2021 5:31 am
db55 wrote: Sun Apr 04, 2021 4:09 amThe argument for a much lower ratio is that interest rates have never been this low and the principal in the bond fund will decrease when interest rates finally rise (I'm assuming that these interest rates aren't forever, especially given the ridiculous debt that the US government is piling up).
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.
Yes, bonds would do better over the long term if interest rates rise. However, you'd do even better if you had been sitting on the sidelines with cash earning almost as much interest and buy bonds with the higher interest rates, instead of having your bonds all drop in value when the interest rates tick up. ...
Yes, if you could successfully time the market you'd do better than buy and hold. :P
No, my point is that your comment makes it sound like rising interest rates justified the decision to hold bonds right now, but it's quite the opposite.
My point is that a long-term bond holder is better off if rates go up than if they don't (or decline) and that the timing and amount of future rate changes are essentially impossible to predict.
AnEngineer
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Re: Bonds vs Cash in a very low interest rate world

Post by AnEngineer »

Seasonal wrote: Mon Apr 05, 2021 4:09 pm
AnEngineer wrote: Mon Apr 05, 2021 1:31 pm
Seasonal wrote: Mon Apr 05, 2021 1:19 pm
AnEngineer wrote: Mon Apr 05, 2021 10:49 am
Seasonal wrote: Sun Apr 04, 2021 5:31 am
Interest rates rising would be good for bonds, so long as you hold and reinvest for more than the average duration of the fund.
Yes, bonds would do better over the long term if interest rates rise. However, you'd do even better if you had been sitting on the sidelines with cash earning almost as much interest and buy bonds with the higher interest rates, instead of having your bonds all drop in value when the interest rates tick up. ...
Yes, if you could successfully time the market you'd do better than buy and hold. :P
No, my point is that your comment makes it sound like rising interest rates justified the decision to hold bonds right now, but it's quite the opposite.
My point is that a long-term bond holder is better off if rates go up than if they don't (or decline) and that the timing and amount of future rate changes are essentially impossible to predict.
Not for the bonds already owned.

The argument is not about market timing, it's that the expected return for bonds purchased now could be lower than cash due to interest rate risk and a small difference in current yields between bonds and cash (at least high-yield savings accounts).
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Re: Bonds vs Cash in a very low interest rate world

Post by renegade06 »

RJC wrote: Mon Apr 05, 2021 1:27 pm
renegade06 wrote: Sun Apr 04, 2021 5:54 pm My bonds are in the TSP G fund. Not much of a yield, but I guess it could be worse.
Is that better than a Total Bond fund in this environment? I have access to TSP as well.
I believe so, but I’d welcome thoughts from the group. From everything I’ve read in this forum, the G fund is risk free. You may not have as high of a return as the F fund, but you’re taking no risk. Right now, the F fund is down over 3% while the G fund is up .29% YTD.
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Re: Bonds vs Cash in a very low interest rate world

Post by Thesaints »

Cash is “bonds”.
I don’t understand the OP dilemma.
Does he mean “should our bond holdings have shorter maturity ?”, or is it “should our bonds have higher credit quality ?”, or both ?
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db55
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Re: Bonds vs Cash in a very low interest rate world

Post by db55 »

Thesaints wrote: Mon Apr 05, 2021 9:15 pm Cash is “bonds”.
I don’t understand the OP dilemma.
Does he mean “should our bond holdings have shorter maturity ?”, or is it “should our bonds have higher credit quality ?”, or both ?
By cash, I meant accounts (like bank accounts) that guarantee the principal and have FDIC insurance - not bonds. With bonds, the principal will vary with the interest rate. For example, the Vanguard California IT fund has lost 0.58% in the past 3 months according to M*.

Given that interest rates during the pandemic have been at historic lows (100 year perspective), I expect interest rates to eventually rise and the principal to decrease - although who knows when or by how much.
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HanSolo
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Re: Bonds vs Cash in a very low interest rate world

Post by HanSolo »

Ramjet wrote: Mon Apr 05, 2021 7:23 am When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
watchnerd wrote: Mon Apr 05, 2021 8:09 am That depends on the type of bond in question.
Ramjet wrote: Mon Apr 05, 2021 10:16 am I must be missing something. In general most bonds will do better than cash in most crash scenarios, no?

2002
S&P 500: -22%
LTT: 16%
Total Bond: 8%
STT: 8%

2008
S&P 500: -37%
LTT: 22%
Total Bond: 5%
STT: 6%
1Q 2020
VOO: -19.61% (S&P 500)
VGLT: +21.90% (long-term treasury)
VCLT: -3.55% (long-term corporate)
VGIT: +7.37% (intermediate-term treasury)
VCIT: -4.09% (intermediate-term corporate)
LeftCoastIV
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Re: Bonds vs Cash in a very low interest rate world

Post by LeftCoastIV »

midareff wrote: Mon Apr 05, 2021 9:19 am Other than that cash is costly.... it costs money to the IRS to get it, its return is shared with the IRS and it looses ground to inflation.
You could replace "cash" with "bond" and the statement above would still be true, in the current interest rate environment (ignoring munis where the second IRS statement isn't relevant)

I just think of cash as "ultra-short term bond with zero credit risk". If the market wants to offer me higher yield for more risk, I'm an interested buyer.

We have an overall AA of ~50/50, so this is a significant issue for us.
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Re: Bonds vs Cash in a very low interest rate world

Post by midareff »

LeftCoastIV wrote: Tue Apr 06, 2021 6:54 am
midareff wrote: Mon Apr 05, 2021 9:19 am Other than that cash is costly.... it costs money to the IRS to get it, its return is shared with the IRS and it looses ground to inflation.
You could replace "cash" with "bond" and the statement above would still be true, in the current interest rate environment (ignoring munis where the second IRS statement isn't relevant)

I just think of cash as "ultra-short term bond with zero credit risk". If the market wants to offer me higher yield for more risk, I'm an interested buyer.

We have an overall AA of ~50/50, so this is a significant issue for us.
After a dozen years of bull run and ten years of retirement I've reviewed the 50/50 allocation I've held for nearly two decades and simply need less bonds. I've had to ask myself the question of how many years of RMD do I really want in short or intermediate term bonds?
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

Ramjet wrote: Mon Apr 05, 2021 10:16 am
watchnerd wrote: Mon Apr 05, 2021 8:09 am
Ramjet wrote: Mon Apr 05, 2021 7:23 am When a market crash inevitably happens you may have wished you kept the bonds instead of substituting for cash
That depends on the type of bond in question.
I must be missing something. In general most bonds will do better than cash in most crash scenarios, no?

2002
S&P 500: -22%
LTT: 16%
Total Bond: 8%
STT: 8%

2008
S&P 500: -37%
LTT: 22%
Total Bond: 5%
STT: 6%
You left out high yield, emerging market, and munis.

2008
High yield: -21.29%
MUB: 1.16%
EMB: -2.14%
Cash: 1.53%

QED: It depends on the type of bond in question
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Thesaints
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Re: Bonds vs Cash in a very low interest rate world

Post by Thesaints »

db55 wrote: Tue Apr 06, 2021 3:38 am
Thesaints wrote: Mon Apr 05, 2021 9:15 pm Cash is “bonds”.
I don’t understand the OP dilemma.
Does he mean “should our bond holdings have shorter maturity ?”, or is it “should our bonds have higher credit quality ?”, or both ?
By cash, I meant accounts (like bank accounts) that guarantee the principal and have FDIC insurance - not bonds. With bonds, the principal will vary with the interest rate. For example, the Vanguard California IT fund has lost 0.58% in the past 3 months according to M*.

Given that interest rates during the pandemic have been at historic lows (100 year perspective), I expect interest rates to eventually rise and the principal to decrease - although who knows when or by how much.
Still don't understand. A $100 bill is a $100 face value bond with zero duration and zero credit risk. $100 in a money market is (in a way) a zero duration bond with extremely small credit risk. A $100 2-year T-bill at issuance is a bond with with a duration just a smidge under 2 years and just a smidge above zero credit risk. And we can go on. There is nothing conceptually different between all of them; there is no sharp distinction between cash and bonds, because they are different flavors of the same financial vehicle.
The fact that 2-bit financial advisors like to use green and blue to color slices of a pie chart, instead of a single color, should not confuse an investor aware of what he's doing.
AnEngineer
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Re: Bonds vs Cash in a very low interest rate world

Post by AnEngineer »

Thesaints wrote: Tue Apr 06, 2021 12:54 pm
db55 wrote: Tue Apr 06, 2021 3:38 am
Thesaints wrote: Mon Apr 05, 2021 9:15 pm Cash is “bonds”.
I don’t understand the OP dilemma.
Does he mean “should our bond holdings have shorter maturity ?”, or is it “should our bonds have higher credit quality ?”, or both ?
By cash, I meant accounts (like bank accounts) that guarantee the principal and have FDIC insurance - not bonds. With bonds, the principal will vary with the interest rate. For example, the Vanguard California IT fund has lost 0.58% in the past 3 months according to M*.

Given that interest rates during the pandemic have been at historic lows (100 year perspective), I expect interest rates to eventually rise and the principal to decrease - although who knows when or by how much.
Still don't understand. A $100 bill is a $100 face value bond with zero duration and zero credit risk. $100 in a money market is (in a way) a zero duration bond with extremely small credit risk. A $100 2-year T-bill at issuance is a bond with with a duration just a smidge under 2 years and just a smidge above zero credit risk. And we can go on. There is nothing conceptually different between all of them; there is no sharp distinction between cash and bonds, because they are different flavors of the same financial vehicle.
The fact that 2-bit financial advisors like to use green and blue to color slices of a pie chart, instead of a single color, should not confuse an investor aware of what he's doing.
What's your point? If a $100 bill is a bond, it's also a stock with 0 dividend and 0 growth.

As a clear example of a fundamental difference, in the US, you are required by law to accept cash as payment of debt.
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watchnerd
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Re: Bonds vs Cash in a very low interest rate world

Post by watchnerd »

Thesaints wrote: Tue Apr 06, 2021 12:54 pm
db55 wrote: Tue Apr 06, 2021 3:38 am
Thesaints wrote: Mon Apr 05, 2021 9:15 pm Cash is “bonds”.
I don’t understand the OP dilemma.
Does he mean “should our bond holdings have shorter maturity ?”, or is it “should our bonds have higher credit quality ?”, or both ?
By cash, I meant accounts (like bank accounts) that guarantee the principal and have FDIC insurance - not bonds. With bonds, the principal will vary with the interest rate. For example, the Vanguard California IT fund has lost 0.58% in the past 3 months according to M*.

Given that interest rates during the pandemic have been at historic lows (100 year perspective), I expect interest rates to eventually rise and the principal to decrease - although who knows when or by how much.
Still don't understand. A $100 bill is a $100 face value bond with zero duration and zero credit risk. $100 in a money market is (in a way) a zero duration bond with extremely small credit risk. A $100 2-year T-bill at issuance is a bond with with a duration just a smidge under 2 years and just a smidge above zero credit risk. And we can go on. There is nothing conceptually different between all of them; there is no sharp distinction between cash and bonds, because they are different flavors of the same financial vehicle.
The fact that 2-bit financial advisors like to use green and blue to color slices of a pie chart, instead of a single color, should not confuse an investor aware of what he's doing.
There might be a useful distinction between tradeable securities that have fluctuating prices as a result vs things that don't.

But, wait, I-bonds aren't tradeable and are called 'bonds'....

Darn it.
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WarAdmiral
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Re: Bonds vs Cash in a very low interest rate world

Post by WarAdmiral »

diabelli wrote: Mon Apr 05, 2021 1:14 pm Someone help me understand a very basic thing, please.
If bond funds are taking a beating now due to rising interest rates, wouldn't that be a reason to keep on buying them in proportion at least to your AA, if not more vigorously now? After all, if stocks have taken a dive I'm more likely to throw a bit more of any extra income at them.

Asking in part because we're sitting on a cash pile amounting to about 1/5th of our portfolio, which is otherwise almost all stocks. I think that our jobs are as secure as jobs can be so we're using this less as an EF than as a theoretical down payment on a new house...if we decide to move...in maybe 2 or 3 or 4 years (it's obviously up in the air somewhat).

I've not put this into treasury or municipal bonds despite the several-year horizon because of all this talk lately of bonds being terrible (well and I'd be doing it in a taxable account). But if there's greater inflation on the way I don't feel good about the cash either.
The interest rate, yield and bond value numbers are totally made up below for simplicity in explanation and to illustrate the trend.

Year 2021 - interest rate 1%
You bought bonds for $1000, yield 2%

Year 2022 - interest rate 1.5%
Your 2021 bonds for $1000 are now valued at $950 as the interest rate spiked up.
You bought bonds for $1000, yield 2.5%

Year 2023 - interest rate 2%
Your 2021 bonds for $1000 are now valued at $900 as the interest rate spiked up.
Your 2022 bonds for $1000 are now valued at $950 as the interest rate spiked up.
You bought bonds for $1000, yield 3.5%

Year 2024 - interest rate 2.5%
Your 2021 bonds for $1000 are now valued at $850 as the interest rate spiked up.
Your 2022 bonds for $1000 are now valued at $900 as the interest rate spiked up.
Your 2023 bonds for $1000 are now valued at $950 as the interest rate spiked up.
You bought bonds for $1000, yield 4%

...

As you can see, unlike stocks, in a rising interest rate enviornment, you are continually losing $$ by holding bonds. i.e. you are not buying low.
AnEngineer
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Re: Bonds vs Cash in a very low interest rate world

Post by AnEngineer »

WarAdmiral wrote: Tue Apr 06, 2021 1:13 pm As you can see, unlike stocks, in a rising interest rate enviornment, you are continually losing $$ by holding bonds. i.e. you are not buying low.
Another way to look at it is that you lock in the terms of the bond when you buy. In a stock, because you own the company your expected return can go up and down in the future.

With a bond, if you hold to maturity, you know what you will get (ignoring credit risk). If interest rates go down, there are people willing to pay you now for your higher interest rate, but it's a break even thing. It doesn't make sense to do unless you want to reduce your bond holdings.

Similarly, if interest rates go up, if you want to sell, people are willing to give you less because of the poor interest rate. But this only matters if you want fewer bonds. Otherwise, hold until maturity.

This is why some of the arguments about "staying the course" and "not market timing" don't apply as well to bonds. You know the terms when you buy, and as the terms change they may no longer be favorable.
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Re: Bonds vs Cash in a very low interest rate world

Post by Thesaints »

AnEngineer wrote: Tue Apr 06, 2021 1:02 pm What's your point?
There is no demarcation line between "cash" and "bonds", only a continuum of duration, credit risk, yield. That's the correct way to analyze the non-stock portion of one's portfolio.
If a $100 bill is a bond, it's also a stock with 0 dividend and 0 growth.
You think that the stock price of a corporation that does not pay dividend and has zero earning growth is fixed ? How much would that be ?
As a clear example of a fundamental difference, in the US, you are required by law to accept cash as payment of debt.
Don't you know that it is possible to draw a cheque in a money market account ?
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