Swedroe's guidelines to Bonds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Taylor Larimore
Advisory Board
Posts: 27205
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Stable Value Funds

Post by Taylor Larimore » Fri Jan 27, 2017 9:13 am

dandypandys wrote:Does Larry's book talk about Stable Asset Value funds at all?
There is a copy at my library :)
I am asking because my 403b choice of bonds was not good, so we chose a stable value fund https://www.standard.com/eforms/16940.pdf
14% allocation (18k) at a rate of 2.30%
Interested in learning more about this in comparison to TB which i can now access through our tIRA's
dandypandys:

Larry's book, "The Only Guide to a Winning Bond Strategy," has an excellent discussion of Stable Value Funds. His reference to The Stable Value Association is also helpful.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
dandypandys
Posts: 65
Joined: Sun Mar 27, 2016 8:32 am

Re: Swedroe's guidelines to Bonds

Post by dandypandys » Fri Jan 27, 2017 9:18 am

Taylor, I will go get it today. Thanks for all your help :sharebeer

User avatar
TheTimeLord
Posts: 5284
Joined: Fri Jul 26, 2013 2:05 pm

Re: Swedroe's guidelines to Bonds

Post by TheTimeLord » Fri Jan 27, 2017 9:56 am

larryswedroe wrote:simple
Just to add that should use CDs instead of Treasuries when you have access to them, unless spread in yields very thin

Larry
This is something I have implemented in my portfolio. They have been a great anchor/foundation. I assume if you are a rebalancer you need some funds in treasuries because of liquidity?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

Re: Swedroe's guidelines to Bonds

Post by matto » Fri Jan 27, 2017 9:57 am

lack_ey wrote:
matto wrote:
lack_ey wrote: I guess the question I would have is this:

If you take corporate bonds or high yield over a full business cycle, determine beta to equities for the full period, and subtract that out, does the residual [corp bond - average equity beta component] underperform during equity bear markets? Does the correlation or drawdowns during bear markets beyond the level expected based on the effective equity component they contain? Or alternatively, is the beta significantly higher or lower during certain periods? Or is the higher correlation with equities during bear markets already explained by underlying, roughly constant effective equity exposure?

The way I hear people talk about them, the implication I think is that there is residual underperformance and the risks are thus not worth it, but I haven't checked it for myself.
That's a very interesting question, but one that I believe is more suited to institutional traders than retail investors. Based on past backtesting results, there has been essentially no difference.

See for example, I volatility balanced TSM/TBM and TSM/Treasuries https://www.portfoliovisualizer.com/bac ... on3_2=46.5

A 0.02 sharpe difference over 8 years and the 2008 drawdown difference was 16.3 vs 17.2%, or 0.9% worse than expected based on keeping volatility equal on the whole time scale. You can decide if you want to use those differences to make a statement about the forward returns.

Even if there has been a difference, why would we expect it to persist? If one wants to avoid corp bonds in order to better simplify the 'buckets' of their portfolio, that's fine. If one want to avoid corp bonds because CDs are attractive, that's also fine.
Yeah, personally nothing I've really found backtesting with portfoliovisualizer indicates you need to strongly stay away from corporates, but that's a somewhat limited data set.

Like you said, if the case against is based on backtests there's not necessarily a strong reason to suspect the same relationship will hold in the future. Especially considering that the credit market is very large it's at least a bit uncomfortable to me to write it all off as mispriced in a meaningful sense for stock/bond investors. (except possibly the long end, where I can believe that pricing is somewhat pushed by insurance companies and some other entities with different stipulations, restrictions, and needs compared to individual investors)

Also the historical record analyzed different ways, like in IMHO the compelling paper "The Credit Risk Premium" by Asvanunt and Richardson, is more encouraging:
http://www.iinews.com/site/pdfs/JFI_Winter_2017_AQR.pdf

I do have some corporate bonds myself but largely suspect it's not a big deal either way.
I agree, my whole problem is decrying a $T industry as mispriced (both corp bonds and MBS) without any really solid proof. I also share your concern about really long bonds being mispriced, but I can also see a story that treasuries are mispriced for similar reasons (reserve currency status, currency wars, companies who put their excess cash into treasuries, and similarly pensions matching liabilities).

Nice find on the paper. I haven't had a chance to read it at great length, but they mention how a naive analysis misses the credit premium because of incorrect duration matching between corporate bonds and treasuries. I think it much more likely that an analysis makes a mistake like this than a $T market be mispriced. And note there are a million different mistakes that can be made that would cause a similar error in results. A 40 year bond bull market makes any callable bond look worse than a 40 year sideways market.

I'll also add that at current bond yields, large expense ratios or advisor fees will likely trump any difference between returns. I hold corporates but if you paid me 75bp to hold treasuries instead, I would. If you paid me 75bp to avoid treasuries for corporates, I would also do that.

Beltane
Posts: 7
Joined: Sat Jul 05, 2014 11:20 pm

Re: Swedroe's guidelines to Bonds

Post by Beltane » Fri Jan 27, 2017 10:25 am

aj76er, I have gone the simpler route, than my 2014 post would imply. That post is me ranting about all the different views of perfect, or at least better, expressed on this board. For someone like me, who has a career outside of investing and who has realized that most expert opinions can’t be relied on, it is very confusing to know how to proceed.

Robert T, I agree that Larry’s posts on fixed income are useful, which is why I now have enough angst to post again. These recent bond threads have made me question past decisions. Now, the question is, what to do? I am not looking at stocks and bonds separately, which is part of why I’m writing. Perhaps the correlation, due to the corporate bonds in my portfolio, is not negative enough.

matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

Re: Swedroe's guidelines to Bonds

Post by matto » Fri Jan 27, 2017 10:45 am

Beltane wrote:aj76er, I have gone the simpler route, than my 2014 post would imply. That post is me ranting about all the different views of perfect, or at least better, expressed on this board. For someone like me, who has a career outside of investing and who has realized that most expert opinions can’t be relied on, it is very confusing to know how to proceed.

Robert T, I agree that Larry’s posts on fixed income are useful, which is why I now have enough angst to post again. These recent bond threads have made me question past decisions. Now, the question is, what to do? I am not looking at stocks and bonds separately, which is part of why I’m writing. Perhaps the correlation, due to the corporate bonds in my portfolio, is not negative enough.
Other than taxation issues, pretty much everything here is bikeshedding. If tax bracket is high enough, hold munis in taxable. Hold non-munis in tax deferred. The higher the yield on the bonds, the more equity like they are, so compensate with holding a bit less equities. Don't hold only high yield. CDs can offer higher yields and attractive put options (redemption ability). Holding treasuries directly has significant lack of simplicity costs for only a few bp of benefit. Keep in mind CDs have issues, if you buy above par they are not risk free. Also if you buy a 10year CD at 5% and in 2 years the bank goes bankrupt, FDIC will *not* match the interest rate you had previously. Finally, if you ever plan on rebalancing, note that the cost to CD rebalancing might be insurmountably high and you might be forced to hold to expiration. I'll also add that holding to expiration makes you lose the term premium aka the roll yield, although you can compensate by going further out on your CDs/other bonds.

The conviction of some people is of a completely incorrect magnitude for the differences this will make. Obviously advisors have a vested interest in making things more complicated than they need to be. A 50bp advisor fee is much more significant than MBS's negative convexity in the context of an entire bond allocation (nobody is recommending you hold *only* MBS).

larryswedroe
Posts: 15650
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Fri Jan 27, 2017 11:03 am

Just two points to add to comments above, first re CDs and buying above par, that warning is important and it's why we have limit on bank credit rating, not willing to buy lower rated bank CDs. The other is that if you buy a long term CD from a bank with low credit, which has to pay higher rates to get funding, then it gets taken over, the new bank can lower the rate to its rates for the remaining period. So you do have reinvestment risk potentially. Another reason why we don't buy CDs from lower rated banks (IDC rating)

Larry

User avatar
Kevin M
Posts: 9881
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Swedroe's guidelines to Bonds

Post by Kevin M » Fri Jan 27, 2017 2:45 pm

matto wrote:
lack_ey wrote: <snip>
Also the historical record analyzed different ways, like in IMHO the compelling paper "The Credit Risk Premium" by Asvanunt and Richardson, is more encouraging:
http://www.iinews.com/site/pdfs/JFI_Winter_2017_AQR.pdf
<snip>
Nice find on the paper. I haven't had a chance to read it at great length, but they mention how a naive analysis misses the credit premium because of incorrect duration matching between corporate bonds and treasuries. I think it much more likely that an analysis makes a mistake like this than a $T market be mispriced. And note there are a million different mistakes that can be made that would cause a similar error in results.
+1 on sharing the paper with us, lack_ey, and concise summary of the main issue, matto.

Would be very interested to hear Larry's view on this paper, since it provides an apparently well-done, academic analysis that seems to rebut the oft-repeated statement that credit risk has not been (sufficiently) rewarded historically. Could this be an example of "when the facts change, I change my mind"?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Robert T
Posts: 2521
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: Swedroe's guidelines to Bonds

Post by Robert T » Fri Jan 27, 2017 2:54 pm

.
FWIW - my earlier take on the paper. viewtopic.php?p=2412589#p2412589

lack_ey
Posts: 6583
Joined: Wed Nov 19, 2014 11:55 pm

Re: Swedroe's guidelines to Bonds

Post by lack_ey » Fri Jan 27, 2017 3:19 pm

It's a final version of an existing paper discussed in the previous thread linked above (and I think a couple times in other places).

One of the criticisms I see is that their hypothetical ex-post Sharpe (or Sortino, etc.) optimal allocation between stocks, government bonds, and corporate bonds targets a low risk level, with very little stocks. But that's the nature of optimizing for those types of measures. I imagine even under their dataset, if targeting a higher return level and leverage constrained, you'd use more stocks and lower the corporate bond allocation. But probably not corporate bonds to zero.

This paper is discussed in Your Complete Guide to Factor-based Investing (the latest Swedroe/Berkin book), by the way. The main thing noted is that the pre-1988 data maybe doesn't adjust for the call features and corporate bonds are relatively tax disadvantaged by not being exempt from state/local taxes. Then says that if CDs have higher yields than Treasuries, this eats up any potential advantage anyway, and credit risk is somewhat correlated to equity risk. (Though the book recommends SMB, and that's a bit correlated to equity risk too.) Not listed under that subsection, there's also the point that credit risk is fairly negatively skewed and of course that's not picked up by a 2nd-order measure like Sharpe.

User avatar
Kevin M
Posts: 9881
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Swedroe's guidelines to Bonds

Post by Kevin M » Fri Jan 27, 2017 3:41 pm

matto wrote: Other than taxation issues, pretty much everything here is bikeshedding.
Had not heard that term before, so had to Google it: Law of triviality - Wikipedia.
Parkinson's law of triviality is C. Northcote Parkinson's 1957 argument that members of an organisation give disproportionate weight to trivial issues.[1] He provides the example of a fictional committee whose job was to approve the plans for a nuclear power plant spending the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike-shed, while neglecting the proposed design of the plant itself, which is far more important but also a far more difficult and complex task.
matto wrote:Keep in mind CDs have issues, if you buy above par they are not risk free.

Of course this only applies to brokered CDs bought at a premium on secondary market, and for those it is indeed something to consider. This is why I noted in an earlier reply that the secondary market 10-year CDs I found at about 3% were priced at a discount, so no exposure to no FDIC coverage of the premium amount.

I actually experienced this first hand in a small way when a Puerto Rican bank I bought a brokered CD from at a premium went bankrupt, and I lost the premium amount. Fortunately it was a small loss, but it implanted this lesson firmly in my mind.

Again, not applicable to direct CDs, new-issue brokered CDs, or secondary CDs bought at or below par (100).
Also if you buy a 10year CD at 5% and in 2 years the bank goes bankrupt, FDIC will *not* match the interest rate you had previously.

Yes, there is a small reinvestment risk with CDs. The historical default rate on banks is very low, so it's a small risk, especially if you stick with higher-rated banks and CUs.

This adds a small but non-zero variance to the left side of the probability distribution of expected return, while the possibility of doing an early withdrawal and reinvesting at a higher rate (that more than compensates for the early withdrawal penalty) adds some variance to the right side of the probability distribution for direct CDs (but of course not for brokered CDs). In my view, and experience, the probability distribution is skewed more to the right by the latter than it is to the left by the former for direct CDs. Of course for brokered CDs there is only the left skew due to reinvestment risk.

Note that for the left skew you must estimate the joint probability of bank/CU failure and the rate you can get on a new CD being lower than the current rate, while for the right skew you must estimate the joint probability of a sufficiently higher rate becoming available and the early withdrawal being allowed (I assume a small probability of an early withdrawal being disallowed, since CD terms usually have language that allows it).

Come to think of it, it's possible that you could reinvest at a higher rate after bank failure, with no early withdrawal penalty (EWP), so there also is a bit of right skew for the bank-failure possibility as well, making the left-skew even less significant.
Finally, if you ever plan on rebalancing, note that the cost to CD rebalancing might be insurmountably high and you might be forced to hold to expiration.

First, this is a good reason to hold some Treasuries, other bonds, or cash, remembering that you probably only need a portion of your fixed income for rebalancing.

Second, the cost of rebalancing out of good direct CDs is unlikely to be "insurmountably high", with the early withdrawal penalty (EWP) limited to say 1-2%, depending on the rate and early withdrawal terms (most of my CDs have EWPs of six months of interest, so 1% on a 2% CD and 1.5% on a 3% CD). For brokered CDs, as long as the bid/ask spread is less than the yield premium, which I think it typically is, you should be OK as long as you hold your CD for more than one year.

Finally, rebalancing events, with say 5/25 bands, are relatively rare, so there's a decent chance that you can use proceeds from maturing CDs to rebalance into stocks, which is exactly what I did in early 2016. You can even incorporate maturing CDs into your rebalancing policy, which certainly is no worse than annual rebalancing. I use a combination of 5/25 and rebalancing with maturing CD proceeds, especially with CDs in taxable accounts.
I'll also add that holding to expiration makes you lose the term premium aka the roll yield, although you can compensate by going further out on your CDs/other bonds.
"Lose the term premium" is overstated. You get the term premium from higher yields simply by extending maturity, which is correctly implied by the second part of the quoted sentence.

Roll return is one component of the term premium, and it's an uncertain component at that. The expected roll return as of 11/8/2016 was completely wiped out in a single day on on 11/9/2016, and went quite negative relative to 11/8 through mid-December, as I illustrated in this post: What happened to my roll yield (aka roll down return)? - Bogleheads.org.

For a five-year holding period, the yield premium of a good 5-year CD (compared to 5-year Treasury) is an almost certain thing, with the only uncertainty being bank/CU failure and inability to reinvest at the same or higher rate, while any roll return from selling a Treasury before maturity is highly uncertain. If you go with the philosophy of taking risk on the equity side, then you want more certainty in the returns of your fixed income, and potential roll return does not contribute to that certainty, but detracts from it.

However, to be fair, you get a right-skew from potential roll return in a steady or falling rate environment (assuming positive yield curve, especially if it's steep), while you get a right-skew from potential break/reinvest with a direct CD in a rising rate environment (or even just from a really good CD deal becoming available). The tie breaker for me is the yield premium of the CD, which gives the CD the win assuming both are held to maturity, so win/win/lose for direct CD vs. lose/lose/win for the Treasury, and win/lose/? for a brokered CD.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

Re: Swedroe's guidelines to Bonds

Post by matto » Fri Jan 27, 2017 6:18 pm

Kevin M wrote:
matto wrote: Other than taxation issues, pretty much everything here is bikeshedding.
Had not heard that term before, so had to Google it: Law of triviality - Wikipedia.
Parkinson's law of triviality is C. Northcote Parkinson's 1957 argument that members of an organisation give disproportionate weight to trivial issues.[1] He provides the example of a fictional committee whose job was to approve the plans for a nuclear power plant spending the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike-shed, while neglecting the proposed design of the plant itself, which is far more important but also a far more difficult and complex task.
matto wrote:Keep in mind CDs have issues, if you buy above par they are not risk free.

Of course this only applies to brokered CDs bought at a premium on secondary market, and for those it is indeed something to consider. This is why I noted in an earlier reply that the secondary market 10-year CDs I found at about 3% were priced at a discount, so no exposure to no FDIC coverage of the premium amount.

I actually experienced this first hand in a small way when a Puerto Rican bank I bought a brokered CD from at a premium went bankrupt, and I lost the premium amount. Fortunately it was a small loss, but it implanted this lesson firmly in my mind.

Again, not applicable to direct CDs, new-issue brokered CDs, or secondary CDs bought at or below par (100).
Also if you buy a 10year CD at 5% and in 2 years the bank goes bankrupt, FDIC will *not* match the interest rate you had previously.

Yes, there is a small reinvestment risk with CDs. The historical default rate on banks is very low, so it's a small risk, especially if you stick with higher-rated banks and CUs.

This adds a small but non-zero variance to the left side of the probability distribution of expected return, while the possibility of doing an early withdrawal and reinvesting at a higher rate (that more than compensates for the early withdrawal penalty) adds some variance to the right side of the probability distribution for direct CDs (but of course not for brokered CDs). In my view, and experience, the probability distribution is skewed more to the right by the latter than it is to the left by the former for direct CDs. Of course for brokered CDs there is only the left skew due to reinvestment risk.

Note that for the left skew you must estimate the joint probability of bank/CU failure and the rate you can get on a new CD being lower than the current rate, while for the right skew you must estimate the joint probability of a sufficiently higher rate becoming available and the early withdrawal being allowed (I assume a small probability of an early withdrawal being disallowed, since CD terms usually have language that allows it).

Come to think of it, it's possible that you could reinvest at a higher rate after bank failure, with no early withdrawal penalty (EWP), so there also is a bit of right skew for the bank-failure possibility as well, making the left-skew even less significant.
Finally, if you ever plan on rebalancing, note that the cost to CD rebalancing might be insurmountably high and you might be forced to hold to expiration.

First, this is a good reason to hold some Treasuries, other bonds, or cash, remembering that you probably only need a portion of your fixed income for rebalancing.

Second, the cost of rebalancing out of good direct CDs is unlikely to be "insurmountably high", with the early withdrawal penalty (EWP) limited to say 1-2%, depending on the rate and early withdrawal terms (most of my CDs have EWPs of six months of interest, so 1% on a 2% CD and 1.5% on a 3% CD). For brokered CDs, as long as the bid/ask spread is less than the yield premium, which I think it typically is, you should be OK as long as you hold your CD for more than one year.

Finally, rebalancing events, with say 5/25 bands, are relatively rare, so there's a decent chance that you can use proceeds from maturing CDs to rebalance into stocks, which is exactly what I did in early 2016. You can even incorporate maturing CDs into your rebalancing policy, which certainly is no worse than annual rebalancing. I use a combination of 5/25 and rebalancing with maturing CD proceeds, especially with CDs in taxable accounts.
I'll also add that holding to expiration makes you lose the term premium aka the roll yield, although you can compensate by going further out on your CDs/other bonds.
"Lose the term premium" is overstated. You get the term premium from higher yields simply by extending maturity, which is correctly implied by the second part of the quoted sentence.

Roll return is one component of the term premium, and it's an uncertain component at that. The expected roll return as of 11/8/2016 was completely wiped out in a single day on on 11/9/2016, and went quite negative relative to 11/8 through mid-December, as I illustrated in this post: What happened to my roll yield (aka roll down return)? - Bogleheads.org.

For a five-year holding period, the yield premium of a good 5-year CD (compared to 5-year Treasury) is an almost certain thing, with the only uncertainty being bank/CU failure and inability to reinvest at the same or higher rate, while any roll return from selling a Treasury before maturity is highly uncertain. If you go with the philosophy of taking risk on the equity side, then you want more certainty in the returns of your fixed income, and potential roll return does not contribute to that certainty, but detracts from it.

However, to be fair, you get a right-skew from potential roll return in a steady or falling rate environment (assuming positive yield curve, especially if it's steep), while you get a right-skew from potential break/reinvest with a direct CD in a rising rate environment (or even just from a really good CD deal becoming available). The tie breaker for me is the yield premium of the CD, which gives the CD the win assuming both are held to maturity, so win/win/lose for direct CD vs. lose/lose/win for the Treasury, and win/lose/? for a brokered CD.

Kevin
DIrect CDs can have insurmountably high rebalancing costs. The EWP isn't the only criteria, the investments available are. Redemption occurs at par so you lose any unrealized gains due to interest rates dropping. The times you want to sell bonds to rebalance, interest rates have most likely dropped (that occurs during deflationary crises). (Yes it's theoretically possible a bank fails during rising interest rates, but this seems less likely).

Finally, I agree with most of what you write above, and certainly the CD market is inefficient. But note I'm only saying there are downsides, not that the downsides are prohibitively likely or extreme. Also just because we are willing to calculate the value of an EWP's put option doesn't mean the average person will be willing to do so (or do it correctly). Except for the portion of one's portfolio used in liability matching, I think it makes sense to not use exclusively CDs.

lack_ey
Posts: 6583
Joined: Wed Nov 19, 2014 11:55 pm

Re: Swedroe's guidelines to Bonds

Post by lack_ey » Fri Jan 27, 2017 6:19 pm

Right, and nobody suggesting CDs has suggested exclusively CDs. Chances are for many people with considerable fixed income allocations, not all of it needs to be particularly liquid.

matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

Re: Swedroe's guidelines to Bonds

Post by matto » Fri Jan 27, 2017 6:36 pm

lack_ey wrote:Right, and nobody suggesting CDs has suggested exclusively CDs. Chances are for many people with considerable fixed income allocations, not all of it needs to be particularly liquid.
Cool then it sounds like we're in agreement. (I wasn't saying anybody was recommending people should be all CDs btw, just that one shouldn't be all CDs.)

stvyreb
Posts: 52
Joined: Sat Nov 05, 2016 8:57 pm

Re: Swedroe's guidelines to Bonds

Post by stvyreb » Sun Aug 12, 2018 1:59 pm

larryswedroe wrote:
Tue Jan 24, 2017 9:10 am
simple
Just to add that should use CDs instead of Treasuries when you have access to them, unless spread in yields very thin

Larry
I always have trouble understanding how to manage Bonds, as I'm not a math genius, so have ended up just owning VG IT Index for everything, however I've noticed the duration is now (8/2018) something like 7.2 years ( & as I recall Mr. Swedroe 's book said something like keep durations < 5 years , so I've thinking of adding some VG ST Index to get the duration below 5 years, however I'd be open to instead placing a portion in CDs , esp to avoid the recent negative returns on share prices.

So, couple questions :

1) perhaps much of the discussion above pertains more to owning via Treasury Direct, because with The Treasury Bond Funds one can lose capital eg:
VSIGX IT Treasu 8-18
SEC 2.77% 1 year – 1% 3 year -2 % 5 yr 1.3% duration 5.1 years

2) do the figures above include the coupon eg when they show "return" ?

3) PenFed has 5 Year Dividend Rates 2.96% APY 3.00% ........so if as Larry says "Treasuries should have a premium as they are more liquid and benefit more in flights to quality/liquidity" in this case is one comparing the fund's duration (eg 5 yrs) to the equivalent in a CD ?

a) and if so looks to me , that the VSIGX is not a "premium" hence a CD would be preferable? ......... which at least would protect one from Corporate Bonds loss of capital risk


4) lastly, I've been hearing a lot of scary talk about corporates lately, however considering the negative returns on Treasuries, it really doesn't meet my Investor Statement Portfolio to increase equities to offset the losses on Treasuries, but I'm wondering what a reasonable "tilt" might be towards Treasuries ; granted that everyone's income needs may be different ,

  • Vanguard IT Treasury Index Admiral Vanguard Short-Term Bond Index Adm Vanguard Inter-Term Bond Index Adm
    YTD -1.25% -0.32% -2.26%
    YTD as-of date 06/30/2018
    1-year -1.34% -0.23% -1.39%
    3-year 0.75% 0.77% 1.70%
    5-year 1.37% 1.05% 2.52%

    SEC yield 2.77% A 2.86% A 3.38% A

If the ST Index Duration is 2.7 and the IT is 7.2 isn't there a suggested Basis Point per year duration suggested, I'm guessing that 2.86 vs. 3.38 the IT duration isn't worth the risk , and so maybe even a bigger rebalance to say: < 4 year average duration might be advised , assuming I don't get CDs involved .......... sigh

User avatar
munemaker
Posts: 3261
Joined: Sat Jan 18, 2014 6:14 pm

Re: Swedroe's guidelines to Bonds

Post by munemaker » Sun Aug 12, 2018 4:44 pm

lack_ey wrote:
Fri Jan 27, 2017 6:19 pm
Right, and nobody suggesting CDs has suggested exclusively CDs. Chances are for many people with considerable fixed income allocations, not all of it needs to be particularly liquid.
I listened to a recent interview with Larry where it sounded to me like he did recommend exclusively CDs for your fixed allocation. His points were:
- Invest in treasuries rather than a bond fund. However, CDs are preferred for individual investors because they carry a higher interest rate. You do not need to diversify your fixed allocation if you invest in treasuries or CDs, so you don't need to pay management expenses to a fund. If your tax bracket justifies, invest in muni bonds, and he gave some criteria on what and what not to buy there.
- Only use a bond fund if you are in a situation (like a 401k) where you cannot buy treasuries or CDs.
- Avoid corporate bonds. They do not adequately compensate for risk. If you do invest in corporates, you sill need to diversify. Corporates have stock like characteristics and are not going to provide protection during a big downturn like treauries do.
- Go a little higher on your equity allocation if you chose to invest your fixed allocation in treasuries or CDs. Your fixed allocation will be less risky without corporates, so you can take more risk on the equity side.

User avatar
FIREchief
Posts: 2446
Joined: Fri Aug 19, 2016 6:40 pm

Re: Swedroe's guidelines to Bonds

Post by FIREchief » Sun Aug 12, 2018 5:59 pm

It looks like I align pretty well with Larry's bond recommendations. I prefer TIPS over CDs because I like the dirt cheap inflation insurance.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
munemaker
Posts: 3261
Joined: Sat Jan 18, 2014 6:14 pm

Re: Swedroe's guidelines to Bonds

Post by munemaker » Sun Aug 12, 2018 6:11 pm

FIREchief wrote:
Sun Aug 12, 2018 5:59 pm
I prefer TIPS over CDs because I like the dirt cheap inflation insurance.
I am trying to educate myself on TIPS and am slowing slogging through a book on the subject.

If I am understanding correctly, when inflation is lower than expected, the TIPS will provide a return that is less than the equivalent non-inflation protected treasury security. Is that right? That turned me off a bit on TIPS. It seems to me that when buying TIPS, you are betting on inflation. Higher than expected inflation --> You win! Lower than expected inflation --> You loose!

Is that correct, or do I have it wrong?

Would it be a good strategy to put half your fixed in TIPS and half in non-inflation protected Treasuries? With that approach, you would be hedging inflation and not betting on the presence or absence of it.

(and I know there is no free lunch)

larryswedroe
Posts: 15650
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Sun Aug 12, 2018 6:41 pm

Today can get 5 year CD at about 3.5, and 5 year TIPS at .75, and expected inflation about 2.1 so about 65bp inflation insurance premium, which to me is on higher side, so I would choose, all else equal the CDs. At say 20-25bp I would choose TIPS, but should depend on your risk aversion to unexpected inflation.

Broken Man 1999
Posts: 1281
Joined: Wed Apr 08, 2015 11:31 am

Re: Swedroe's guidelines to Bonds

Post by Broken Man 1999 » Sun Aug 12, 2018 6:59 pm

Eh, next week I simply must get my bond holding to one bond fund, along with my US Savings Bonds.

Currently in the following:

Vanguard Short-term Treasury Index fund: 41.9%
Vanguard Intermediate-term Treasury Index fund: 15.9%
Vanguard Total Bond fund: 28.2%
Savings Bonds Series I and EE: 14.0%

I'm thinking maybe this:

1. Subtract the US Savings Bonds value from the 50% desired bond allocation. Currently they provide 14% of my bond holdings. At my current expense spending, they hold enough $$$ to cover three years expenses. Of course given their high fixed rate of 3%+, I would not consider actually using them, preferring to hold them until they mature.

That would leave 86% of my 50% bond allocation to be filled as follows:

1. Keep one year's expenses in Vanguard Federal Money Market fund.
2.Use brokerage CDs to build a ladder with rungs equal to the Vanguard Intermediate-term Treasury Index fund's duration minus one year. Each rung would represent my expected expenses, increasing at 3% each year. So, with the Vanguard Federal Money Market fund holding one years expenses. I would start a CD ladder at two years, adding enough rungs to equal the Vanguard Intermediate-term Treasury Index fund's duration. Rinse and repeat, watching the Intermediate-term Treasury Index fund's duration. Put everything else after Vanguard Federal Money Market fund and CDs in Vanguard Intermediate-tern Treasury Index fund.

How does that allocation sound?

I honestly do not like the Vanguard Total Bond holding. I prefer US Govt. 100%. I understand the appeal of the Vanguard Total Bond fund, but it just isn't something I am comfortable holding, especially as my main bond holding. It isn't my main holding now, so I would sell it and Vanguard Short-term Treasury Index fund, and end up with Vanguard Federal Money Market fund, brokerage CDs, and Intermediate-term Treasury Index fund. For now, subject to change, I am not holding any international bonds.

Any comments would be welcome, as this effort is a work in progress.

Bond allocation gives me a headache. For some reason I agonize over bonds, but I am able to make quick and easy decisions on the equity side.

Broken Indecisive Man 1999

Edited to correct a bond holding.
Edited to add bolded statrement.
Last edited by Broken Man 1999 on Sun Aug 12, 2018 7:08 pm, edited 2 times in total.
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

AlphaLess
Posts: 346
Joined: Fri Sep 29, 2017 11:38 pm

Re: Swedroe's guidelines to Bonds

Post by AlphaLess » Sun Aug 12, 2018 7:02 pm

I feel like there are fundamentally different guidelines:
- differentiate between corporate risk, sovereign risk (aka treasury) and munis, i.e., avoid calling them all 'bonds',
- only use mutual funds for diversification purposes. in case of treasury funds, diversification is in term to maturity. in case of munis, diversification is both with respect to issuer as well as term to maturity,
- avoid corporate credit risk (as correlation with equities is too high, and additional diversification is minuscule, if none),
- when considering treasury funds and munis, take careful consideration of tax consequences.

User avatar
FIREchief
Posts: 2446
Joined: Fri Aug 19, 2016 6:40 pm

Re: Swedroe's guidelines to Bonds

Post by FIREchief » Sun Aug 12, 2018 9:53 pm

munemaker wrote:
Sun Aug 12, 2018 6:11 pm
FIREchief wrote:
Sun Aug 12, 2018 5:59 pm
I prefer TIPS over CDs because I like the dirt cheap inflation insurance.
If I am understanding correctly, when inflation is lower than expected, the TIPS will provide a return that is less than the equivalent non-inflation protected treasury security. Is that right? That turned me off a bit on TIPS. It seems to me that when buying TIPS, you are betting on inflation. Higher than expected inflation --> You win! Lower than expected inflation --> You loose!

Is that correct, or do I have it wrong?
That's essentially correct. Buying power is all I'm interested in, so I'm really only interested in real rates.
Would it be a good strategy to put half your fixed in TIPS and half in non-inflation protected Treasuries? With that approach, you would be hedging inflation and not betting on the presence or absence of it.

(and I know there is no free lunch)
There's no right answer for this, and you'll likely get various opinions; none of which is correct or incorrect.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
munemaker
Posts: 3261
Joined: Sat Jan 18, 2014 6:14 pm

Re: Swedroe's guidelines to Bonds

Post by munemaker » Sun Aug 12, 2018 11:06 pm

FIREchief wrote:
Sun Aug 12, 2018 9:53 pm
munemaker wrote:
Sun Aug 12, 2018 6:11 pm
FIREchief wrote:
Sun Aug 12, 2018 5:59 pm
I prefer TIPS over CDs because I like the dirt cheap inflation insurance.
If I am understanding correctly, when inflation is lower than expected, the TIPS will provide a return that is less than the equivalent non-inflation protected treasury security. Is that right? That turned me off a bit on TIPS. It seems to me that when buying TIPS, you are betting on inflation. Higher than expected inflation --> You win! Lower than expected inflation --> You loose!

Is that correct, or do I have it wrong?
That's essentially correct. Buying power is all I'm interested in, so I'm really only interested in real rates.

Makes sense.

Thanks

stvyreb
Posts: 52
Joined: Sat Nov 05, 2016 8:57 pm

Re: Swedroe's guidelines to Bonds

Post by stvyreb » Mon Aug 13, 2018 1:14 pm

lol......looks like my revival of last year's thread led to some discussion, though much of it, seems to not fit my world. eg I'm not ready to go all treasuries in my IRA accounts, and don't want to hassle with brokerage CDs , which I'll probably barely understand.

maybe I can simplify my question:

If I were to use all VG Bond Index Funds, and need some income to live on, should I still try to get my duration to less than 5 years ? As Mr Swedroe, I believe, used to advocate ?


2)
Do people put high figures into CDs ? Any particular Bonds at Treasury Direct that look appealing? I have an account, but have never bought Bonds, just have Savings Bonds

User avatar
vineviz
Posts: 993
Joined: Tue May 15, 2018 1:55 pm

Re: Swedroe's guidelines to Bonds

Post by vineviz » Mon Aug 13, 2018 1:29 pm

stvyreb wrote:
Mon Aug 13, 2018 1:14 pm
If I were to use all VG Bond Index Funds, and need some income to live on, should I still try to get my duration to less than 5 years ? As Mr Swedroe, I believe, used to advocate ?
The same rules apply as always, which is to match the duration of your bonds to your investment horizon.

Money markets should hold money you need in the next 12 months.
Vanguard Short-Term Bond Index (VBIRX) should hold money you need in 1 or 2 years.
Vanguard Interm-Term Bond Index (VBILX) should hold money you need in 3 to 6 years.
Vanguard Long-Term Bond Index (VBLTX) and/or stock funds should hold money you need in 7 or more years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

stvyreb
Posts: 52
Joined: Sat Nov 05, 2016 8:57 pm

Re: Swedroe's guidelines to Bonds

Post by stvyreb » Mon Aug 13, 2018 5:45 pm

thanks but my investment horizon /"when I need the money" is unknown

I've noticed the IT VG Index duration has creep up to 7.2 years ; I'm looking at having both my tax-deferred and taxable bond portfolio sensical overall, and simple enough I can manage without chasing basis points, on things I don't understand.

But, I have a large amount available(from a recent TLH) I just did, I could just let it sit in prime money market, or I could rebalance to a duration < 5 years, or I could start buying 7 year Pen Fed CDs ,

Or I could tilt the whole thing towards treasuries, despite their losing to inflation, and do a mismash of portfolio strategies, as I have not chosen to follow the large scheme or only owning treasuries, and increasing my equities to 60-70% etc

User avatar
FIREchief
Posts: 2446
Joined: Fri Aug 19, 2016 6:40 pm

Re: Swedroe's guidelines to Bonds

Post by FIREchief » Mon Aug 13, 2018 6:47 pm

stvyreb wrote:
Mon Aug 13, 2018 5:45 pm
Or I could tilt the whole thing towards treasuries, despite their losing to inflation
Why do you think that treasuries will "lose to inflation?" :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
Kevin M
Posts: 9881
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Swedroe's guidelines to Bonds

Post by Kevin M » Mon Aug 13, 2018 7:10 pm

larryswedroe wrote:
Sun Aug 12, 2018 6:41 pm
Today can get 5 year CD at about 3.5, and 5 year TIPS at .75, and expected inflation about 2.1 so about 65bp inflation insurance premium, which to me is on higher side, so I would choose, all else equal the CDs. At say 20-25bp I would choose TIPS, but should depend on your risk aversion to unexpected inflation.
New-issue 5-year CDs have been offered at 3.30% at Fidelity and Vanguard, but I now see one at 3.35% (at both VG and Fido). When I looked earlier today, highest secondary yield I saw at Fidelity was 3.40% before commission, so say 3.38% after 0.1% commission. That's still a nice yield premium over the 5-year Treasury at about 2.75%.

However, new issue 3-year CD yield is 3.00%, and you probably can get 3.1% on secondary market. So you're only getting about 30 basis points for extending from 3-year at 3.1% to 5-year at about 3.4%, which is 15 bps/year, so somewhat shy of the guideline of 20 bps per extra year of maturity. I haven't been going much beyond 3-year maturity with CDs in IRA accounts.

In taxable accounts, Treasuries could have higher taxable-equivalent yield (TEY) than CDs at certain maturities, depending on state income tax rate. For me, TEY of 2-year Treasury is higher than 2-year CD, and 3-year Treasury TEY is about equal to 3-year new-issue CD. But, you only get about 7 basis points of additional yield for extending from 2-year to 3-year Treasury (8 bps/year of TEY for me), so I am hesitant to go beyond 2-year maturity in taxable.

I understand that in not extending maturity beyond where I feel I'm being adequately compensated for the additional term risk, I am taking on extra reinvestment risk.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

steve321
Posts: 20
Joined: Sat Sep 09, 2017 9:16 am

Re: Swedroe's guidelines to Bonds

Post by steve321 » Tue Aug 14, 2018 3:55 am

simplesauce wrote:
Tue Jan 24, 2017 8:11 am


-Avoid any bonds longer than 10-years
The Swedroe portfolio is basically a type of risk parity portfolio. Dalio invented risk parity and suggested to Tony robbins a portfolio with 40% long bonds...

stvyreb
Posts: 52
Joined: Sat Nov 05, 2016 8:57 pm

Re: Swedroe's guidelines to Bonds

Post by stvyreb » Tue Aug 14, 2018 2:08 pm

FIREchief wrote:
Mon Aug 13, 2018 6:47 pm
stvyreb wrote:
Mon Aug 13, 2018 5:45 pm
Or I could tilt the whole thing towards treasuries, despite their losing to inflation
Why do you think that treasuries will "lose to inflation?" :confused
If I'm reading it correctly, Treasury Funds for 3 years are negative (but I am a rookie, I don't even know if the numbers include the coupon or not) ; I personally am not game to making complicated ladders (though, it might pay off, the whole thought process gets complicated and like with computers, I'm more apt to make some expensive mistake anyway) .

I guess the idea with the overall risk-parity portfolio is, a small base of 0 risk term individual T-bonds or intermediate length, and a very large equity position (where your inflation risk is mitigated)...... but yes, I would think even non TIP Treasury Direct Bonds have high inflation risk ;

Bond discussions seem too complicated to make many points.

I'm thinking now that the 5 years or less duration was a Bill Bernstein thing, not a Mr Swedroe thing,


PS: Vanguard has CDs ? those APY or are they "dividend rates" look much better than PenFed :)

User avatar
Kevin M
Posts: 9881
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Swedroe's guidelines to Bonds

Post by Kevin M » Tue Aug 14, 2018 3:15 pm

stvyreb wrote:
Tue Aug 14, 2018 2:08 pm
FIREchief wrote:
Mon Aug 13, 2018 6:47 pm
stvyreb wrote:
Mon Aug 13, 2018 5:45 pm
Or I could tilt the whole thing towards treasuries, despite their losing to inflation
Why do you think that treasuries will "lose to inflation?" :confused
If I'm reading it correctly, Treasury Funds for 3 years are negative (but I am a rookie, I don't even know if the numbers include the coupon or not)
It sounds like you are looking at the historical 3-year return of one or more Treasury funds. If we look at Vanguard Intermediate-Term Treasury, VFITX, for example, then the 3-year nominal annualized total return as of 7/31/2018 is 0.31%, so slightly positive. And yes, these numbers include reinvestment of dividends (which you can roughly think of as coupon payments of the bonds in the fund). Adjusting for inflation, the real return has been negative.

What we don't know is whether or not the real (inflation-adjusted) returns over the next N years will be positive or negative. If we knew they would be negative, then investing in TIPS, which currently have positive real yields at all maturities, would be the way to go if these were our only choices. Another possibility that we've discussed is investing in CDs, which might provide enough of a yield premium over Treasuries to provide a positive real return even if Treasuries provide a negative real return.
PS: Vanguard has CDs ? those APY or are they "dividend rates" look much better than PenFed :)
What your seeing is yield to maturity for Vanguard's brokered CDs. For new-issue CDs, the yield to maturity equals the coupon rate. These yields/rates aren't exactly comparable to APY, but the differences are small enough that you can ignore them at current low rates, especially considering the gap between the PenFed rates and the Vanguard rates. For example, PenFed 2-year is 2.60% compared to Vanguard 2-year new-issue at 2.80%, while PenFed 3-year is 2.70% compared to Vanguard 3-year new-issue at 3.00%.

There are much more competitive direct CDs (bought directly from a bank or credit union) available than those offered at PenFed though.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
FIREchief
Posts: 2446
Joined: Fri Aug 19, 2016 6:40 pm

Re: Swedroe's guidelines to Bonds

Post by FIREchief » Tue Aug 14, 2018 4:10 pm

stvyreb wrote:
Tue Aug 14, 2018 2:08 pm
FIREchief wrote:
Mon Aug 13, 2018 6:47 pm
stvyreb wrote:
Mon Aug 13, 2018 5:45 pm
Or I could tilt the whole thing towards treasuries, despite their losing to inflation
Why do you think that treasuries will "lose to inflation?" :confused
If I'm reading it correctly, Treasury Funds for 3 years are negative (but I am a rookie, I don't even know if the numbers include the coupon or not) ; I personally am not game to making complicated ladders (though, it might pay off, the whole thought process gets complicated and like with computers, I'm more apt to make some expensive mistake anyway) .
Individual TIPS are treasuries, so if a person is concerned with inflation, they are an excellent choice. You don't need a complicated ladder in order to buy TIPS.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

stvyreb
Posts: 52
Joined: Sat Nov 05, 2016 8:57 pm

Re: Swedroe's guidelines to Bonds

Post by stvyreb » Tue Aug 14, 2018 6:24 pm

Kevin M wrote:
Tue Aug 14, 2018 3:15 pm
stvyreb wrote:
Tue Aug 14, 2018 2:08 pm
FIREchief wrote:
Mon Aug 13, 2018 6:47 pm
stvyreb wrote:
Mon Aug 13, 2018 5:45 pm
Or I could tilt the whole thing towards treasuries, despite their losing to inflation
Why do you think that treasuries will "lose to inflation?" :confused
If I'm reading it correctly, Treasury Funds for 3 years are negative (but I am a rookie, I don't even know if the numbers include the coupon or not)
It sounds like you are looking at the historical 3-year return of one or more Treasury funds. If we look at Vanguard Intermediate-Term Treasury, VFITX, for example, then the 3-year nominal annualized total return as of 7/31/2018 is 0.31%, so slightly positive. And yes, these numbers include reinvestment of dividends (which you can roughly think of as coupon payments of the bonds in the fund). Adjusting for inflation, the real return has been negative.

What we don't know is whether or not the real (inflation-adjusted) returns over the next N years will be positive or negative. If we knew they would be negative, then investing in TIPS, which currently have positive real yields at all maturities, would be the way to go if these were our only choices. Another possibility that we've discussed is investing in CDs, which might provide enough of a yield premium over Treasuries to provide a positive real return even if Treasuries provide a negative real return.
PS: Vanguard has CDs ? those APY or are they "dividend rates" look much better than PenFed :)
What your seeing is yield to maturity for Vanguard's brokered CDs. For new-issue CDs, the yield to maturity equals the coupon rate. These yields/rates aren't exactly comparable to APY, but the differences are small enough that you can ignore them at current low rates, especially considering the gap between the PenFed rates and the Vanguard rates. For example, PenFed 2-year is 2.60% compared to Vanguard 2-year new-issue at 2.80%, while PenFed 3-year is 2.70% compared to Vanguard 3-year new-issue at 3.00%.

There are much more competitive direct CDs (bought directly from a bank or credit union) available than those offered at PenFed though.

Kevin
Well on depositaccounts.com for 3 year CDs I am seeing it topping out at 2.7% myself

So by "Vanguard CDs" you folks mean brokerage CDs? ; If so, as I recall there are some downsides to doing that ?
------

Anyway, maybe I need to start a new thread ; I need some kind of statement of investing to follow for Bonds, and a simple one preferably.

EG "Keep your Duration < 5 years" or the duration that gives an increase of 20bp for each year of duration longer, but no greater than 8 years

and If I start mixing in CDs would I count those as "cash" etc ?
------

and lastly what about "Tilting" Bonds towards Treasuries or perhaps that doesn't make sense if one is not going to increase their equites along with it

but just for arguments sake 50% equities (with 30% foreign index included) 50% (25% VG bond index - which is 50% USG already 25% VG UST Bond index) ??

Currently I am in th 30% equity range, and otherwise not otherwise very comfortable increasing to 50% equity and /or frequently needing to tweak my asset allocations

User avatar
Kevin M
Posts: 9881
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Swedroe's guidelines to Bonds

Post by Kevin M » Tue Aug 14, 2018 8:38 pm

stvyreb wrote:
Tue Aug 14, 2018 6:24 pm
Well on depositaccounts.com for 3 year CDs I am seeing it topping out at 2.7% myself
That's weird. I see a number of 3-year CDs at 3% or higher, and I even see a 2-year at 3%, all at depositaccounts.com.
So by "Vanguard CDs" you folks mean brokerage CDs? ; If so, as I recall there are some downsides to doing that ?
Yes, I specifically said "Vanguard brokered CDs". Any CD you buy from a broker, like Vanguard, Fidelity or Schwab, is by definition a brokered CD, as opposed to a "direct" CD bought directly from a bank or credit union.

There are pros and cons to brokered CDs vs. direct CDs. A direct CD with a good yield and a low early withdrawal penalty could be considered preferable to a brokered CD with about the same yield, as the early withdrawal option could allow you to get out of the CD fairly cheaply and reinvest in a higher yielding CD if rates increase by much. However, I don't consider this to be of much value for shorter-term CDs, like 2-year or 3-year maturities, so I think lately 2-year to 3-year brokered CDs in an IRA have been a good choice for fixed income.

A benefit to brokered CDs is that you can shop for the best rates from different banks without having to open accounts at different banks or credit unions. I've done lots of both.
Anyway, maybe I need to start a new thread ; I need some kind of statement of investing to follow for Bonds, and a simple one preferably.

EG "Keep your Duration < 5 years" or the duration that gives an increase of 20bp for each year of duration longer, but no greater than 8 years
You can start a new thread, but there already are hundreds of threads on bonds. If you read through some of them, you'll see that there is no consensus on a single approach. One of the simplest bond policies followed by many Bogleheads is to just own a total bond market fund. Since this thread is about Larry Swedroe's guidelines for bonds, you're going to get a different and more complicated set of guidelines. Just read the OP and the first few replies on page 1 of this thread, and you'll get the gist of Larry's guidelines.
and If I start mixing in CDs would I count those as "cash" etc ?
Again, read the first few posts of this thread and you'll see some of Larry's inputs on CDs. CDs are more like bonds than like cash. A brokered CD is very much like a bond, as the price will vary inversely with the applicable yield (interest rate) in exactly the same way as a bond. A direct CD is somewhat different due to the early withdrawal option, but you're still taking on more term risk than with cash.

In an IRA, I would favor a 2-year or 3-year CD over a 2-year or 3-year Treasury, because the yields are significantly higher, while in a taxable account I would favor the Treasuries, because after factoring in the state tax exemption, they have higher taxable-equivalent yields than the CDs.
and lastly what about "Tilting" Bonds towards Treasuries or perhaps that doesn't make sense if one is not going to increase their equites along with it
Again, this is a personal preference. Larry and those who agree with him will stick with Treasuries or CDs since there is no credit risk, but perhaps also consider AA/AAA-rated municipal bonds in taxable accounts, depending on tax rates and yields relative to Treasuries or CDs. Many others are comfortable with the corporate and MBS bonds in something like total bond market, but not Larry or those who agree with him.

As Larry explained early on in the thread, he generally favors CDs over Treasuries if the CD yield premiums are reasonable, especially in tax-advantaged accounts, but suggests that one might still want to hold some Treasuries to rebalance into stocks in a flight-to-safety scenario, in which Treasuries might increase in value as stocks lose value.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
jeffyscott
Posts: 7089
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Swedroe's guidelines to Bonds

Post by jeffyscott » Wed Aug 15, 2018 9:37 am

Kevin M wrote:
Tue Aug 14, 2018 8:38 pm
stvyreb wrote:
Tue Aug 14, 2018 6:24 pm
Well on depositaccounts.com for 3 year CDs I am seeing it topping out at 2.7% myself
That's weird. I see a number of 3-year CDs at 3% or higher, and I even see a 2-year at 3%, all at depositaccounts.com.
You have to scroll past the "sponsored results" to see the higher rates. I see 2.7% at the top of the list, but 3.56% once you get past the sponsored ones (aka ads). And the 3.56% is only 30 months.

I am probably too lazy to chase these direct CD rates with IRA money myself, but there do seem to be some good rates around. I also object to the annoying "donate $5 to some random charity and we'll let you join our credit union", seems like a scammy way to skirt the supposed purpose of credit unions.
press on, regardless - John C. Bogle

User avatar
Doc
Posts: 8372
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Swedroe's guidelines to Bonds

Post by Doc » Wed Aug 15, 2018 10:53 am

Kevin M wrote:
Tue Aug 14, 2018 8:38 pm
As Larry explained early on in the thread, he generally favors CDs over Treasuries if the CD yield premiums are reasonable, especially in tax-advantaged accounts, but suggests that one might still want to hold some Treasuries to rebalance into stocks in a flight-to-safety scenario, in which Treasuries might increase in value as stocks lose value.
The flight-to-safety concept often does not get much attention in these type of threads. We should all try to address where we are coming from when we respond. Not doing so sometimes leads us to disagree when we are not addressing the same starting point. For example when we are looking at CDs vs. Treasuries the flight-to-safety aspects be more important than the yield to some but not necessarily all of us.

Re: "As Larry explained": See a thread from 2007 viewtopic.php?p=19685#p19685

Some snippets from that thread ...
OP wrote:"2nd question on pratical application of Larry's Bond Strateg"
Regarding the topic of 20 basis points per year of maturity being a benchmark for extending the maturity in the fixed income side,
larryswedroe wrote:The market price based on the historical evidence is that today's yield curve is the best estimate of tomorrow's yield curve. Thus if you want to have the highest expected return then you go to the spot on the curve that delivers that. PERIOD. thus it is not active in the important sense. It accepts the market price as the right price.
the rule of 20bp is simply a "common sense" one. you take more risk only if you get at least some compensation for it. You could use 15bp if you prefer, that is judgment call. DFA happens to use 20 and I think they are pretty smart guys so I suggest others consider doing so. To me the amount is not important, but the discipline is.
larryswedroe wrote: Agree, that it is the best predictor and that it appears to be a good predictor only in short term.
and yes that also leads to strategies such as riding the yield curve.
larryswedroe wrote:The shifting maturity approach, as I explained, is based on belief that the market price is correct price, meaning it is best estimate of the right price. And thus by shifting maturity you will earn the highest return IF the market price actually turns out to be correct.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

gmaynardkrebs
Posts: 810
Joined: Sun Feb 10, 2008 11:48 am

Re: Swedroe's guidelines to Bonds

Post by gmaynardkrebs » Wed Aug 15, 2018 11:34 am

larryswedroe wrote:
The market price based on the historical evidence is that today's yield curve is the best estimate of tomorrow's yield curve.

Although this may seem like a niggling question, is it actually based on historical evidence? I thought it was a direct corollary of the EMH. It wouldn't surprise me if the historic evidence is consistent with the EMH, but that's a different question.

User avatar
Doc
Posts: 8372
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Swedroe's guidelines to Bonds

Post by Doc » Wed Aug 15, 2018 11:58 am

gmaynardkrebs wrote:
Wed Aug 15, 2018 11:34 am
larryswedroe wrote:
The market price based on the historical evidence is that today's yield curve is the best estimate of tomorrow's yield curve.

Although this may seem like a niggling question, is it actually based on historical evidence? I thought it was a direct corollary of the EMH. It wouldn't surprise me if the historic evidence is consistent with the EMH, but that's a different question.
Niggling answer.

It came from the heights of Mount Olympus or at least the 5th floor of an office building in Clayton Missouri so it must be true. :D

But I always thought it was historical not EMH. What was left out of Larry's quote was the appendage that I often see -
"but not a very good one".

From a theoretical viewpoint the current yield curve has all the current market information baked into it so for the yield curve to change in the future some new and unforeseen event must occur. And we know that the unknown event will occur because the yield curve does change. So if EMH is at all meaningful it would say the the curve will change.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

Post Reply