Classifying CDs as Bonds or Short Term assets

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
AtomicCash
Posts: 23
Joined: Mon Jun 25, 2018 9:14 am

Classifying CDs as Bonds or Short Term assets

Post by AtomicCash » Mon Jul 16, 2018 5:39 pm

I've used Fidelity's Asset Allocation analysis tool before and was confused why their percentages for Bonds and Short Term didn't match my own spreadsheet calculations. I dug into it more today and found out that Fido calls a CD a "Bond" if maturity is more than 1 year out and it calls a CD "Short Term" if maturity is less than 1 year out.

So a 2 year CD will be shown as a Bond in your Asset Allocation for the first year and then it will be shown as Short Term in your Asset Allocation for the second year.

I actually assign all my CDs to Short Term in my own Asset Allocation spreadsheet (for reasons that may only make sense to me), but I thought it was interesting the way Fido's analysis tool is doing it.

Marc

retiredjg
Posts: 33262
Joined: Thu Jan 10, 2008 12:56 pm

Re: Classifying CDs as Bonds or Short Term assets

Post by retiredjg » Mon Jul 16, 2018 5:56 pm

If you are only looking at retirement assets, I don't think the demarcation between "bond" and "short term asset" is of much importance. It all falls into the fixed income assets portion of the portfolio, commonly called the bond side.

To me, a CD of any term would fall into the "fixed income assets" side of the portfolio. Or the "non-stock" side of the portfolio which is probably easier to think of .

I just don't see any need to carve out a short term bucket - it's all "bonds" to me. How much is "short term" is not particularly important.

User avatar
munemaker
Posts: 3292
Joined: Sat Jan 18, 2014 6:14 pm

Re: Classifying CDs as Bonds or Short Term assets

Post by munemaker » Mon Jul 16, 2018 6:26 pm

Brokered CDs = Bonds
Bank CDs = Cash

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Classifying CDs as Bonds or Short Term assets

Post by danielc » Mon Jul 16, 2018 8:49 pm

AtomicCash wrote:
Mon Jul 16, 2018 5:39 pm
I've used Fidelity's Asset Allocation analysis tool before and was confused why their percentages for Bonds and Short Term didn't match my own spreadsheet calculations. I dug into it more today and found out that Fido calls a CD a "Bond" if maturity is more than 1 year out and it calls a CD "Short Term" if maturity is less than 1 year out.
That seems reasonable. A CD is basically a bond with a put option. I don't know where most people draw the line between short term and intermediate term, but 1 year seems reasonable enough.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Classifying CDs as Bonds or Short Term assets

Post by danielc » Mon Jul 16, 2018 8:52 pm

munemaker wrote:
Mon Jul 16, 2018 6:26 pm
Brokered CDs = Bonds
Bank CDs = Cash
That doesn't make any sense. Surely maturity is far more important when deciding how to classify fixed income instruments. "Cash" is short-term fixed income like money market and short-term bonds.

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

Re: Classifying CDs as Bonds or Short Term assets

Post by lack_ey » Mon Jul 16, 2018 9:12 pm

danielc wrote:
Mon Jul 16, 2018 8:52 pm
munemaker wrote:
Mon Jul 16, 2018 6:26 pm
Brokered CDs = Bonds
Bank CDs = Cash
That doesn't make any sense. Surely maturity is far more important when deciding how to classify fixed income instruments. "Cash" is short-term fixed income like money market and short-term bonds.
I don't think that's unreasonable.

With respect to investment behavior, looking at price (and thus total return) volatility, bank CDs can be cashed out at the same price over time (principal minus early withdrawal penalty) whereas brokered CDs are marketable and change in price like bonds. So while I'm not sure I entirely agree with the categorization, this would seem to make sense to me.

User avatar
munemaker
Posts: 3292
Joined: Sat Jan 18, 2014 6:14 pm

Re: Classifying CDs as Bonds or Short Term assets

Post by munemaker » Mon Jul 16, 2018 9:46 pm

danielc wrote:
Mon Jul 16, 2018 8:52 pm
munemaker wrote:
Mon Jul 16, 2018 6:26 pm
Brokered CDs = Bonds
Bank CDs = Cash
That doesn't make any sense. Surely maturity is far more important when deciding how to classify fixed income instruments. "Cash" is short-term fixed income like money market and short-term bonds.
Brokered trade just as bonds on the secondary market. Bank CDs have no secondary market, can be redeemed for face value (less early redemption penalty, where applicable) and are considered cash equivalents.

EDIT: OK - I am going to eat my words on this:
Certificates of Deposit
Bank certificates of deposit, or CDs, tie up your money for a specific length of time while paying higher interest than savings accounts. Only CDs of less than three months qualify as cash equivalents.
reference: https://pocketsense.com/can-used-cash-e ... -1779.html

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Classifying CDs as Bonds or Short Term assets

Post by danielc » Mon Jul 16, 2018 11:02 pm

lack_ey wrote:
Mon Jul 16, 2018 9:12 pm
I don't think that's unreasonable.

With respect to investment behavior, looking at price (and thus total return) volatility, bank CDs can be cashed out at the same price over time (principal minus early withdrawal penalty) whereas brokered CDs are marketable and change in price like bonds. So while I'm not sure I entirely agree with the categorization, this would seem to make sense to me.
You make a good point. The distinction between bonds with and without a put option is indeed important. I just don't agree that bonds with a put option are cash, but maybe that's just scemantics. For example, I think it is reasonable to say that I-Bonds and Bank CDs are similar to each other and both are different from Brokered CDs. But I would have said that all these things are bonds.

User avatar
jeffyscott
Posts: 7104
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Classifying CDs as Bonds or Short Term assets

Post by jeffyscott » Wed Jul 18, 2018 1:58 pm

I am including them in a category that I call: "Cash and gov't guaranteed". I don't formally divide these but just make sure enough of it is liquid enough to cover our potential needs/wants beyond what pension provides.

I am trying to avoid bond funds that hold a lot of treasuries and so our other fixed income is mostly corporate, foreign, and floating rate bonds. For these I have 2 categories: "low duration bond funds" and "other bond funds".

I recently revised fixed income categories due to being able to roll over assets and start buying CDs in tax deferred accounts. This is what I decided on at least for now.
press on, regardless - John C. Bogle

User avatar
Kevin M
Posts: 9896
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Classifying CDs as Bonds or Short Term assets

Post by Kevin M » Wed Jul 18, 2018 3:23 pm

AtomicCash wrote:
Mon Jul 16, 2018 5:39 pm
I've used Fidelity's Asset Allocation analysis tool before and was confused why their percentages for Bonds and Short Term didn't match my own spreadsheet calculations. I dug into it more today and found out that Fido calls a CD a "Bond" if maturity is more than 1 year out and it calls a CD "Short Term" if maturity is less than 1 year out.

So a 2 year CD will be shown as a Bond in your Asset Allocation for the first year and then it will be shown as Short Term in your Asset Allocation for the second year.

I actually assign all my CDs to Short Term in my own Asset Allocation spreadsheet (for reasons that may only make sense to me), but I thought it was interesting the way Fido's analysis tool is doing it.

Marc
It doesn't do this just for CDs, but also for Treasuries; I have both a bill and a note with less than one year to maturity that are classified as short term. This is in line with the typical financial markets definition of cash or short-term reserves. I note that munis with less than one year to maturity are considered bonds, so I guess Fidelity requires little-to-no default risk for an asset to be classified as short-term.

It doesn't match my definition of cash or short-term reserves, which is fixed income with no term risk (0-year maturity, no-penalty CD, etc.) and little-to-no credit risk. So for me, any brokered CD is a bond. My definition of cash or short-term reserves requires liquidation price certainty and no loss upon liquidation.

A direct CD (bought directly from a bank or credit union) with an early withdrawal option is a different beast entirely. If the early withdrawal penalty (EWP) is small enough relative to the term to maturity, then it can have significantly less term risk than a brokered CD (or bond) of the same maturity. However, I don't consider direct CDs cash because there is some term risk; there is a loss upon early redemption, and there is opportunity cost if yields increase whether you do an early withdrawal or not. I'm not going to do an early withdrawal from a CD to pay for a short-term liability if I have cash in a bank account or money market, so there's obviously a difference.

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

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Classifying CDs as Bonds or Short Term assets

Post by danielc » Wed Jul 18, 2018 4:25 pm

jeffyscott wrote:
Wed Jul 18, 2018 1:58 pm
I am trying to avoid bond funds that hold a lot of treasuries and so our other fixed income is mostly corporate, foreign, and floating rate bonds. For these I have 2 categories: "low duration bond funds" and "other bond funds".
What's wrong with treasuries?

User avatar
AtomicCash
Posts: 23
Joined: Mon Jun 25, 2018 9:14 am

Re: Classifying CDs as Bonds or Short Term assets

Post by AtomicCash » Wed Jul 18, 2018 4:40 pm

jeffyscott wrote:
Wed Jul 18, 2018 1:58 pm
I am including them in a category that I call: "Cash and gov't guaranteed". I don't formally divide these but just make sure enough of it is liquid enough to cover our potential needs/wants beyond what pension provides.
...
My Short Term category is comprised of only CDs. It's about 35% of my portfolio now. At 2% return, and with my pension, I won't outlive that money. So I wanted to put that money somewhere safe with no default risk and not care what the market does with the other 65% of my portfolio.

I know this is opening a can of worms, but I consider my brokered CD ladder to be as liquid as cash. It's a 2 year ladder with about 12 rungs so I have a chunk of cash available every 2-3 months. That's plenty liquid for my lifestyle.
Kevin M wrote:
Wed Jul 18, 2018 3:23 pm
... I note that munis with less than one year to maturity are considered bonds, so I guess Fidelity requires little-to-no default risk for an asset to be classified as short-term. ...

Kevin
Yeah, I noticed that too. I guess a corporate bond is a bond is a bond. :)

Marc

User avatar
jeffyscott
Posts: 7104
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Classifying CDs as Bonds or Short Term assets

Post by jeffyscott » Wed Jul 18, 2018 4:56 pm

danielc wrote:
Wed Jul 18, 2018 4:25 pm
jeffyscott wrote:
Wed Jul 18, 2018 1:58 pm
I am trying to avoid bond funds that hold a lot of treasuries and so our other fixed income is mostly corporate, foreign, and floating rate bonds. For these I have 2 categories: "low duration bond funds" and "other bond funds".
What's wrong with treasuries?
Nothing, but I don't want them in tax deferred as they are no safer than CDs but pay less interest.

I have some in taxable, where the net yield exceeds CDs due to the exemption from state income tax.
press on, regardless - John C. Bogle

Post Reply