Rising inflation with low or no yield in fixed income

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willthrill81
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Re: Rising inflation with low or no yield in fixed income

Post by willthrill81 »

Doc wrote: Wed Sep 02, 2020 4:32 pm RE: Transfer limits.
JackoC wrote: Wed Sep 02, 2020 3:57 pm That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k). Also where there are low limits it's often on ACH 'push' and doesn't apply to 'pull' from another bank.
During market hours I can have the 6 digit proceeds from a T-Bill sale in my bank in less than an hour. Maybe just a few minutes.
If that's important to you, that's fine, but I suspect that few here have the need to transfer $100k or more in under an hour.

The lion's share of investors would be better off earning .80% from an FDIC insured high-yield savings account than T-bills paying .13%.
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skeptical
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Re: Rising inflation with low or no yield in fixed income

Post by skeptical »

ChinchillaWhiplash wrote: Wed Sep 02, 2020 10:58 am How will this play out? Will be no place to park $$$s if rising inflation last with no safe instruments to keep up. How much increase in inflation does the Fed want before increasing interest rates? Will people just put their money into equities and call it good? Should help keep the markets pumped up for a while. Will bond funds drop a bunch if there is a rush to the exits? How do you see this playing out in the next 5 to 10 yrs. ?
I have no idea what will happen in 5-10 years, but I reduced my average duration from what was 5-6 years to between 2 and 2.5 years, and shifted 1/3 of my muni to treasury, and took the hit on income. Since the spread between intermediate and short duration has narrowed, it was relatively speaking, not as big a loss as it seems.

My bonds are now safer (less muni and less term risk). Less exposed to local government budget issues, and I figure if inflation goes up, my current bond portfolio will drop less than half of what it would have, assuming interest rates adjust upwards.

Just accepting the fact that I will get less return going forward.
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ray.james
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Re: Rising inflation with low or no yield in fixed income

Post by ray.james »

I think inflation in general a good thing compared to Deflation.(Fed is truly scared of this) We can already see this in precursors.

Lumber prices jumped in 2020. https://tradingeconomics.com/commodity/lumber
Healthcare steady at 6.8% according to williswatsontowers report.https://www.willistowerswatson.com/-/me ... AW-LRL.pdf
Food prices https://tradingeconomics.com/united-sta ... -inflation
Wheat prices https://www.macrotrends.net/2534/wheat- ... chart-data
Even the speculative portion - dollar index https://www.marketwatch.com/investing/index/dxy

The only reason we do not hear about it, the major part of inflation is transportation costs. Thanks to current oil prices, the impact is small. However the inflation we are talking about is 2-5% and not the crazy 1970s. For young accumulators like me, keep that fat mortgage for some time. For retirees there is merit in exploring liability matching portfolio or even do nothing and expect lower real returns. Grok has some great posts on these.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Doc
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

willthrill81 wrote: Wed Sep 02, 2020 4:40 pm The lion's share of investors would be better off earning .80% from an FDIC insured high-yield savings account than T-bills paying .13%.
I agree. I don't think I've ever made a transaction like that. But I have made many trades of smaller amounts that would have been greatly hampered and often costly if I had to wait until the next business day for the money to arrive in my brokerage account.

Just to be clear, in normal times I wouldn't have any T-Bills at all. Until the yield curve went flat a couple of years back all those assets were in 3-7 Treasury note ladder. The T-Bills are not meant to be a long term asset. That's why they are Bills.
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typical.investor
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Re: Rising inflation with low or no yield in fixed income

Post by typical.investor »

skeptical wrote: Wed Sep 02, 2020 4:45 pm
ChinchillaWhiplash wrote: Wed Sep 02, 2020 10:58 am How will this play out? Will be no place to park $$$s if rising inflation last with no safe instruments to keep up. How much increase in inflation does the Fed want before increasing interest rates? Will people just put their money into equities and call it good? Should help keep the markets pumped up for a while. Will bond funds drop a bunch if there is a rush to the exits? How do you see this playing out in the next 5 to 10 yrs. ?
I have no idea what will happen in 5-10 years, but I reduced my average duration from what was 5-6 years to between 2 and 2.5 years, and shifted 1/3 of my muni to treasury, and took the hit on income. Since the spread between intermediate and short duration has narrowed, it was relatively speaking, not as big a loss as it seems.

My bonds are now safer (less muni and less term risk). Less exposed to local government budget issues, and I figure if inflation goes up, my current bond portfolio will drop less than half of what it would have, assuming interest rates adjust upwards.

Just accepting the fact that I will get less return going forward.
That's probably a good strategy.

Personally, I am not shortening duration. Stocks are definitely on a tear and I think will have more volatility going forward. Sure, rising rates will hurt bonds, but in any crash the rates will fall, the bonds will recover, and there will be a chance to buy stocks at a lower price.

Value stocks have shorter duration. International stocks tend to be more valuey than US. And I have an allocation to emerging markets which are heavier in materials should should provide additional inflation relief.

Anyway, bonds are just one component of my portfolio. I don't want to look at them in isolation.
venkman
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Re: Rising inflation with low or no yield in fixed income

Post by venkman »

MYGA rates are pretty compelling right now, compared to most other fixed income options.

Maybe a shade or two less safe than Treasuries or CD's; but for money you definitely won't need to touch until the end of the term, the liquidity premium is nice.
Northern Flicker
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Re: Rising inflation with low or no yield in fixed income

Post by Northern Flicker »

JoMoney wrote: Wed Sep 02, 2020 12:25 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:17 pm
JoMoney wrote: Wed Sep 02, 2020 12:11 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
There is a penalty / lost interest if not held for 5 years, but Series I Savings Bonds can be redeemed anytime after the 12 month holding period without any principal lost... not sure if "liquidity" is even the right term to use, as these aren't marketable securities, they're redeemed directly by the U.S. Treasury.
Not being able to realize full face value is a loss of some liquidity. There is a tendency on BH to liquidity as a binary, all or nothing thing. It's not. There are gradations.
That hasn't been my perception of it, most seem to use liquidity as a sort of scale of "gradations" on how easily and how much of a security can be bought/sold with little impact to the market price... which is why it's a poor term to be used for a non-marketable security, where the "liquidity" is binary, either the U.S. Government/Treasury will make good on their promise to redeem it or they won't (which would be in default of the terms of the savings bond).
It is not binary for i-bonds in the first 5 years. There are other more subtle issues around whether the value realized in redemption corresponds to the value of continuing to hold the bond instead of redeeming it, but this is not in play when newly issued bonds have a zero real yield. It is a an issue of holding a bond at a higher real yield than prevailing real yield.
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JackoC
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

palanzo wrote: Wed Sep 02, 2020 4:18 pm
JackoC wrote: Wed Sep 02, 2020 3:57 pm
palanzo wrote: Wed Sep 02, 2020 3:40 pm
JackoC wrote: Wed Sep 02, 2020 3:30 pm
Doc wrote: Wed Sep 02, 2020 3:12 pm
1) Liquidity.
1) How is it any easier to withdraw money from a brokerage account where you sold t-bills than make a transfer from a savings account? I can't see that being a practical distinction in favor of bills for many people or situations. My *checking* account pays much more than bills.

A person has to have a *real* aversion of any mouse clicking and account tracking, or many times the $250k FDIC limit in cash, or very small scale (where the rate you get doesn't really matter) to justify bills over bank accounts now IMO.
There is a real practical distinction. Many banks and CUs do not allow you to transfer more than 5K or 10K a day. Some have lower limits.
That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k).
I also used VUSXX. The problem with "push" is that it is then impossible to move a sizable amount to another bank if the original banks drops its rates as is happening now. I'm sure the banks love when you "pull" and then you are stuck. If you know of HYSA that have high "push" amounts please let me know.
Again, few banks actually have such limits to begin with IME. Currently my four highest rate banks are Ally 1.50% no penalty CD (which again I got in March but T-bill rates were actually lower then than now) my checking account (1.25%), LiveOak Bank 0.85%, SFGI Direct 0.81%, none have meaningful withdrawal limits. A business money market for my LLC at 0.70% has a $20k per day ACH limit but it's not a problem given the way I use the account. Others savings accounts I have which are basically empty now because their rates a little lower (Capital One, CIT, Discover Bank) likewise do not have such a restriction.

And again as to 'the bank can drop its rate' this is a reasonable argument when good bank savings rates are in the ballpark of T-bill rates, especially considering no state tax on T-bill interest. It's not a good argument when the 3 month bill is 0.12% and the bank savings rate is 0.80%.
Last edited by JackoC on Thu Sep 03, 2020 9:04 am, edited 1 time in total.
JackoC
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

Doc wrote: Wed Sep 02, 2020 4:32 pm RE: Transfer limits.
JackoC wrote: Wed Sep 02, 2020 3:57 pm That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k). Also where there are low limits it's often on ACH 'push' and doesn't apply to 'pull' from another bank.
During market hours I can have the 6 digit proceeds from a T-Bill sale in my bank in less than an hour. Maybe just a few minutes.
Yeah, very hard to see that being worth getting 0.12% v 0.80%. It's absolutely not for me since I can just keep $100k in my checking account, the place from which all money goes to the 'outside world' (electronic bill pay, ATM, checks) and get 1.25% (a super rate not likely to last much longer, but there are plenty of checking accounts around 0.50%). And I believe the topic is having some money in cash in general. If I only had any money in cash for brief periods, it wouldn't matter what rate I got on it. I think that's covered in my caveat that bank accounts are the obvious choice now over T-bills unless your scale is so large that the $250k per bank account FDIC limit results in an unmanageable number of accounts, or else the amount is so small (either the total portfolio is so small, or a larger portfolio rarely has any money in cash) that the rate on cash doesn't matter.
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Doc
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

JackoC wrote: Thu Sep 03, 2020 9:02 am If I only had any money in cash for brief periods, it wouldn't matter what rate I got on it.
:thumbsup
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Kevin K
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Re: Rising inflation with low or no yield in fixed income

Post by Kevin K »

There's an article on cash on Portfolio Charts that shows in a really helpful visual way how T bills have performed relative to inflation:

https://portfoliocharts.com/2017/05/12/ ... -investor/

Another thing I find helpful about the piece is the reminder not to view cash in isolation but look at how it performs in conjunction with the rest of the assets in a portfolio. And I think the piece makes a good case for T-bills/cash being one of the best assets to deal with inflation. Not to say that those pointing out that CDs from the best online banks and/or I and E bonds may not be better options at the moment.
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Re: Rising inflation with low or no yield in fixed income

Post by dknightd »

ChinchillaWhiplash wrote: Wed Sep 02, 2020 10:58 am How will this play out? Will be no place to park $$$s if rising inflation last with no safe instruments to keep up. How much increase in inflation does the Fed want before increasing interest rates? Will people just put their money into equities and call it good? Should help keep the markets pumped up for a while. Will bond funds drop a bunch if there is a rush to the exits? How do you see this playing out in the next 5 to 10 yrs. ?
I have absolutely no idea! While I was working I kept 3-6 months of expenses in an essentially 0 yielding savings account. My assumption was I was unlikely to loose my job and I could find a new job in 6 months. Now I'm retired I keep about 3-6 years (note: years, not months) in cash like things. I hope that provides me with an adequate buffer since I have no idea how things might turnout.
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