Why not just do CDs and skip bonds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
sitout
Posts: 17
Joined: Tue Aug 15, 2017 8:05 pm

Why not just do CDs and skip bonds?

Post by sitout » Mon Feb 12, 2018 8:16 pm

Perhaps I’m missing something, but with CD’s being insured up to $250K and having rates comparable or in excess of most or many more highly rated bonds, why not just predominantly rely on CD’s for fixed income and largely skip bonds? (I do recognize the holding requirement for CD’s and some tax benefits of certain bonds).

ColoradoRick
Posts: 40
Joined: Sat Aug 27, 2016 12:06 pm

Re: Why not just do CDs and skip bonds?

Post by ColoradoRick » Mon Feb 12, 2018 8:37 pm

+1 - - I decided on a 7 year brokered CD ladder through Vanguard of FDIC insured with a death put (if I die, my wife gets the face value.) Disadvantage with a brokered CD is that if you need the funds before maturity, you can't return it to the bank, but have to sell on the open market and that usually means you will get a haircut. But it is my method of eliminating interest rate risk that you take on NAV of a b and fund because every January a CD matures and I can use it to live on or roll it over. In periods of rising interest rates I usually roll it over. I don't intend on ever cashing out early but it is a risk I am taking.

AlohaJoe
Posts: 3205
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why not just do CDs and skip bonds?

Post by AlohaJoe » Mon Feb 12, 2018 8:39 pm

sitout wrote:
Mon Feb 12, 2018 8:16 pm
Perhaps I’m missing something, but with CD’s being insured up to $250K and having rates comparable or in excess of most or many more highly rated bonds, why not just predominantly rely on CD’s for fixed income and largely skip bonds? (I do recognize the holding requirement for CD’s and some tax benefits of certain bonds).
Lots of people do that. It is discussed (and recommended) constantly on this forum. It is discussed so much there is even a wiki article on it: https://www.bogleheads.org/wiki/CDs_vs_bonds

JBTX
Posts: 3112
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why not just do CDs and skip bonds?

Post by JBTX » Mon Feb 12, 2018 9:29 pm

Nothing wrong with CDs but why would they be preferable? If you want guarantees treasuries are back by federal Govt?

Ibonds probably give better return.

Seems like some like CDs because they get the illusion of safety and security by giving a fixed nominal return over a given period.

z3r0c00l
Posts: 1071
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Why not just do CDs and skip bonds?

Post by z3r0c00l » Mon Feb 12, 2018 9:50 pm

CDs are great, but bond funds are more liquid and still yield more in most cases. Remember that if rates are going up, your CD may not lose value but you will be stuck with a lower paying CD while better ones are available.

Brokered 5 year CDs, which are quite illiquid, pay about the same as VBTLX does right now. (2.8%) It is a no-brainer for me, then, because VBTLX is completely liquid and I can buy and sell whenever I want. And of course, VBTLX and other bond funds dynamically adjust to raising rates. The real choice comes in determining if you can tolerate price fluctuations, and most of us can.

User avatar
Starchild
Posts: 59
Joined: Fri Feb 09, 2018 9:01 am

Re: Why not just do CDs and skip bonds?

Post by Starchild » Mon Feb 12, 2018 10:01 pm

Certainly not an expert here, but the liquidity is the biggest concern. You get penalized inyou have to early withdrawal. Plus, cd rates suck. You’d have to hold up the cash forever to match a modest bond. On the other hand, when interest rates change, you lose principal on bond funds.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Mon Feb 12, 2018 10:40 pm

CDs are a great alternative. Better than bond funds of similar duration and yield because with a bond fund if yields keep rising you may need to wait almost double the duration to get your principal back with the interest based on the original yield.

michaeljc70
Posts: 2727
Joined: Thu Oct 15, 2015 3:53 pm

Re: Why not just do CDs and skip bonds?

Post by michaeljc70 » Tue Feb 13, 2018 12:28 am

CDs are less diverse (generally) and have lower returns. They are also less liquid (without penalty). Something like the Total Bond (BND) holds a variety of maturities, credit ratings and also corporate bonds. CDs didn't return more than 5% like BND in 2008-2011.

motorcyclesarecool
Posts: 411
Joined: Sun Dec 14, 2014 7:39 am

Re: Why not just do CDs and skip bonds?

Post by motorcyclesarecool » Tue Feb 13, 2018 5:12 am

A brokered CD is a bond. They often pay a higher yield than treasuries, and the face value is FDIC insured. The downside of brokered CDs is a loss of liquidity for which you must pay if you wish to access cash prior to the full maturity. Also, if you establish a CD ladder, you have to go in and maintain it as your issues mature. Bond fund is easier to set-and-forget, and more liquid, but is scary to see balance decrease when interest rates increase.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

Carl53
Posts: 1545
Joined: Sun Mar 07, 2010 8:26 pm

Re: Why not just do CDs and skip bonds?

Post by Carl53 » Tue Feb 13, 2018 5:48 am

ColoradoRick wrote:
Mon Feb 12, 2018 8:37 pm
+1 - - I decided on a 7 year brokered CD ladder through Vanguard of FDIC insured with a death put (if I die, my wife gets the face value.) Disadvantage with a brokered CD is that if you need the funds before maturity, you can't return it to the bank, but have to sell on the open market and that usually means you will get a haircut. But it is my method of eliminating interest rate risk that you take on NAV of a b and fund because every January a CD matures and I can use it to live on or roll it over. In periods of rising interest rates I usually roll it over. I don't intend on ever cashing out early but it is a risk I am taking.
If you buy these through a joint account will your death trigger the put? Or are you buying these in your individual account with her as a beneficiary to the brokerage account?

I happened to look yesterday at Vanguard and believe at that time there were no new issue longer term CDs but there were some secondary CDs with yields in excess of 3%. Some of these could be bought at a discounted price as the coupon rate was lower than current rates.

ralph124cf
Posts: 1897
Joined: Tue Apr 01, 2014 11:41 am

Re: Why not just do CDs and skip bonds?

Post by ralph124cf » Tue Feb 13, 2018 6:43 am

The generic term "bonds" as used on this board generally includes all fixed income assets, that is savings accounts, CDs, individual bonds, bond funds, and TIPs.

Ralph

Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: Why not just do CDs and skip bonds?

Post by Iliketoridemybike » Tue Feb 13, 2018 7:12 am

Why not CD’s?

Liquidity
Return
Taxable if held in a taxable account vs muni bond

User avatar
Earl Lemongrab
Posts: 4368
Joined: Tue Jun 10, 2014 1:14 am

Re: Why not just do CDs and skip bonds?

Post by Earl Lemongrab » Tue Feb 13, 2018 4:11 pm

CDs are generally not available in 401(k)s. For a lot of us, that's where fixed-income is kept. We don't want them taxable or to use up valuable Roth space to hold them.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

rongos
Posts: 98
Joined: Wed May 04, 2011 8:36 am

Re: Why not just do CDs and skip bonds?

Post by rongos » Tue Feb 13, 2018 5:17 pm

Long term, bonds outperform CDs.

Conventional thinking says bonds go up when stocks go down (flight to safety).

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Tue Feb 13, 2018 5:49 pm

Earl Lemongrab wrote:
Tue Feb 13, 2018 4:11 pm
CDs are generally not available in 401(k)s. For a lot of us, that's where fixed-income is kept. We don't want them taxable or to use up valuable Roth space to hold them.
Some 401(k) plans have a "brokerage link" where you can invest in brokered CDs among other things. Also, many 401(k) plans have stable value funds (which may or may not have a competitive interest rate).

Mors
Posts: 166
Joined: Wed Aug 16, 2017 10:06 am

Re: Why not just do CDs and skip bonds?

Post by Mors » Tue Feb 13, 2018 8:14 pm

If you go with a cd ladder, make sure you still have a part of your fixed income liquid (bond funds probably) so that you can profit from rebalancing in case a big market correction happens. Past experience suggest to keep enough fixed income in order to rebalance to your original weights in case of an up to 50% stocks correction.

mega317
Posts: 2169
Joined: Tue Apr 19, 2016 10:55 am

Re: Why not just do CDs and skip bonds?

Post by mega317 » Wed Feb 14, 2018 12:39 am

rongos wrote:
Tue Feb 13, 2018 5:17 pm
Long term, bonds outperform CDs.

Conventional thinking says bonds go up when stocks go down (flight to safety).
No. Stocks and most bonds have very low correlation. Meaning when stocks go down, bonds could do anything.

User avatar
Earl Lemongrab
Posts: 4368
Joined: Tue Jun 10, 2014 1:14 am

Re: Why not just do CDs and skip bonds?

Post by Earl Lemongrab » Wed Feb 14, 2018 1:40 am

visualguy wrote:
Tue Feb 13, 2018 5:49 pm
Some 401(k) plans have a "brokerage link" where you can invest in brokered CDs among other things. Also, many 401(k) plans have stable value funds (which may or may not have a competitive interest rate).
Brokered CDs are essentially bonds. They have similar change in value due shifting interest rates.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Wed Feb 14, 2018 2:00 am

Earl Lemongrab wrote:
Wed Feb 14, 2018 1:40 am
visualguy wrote:
Tue Feb 13, 2018 5:49 pm
Some 401(k) plans have a "brokerage link" where you can invest in brokered CDs among other things. Also, many 401(k) plans have stable value funds (which may or may not have a competitive interest rate).
Brokered CDs are essentially bonds. They have similar change in value due shifting interest rates.
True, but you are guaranteed to get the principal plus the interest at the end of the term of the CD, which is not the case with a bond fund where you may need to wait for almost double the duration to get the principal plus the interest (based on the originial yield) if yields keep rising.

Always passive
Posts: 248
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Why not just do CDs and skip bonds?

Post by Always passive » Wed Feb 14, 2018 3:14 am

visualguy wrote:
Mon Feb 12, 2018 10:40 pm
CDs are a great alternative. Better than bond funds of similar duration and yield because with a bond fund if yields keep rising you may need to wait almost double the duration to get your principal back with the interest based on the original yield.
Can you explain that? Why almost double? I thought that waiting until duration was sufficient.

ColoradoRick
Posts: 40
Joined: Sat Aug 27, 2016 12:06 pm

Re: Why not just do CDs and skip bonds?

Post by ColoradoRick » Wed Feb 14, 2018 11:20 am

Carl53 wrote:
Tue Feb 13, 2018 5:48 am
ColoradoRick wrote:
Mon Feb 12, 2018 8:37 pm
+1 - - I decided on a 7 year brokered CD ladder through Vanguard of FDIC insured with a death put (if I die, my wife gets the face value.) Disadvantage with a brokered CD is that if you need the funds before maturity, you can't return it to the bank, but have to sell on the open market and that usually means you will get a haircut. But it is my method of eliminating interest rate risk that you take on NAV of a b and fund because every January a CD matures and I can use it to live on or roll it over. In periods of rising interest rates I usually roll it over. I don't intend on ever cashing out early but it is a risk I am taking.
If you buy these through a joint account will your death trigger the put? Or are you buying these in your individual account with her as a beneficiary to the brokerage account?

I happened to look yesterday at Vanguard and believe at that time there were no new issue longer term CDs but there were some secondary CDs with yields in excess of 3%. Some of these could be bought at a discounted price as the coupon rate was lower than current rates.
Sorry Carl53 just saw your question....I should have mentioned but didn't it is in a rollover IRA from work (I'm retired) where I am sole owner but my wife is a beneficiary. Never say never, but I have 2.5 years living expenses in settlement account and Short Term Treasuries plus another 2 years in a taxable joint account so my plan is never to have to liquidate the CDs before maturity. I am not sure in either a taxable account or joint account. I would suggest calling your financial firm.

mindbogle
Posts: 129
Joined: Sun Feb 10, 2013 11:28 am

Re: Why not just do CDs and skip bonds?

Post by mindbogle » Wed Feb 14, 2018 11:50 am

...with CD’s being insured up to $250K and having rates comparable or in excess of most or many more highly rated bonds
Yes, except that recently the yield premium for direct CD's over treasuries has dwindled, and in some cases gone negative.

MB

stocknoob4111
Posts: 190
Joined: Sun Jan 07, 2018 12:52 pm

Re: Why not just do CDs and skip bonds?

Post by stocknoob4111 » Wed Feb 14, 2018 1:16 pm

I went with a Bond Fund (VBTLX) because if I needed emergency access to cash I can sell only as much as required. If you have a larger sum (say $100k) it would be messy to put it in a CD because say you need $10k then you would have to break the entire CD and pay the huge penalties on the entire sum. With a bond fund I can sell only $10k and limit my losses. Perhaps you can open 10 CDs of $10k each but that is messy. Also, many CDs have minimums to get the top rate. In this way I think CDs are a bit rigid and not as flexible as a bond fund.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Wed Feb 14, 2018 2:08 pm

Always passive wrote:
Wed Feb 14, 2018 3:14 am
visualguy wrote:
Mon Feb 12, 2018 10:40 pm
CDs are a great alternative. Better than bond funds of similar duration and yield because with a bond fund if yields keep rising you may need to wait almost double the duration to get your principal back with the interest based on the original yield.
Can you explain that? Why almost double? I thought that waiting until duration was sufficient.
It's 2D-1 where D is the duration. See here:

viewtopic.php?t=165157

stocknoob4111
Posts: 190
Joined: Sun Jan 07, 2018 12:52 pm

Re: Why not just do CDs and skip bonds?

Post by stocknoob4111 » Wed Feb 14, 2018 3:20 pm

visualguy wrote:
Wed Feb 14, 2018 2:08 pm
It's 2D-1 where D is the duration. See here:

viewtopic.php?t=165157
The way I understood it NAV should rise/drop just based on duration and current yield so why would I need to wait 2D? That does not make much sense. Say D = 6 years and interest rates increase by .5% and remain constant for 6 years I expect my NAV to drop by .5 x 6 = 3% but I would recoup the 3% drop in NAV with the increased yield and should also get my original promised yield. Also re-investment of the dividend is going to be at higher rates in a rising rate environment compared to a CD which is fixed rate.

I know the other thread refers to complex mathematical models but this is a very simple math problem so models should not be necessary...perhaps they are modeling an environment where the rates are constantly rising?

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Wed Feb 14, 2018 11:04 pm

Yes, they are looking at a rising rate environment such as a 0.5% increase per year. This is more like what we are dealing with - repeated gradual increases over time, not a single big increase.

onourway
Posts: 1016
Joined: Thu Dec 08, 2016 3:39 pm

Re: Why not just do CDs and skip bonds?

Post by onourway » Thu Feb 15, 2018 10:17 am

stocknoob4111 wrote:
Wed Feb 14, 2018 3:20 pm
visualguy wrote:
Wed Feb 14, 2018 2:08 pm
It's 2D-1 where D is the duration. See here:

viewtopic.php?t=165157
The way I understood it NAV should rise/drop just based on duration and current yield so why would I need to wait 2D? That does not make much sense. Say D = 6 years and interest rates increase by .5% and remain constant for 6 years I expect my NAV to drop by .5 x 6 = 3% but I would recoup the 3% drop in NAV with the increased yield and should also get my original promised yield. Also re-investment of the dividend is going to be at higher rates in a rising rate environment compared to a CD which is fixed rate.

I know the other thread refers to complex mathematical models but this is a very simple math problem so models should not be necessary...perhaps they are modeling an environment where the rates are constantly rising?
The issue can be mitigated if one is using a bond fund and needs to meet a specific future obligation by holding two bond funds, one with short duration, and re-balancing periodically to keep the average duration of the two equal to the time to obligation. This is discussed exhaustively in the wiki and in this thread that spawned much of that current section of the wiki.

Larry2623
Posts: 36
Joined: Sat Jul 15, 2017 9:23 pm

Re: Why not just do CDs and skip bonds?

Post by Larry2623 » Thu Feb 15, 2018 10:33 am

The issue I have with Bond advice is we have been in a 30 year bond bull market. I wonder how many people's advice take that into account?

onourway
Posts: 1016
Joined: Thu Dec 08, 2016 3:39 pm

Re: Why not just do CDs and skip bonds?

Post by onourway » Thu Feb 15, 2018 10:41 am

Larry2623 wrote:
Thu Feb 15, 2018 10:33 am
The issue I have with Bond advice is we have been in a 30 year bond bull market. I wonder how many people's advice take that into account?
Well, since it comes up in nearly every bond thread, I'd say it's been discussed a lot.

User avatar
ruralavalon
Posts: 12997
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Why not just do CDs and skip bonds?

Post by ruralavalon » Thu Feb 15, 2018 1:09 pm

sitout wrote:
Mon Feb 12, 2018 8:16 pm
Perhaps I’m missing something, but with CD’s being insured up to $250K and having rates comparable or in excess of most or many more highly rated bonds, why not just predominantly rely on CD’s for fixed income and largely skip bonds? (I do recognize the holding requirement for CD’s and some tax benefits of certain bonds).
CDs are a reasonable alternative, but less liquid and more trouble than a bond fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
ogd
Posts: 4854
Joined: Thu Jun 14, 2012 11:43 pm

Re: Why not just do CDs and skip bonds?

Post by ogd » Thu Feb 15, 2018 11:06 pm

visualguy wrote:
Wed Feb 14, 2018 2:08 pm
Always passive wrote:
Wed Feb 14, 2018 3:14 am
visualguy wrote:
Mon Feb 12, 2018 10:40 pm
CDs are a great alternative. Better than bond funds of similar duration and yield because with a bond fund if yields keep rising you may need to wait almost double the duration to get your principal back with the interest based on the original yield.
Can you explain that? Why almost double? I thought that waiting until duration was sufficient.
It's 2D-1 where D is the duration. See here:

viewtopic.php?t=165157
I wrote the post that you're referring to and I hate to see that argument misused.

The 2D-1 factoid does not mean that you're stuck waiting for that long in a bond fund to recover your money and that this is a problem inherent with bond funds somehow. It's merely what happens if you do nothing and you keep your investments (duration, in this case) constant like most of us do. You can do something different if cashing out after D years is what you wanted. The argument is instead meant to show that continued rate increases do not push your recovery horizon out indefinitely, and after a while the ever-increasing yield expectations built into "you get your original investment plus starting yield D years later" eventually overwhelm the ongoing losses from each increase.

To understand where the difference between, say, a 5 year bond fund and a 5 year bond or CD [*] comes from, it's illustrative to look at the situation four years later. In the bond fund case, you still have a 5 year (-ish) duration. In the bond or CD case, you have a 1 year-ish duration. It's no wonder then that the fund is more exposed to further interest rate increases. The question is -- what is it you want in your portfolio? A 5 year duration or a 1 year duration? If you wanted 1 year, you should have lowered the fund duration long before, by mixing with cash or shorter funds; with enough such steps you can get very close to the behavior of an instrument with declinining duration. But 1) be aware that there is a flip side of the coin and you can miss out on potentially high rewards of a 5 year duration (example), and 2) most of us actually do keep duration constant rather than cashing out after 5 years or seesawing back and forth between 5 years and zero. If the 1 year bond is part of a much larger portfolio that averages to a constant 5 years, then the behavior of the portfolio as a whole will mirror that of the fund, in spite of all the instruments being held to maturity -- this is simply a function of bond prices being sensical in a liquid market, declines in value precisely accounting for the lower interest of an instrument from before the rate increase.

[*] This applies to brokered CDs or in general CDs where early withdrawals are not allowed or are too expensive. The CDs bought directly from a bank that do offer relatively cheap early withdrawals do also offer a genuine reduction in risk compared to bonds, bond funds or even the first category of CDs. This is sort of a freebie for the small investor that, by all means, one should take advantage of. Although it should be noted, I have many such CDs and I'm not breaking them -- just doesn't seem worth it yet and they might run out or get too close to maturity before it ever is worth it.

So please don't quote my 2D-1 post in the sense that you did. It's very easy for someone to get their money back plus original yield D years after a rate increase if they wish to do so -- by simply selling the fund and buying the equally-depreciated bonds or brokered CDs, or by shifting bond funds to a declining duration as mentioned above. The fact that you can still exchange as much of one instrument for another as you could before the risk event is clear proof that they carry the same risk. The post just notes what happens if one doesn't make any changes to the duration of a portfolio, on the premise that if one wants intermediate bonds, one still wants intermediate bonds after their yields have increased. Or on the premise of laziness, take your pick.
visualguy wrote:Yes, they are looking at a rising rate environment such as a 0.5% increase per year. This is more like what we are dealing with - repeated gradual increases over time, not a single big increase.
I should add -- you don't know this will happen. We're not talking about Fed overnight rates, but the yields of 5 year bonds (or 10, or so on), and those are set by bond market participants with wisdom, political connections and advanced degrees, who don't like to lose money. You're saying that you know better. Personally I think one has a better chance of stock picking Amazon vs Walmart (for more rewards, probably) than playing bond market games with those guys.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Thu Feb 15, 2018 11:28 pm

The reason I mentioned the 2D-1 is that many have the misconception that they would get their principal back with the interest based on the original yield after D even in a rising interest rate environment. I know that I wasn't sure myself about how long that would take until reading the cited study, and it was a surprise to me to learn that it would be that long.

Yes, you can shorten duration, but now this gets complicated with bond funds... How do you manage your bond fund portfolio once you do need to make regular withdrawals or you are close to that stage? Not sure what the strategy is supposed to be for the withdrawal stage or rebalancing.

Also, this study was one of the factors that pushed me toward investing more in CDs instead. I know what I'm getting there and when, the yields for my CD ladders are similar to bond funds of similar duration, and I can do early withdrawal on some of the CDs.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Thu Feb 15, 2018 11:35 pm

ogd wrote:
Thu Feb 15, 2018 11:06 pm
I should add -- you don't know this will happen. We're not talking about Fed overnight rates, but the yields of 5 year bonds (or 10, or so on), and those are set by bond market participants with wisdom, political connections and advanced degrees, who don't like to lose money. You're saying that you know better. Personally I think one has a better chance of stock picking Amazon vs Walmart (for more rewards, probably) than playing bond market games with those guys.
Exactly - I don't want to play bond market games with those guys, which is one of the reasons I feel more confident with CDs. I don't see what I stand to gain messing around with bond funds. Where's the reward that makes it worth it? Maybe in tax-exempt bond funds, but I don't see it in taxable bond market index funds.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Why not just do CDs and skip bonds?

Post by RRAAYY3 » Thu Feb 15, 2018 11:42 pm

visualguy wrote:
Thu Feb 15, 2018 11:35 pm
ogd wrote:
Thu Feb 15, 2018 11:06 pm
I should add -- you don't know this will happen. We're not talking about Fed overnight rates, but the yields of 5 year bonds (or 10, or so on), and those are set by bond market participants with wisdom, political connections and advanced degrees, who don't like to lose money. You're saying that you know better. Personally I think one has a better chance of stock picking Amazon vs Walmart (for more rewards, probably) than playing bond market games with those guys.
Exactly - I don't want to play bond market games with those guys, which is one of the reasons I feel more confident with CDs. I don't see what I stand to gain messing around with bond funds. Where's the reward that makes it worth it? Maybe in tax-exempt bond funds, but I don't see it in taxable bond market index funds.
Sounds like you actually want steady, reliable returns for your fixed income - which I understand and agree with completely

I don’t think I’ll ever bother with bonds - lower returns than stocks and are still “risky”/can lose value

I don’t see the appeal, other than “they don’t suck as much as stocks do in bear markets”

sitout
Posts: 17
Joined: Tue Aug 15, 2017 8:05 pm

Re: Why not just do CDs and skip bonds?

Post by sitout » Thu Feb 15, 2018 11:47 pm

Thanks a lot for the awesome discussions. I finally dipped my toe in earlier today and sold equity funds in a Vanguard IRA account to purchase a 18-month brokered new issue CD at 2.1%. The process at Vanguard was easy.

User avatar
ogd
Posts: 4854
Joined: Thu Jun 14, 2012 11:43 pm

Re: Why not just do CDs and skip bonds?

Post by ogd » Fri Feb 16, 2018 12:03 am

visualguy wrote:
Thu Feb 15, 2018 11:35 pm
ogd wrote:
Thu Feb 15, 2018 11:06 pm
I should add -- you don't know this will happen. We're not talking about Fed overnight rates, but the yields of 5 year bonds (or 10, or so on), and those are set by bond market participants with wisdom, political connections and advanced degrees, who don't like to lose money. You're saying that you know better. Personally I think one has a better chance of stock picking Amazon vs Walmart (for more rewards, probably) than playing bond market games with those guys.
Exactly - I don't want to play bond market games with those guys, which is one of the reasons I feel more confident with CDs. I don't see what I stand to gain messing around with bond funds. Where's the reward that makes it worth it? Maybe in tax-exempt bond funds, but I don't see it in taxable bond market index funds.
Bond market games meant trying to outguess them. Passive participation in the bond market is nothing of the sort.

Bond funds are far more liquid and significantly easier to manage while having the same risks as brokered CDs, which btw are part of the bond market though it might not be immediately obvious.

Bank-direct CDs are influenced by the bond market, but they can be quite insulated due to marketing factors (attracting checking customers etc) and banks counting on you to not make cold blooded decisions on when to use (almost ab-use) early withdrawals. Hunting for good CDs is IMHO one of the few productive ways of spending time on fixed income. Brokered CDs or individual bonds or even (again) trying to shift around based on the direction of rates -- not so productive.

visualguy
Posts: 583
Joined: Thu Jan 30, 2014 1:32 am

Re: Why not just do CDs and skip bonds?

Post by visualguy » Fri Feb 16, 2018 12:29 am

ogd wrote:
Fri Feb 16, 2018 12:03 am
Bond funds are far more liquid and significantly easier to manage while having the same risks as brokered CDs, which btw are part of the bond market though it might not be immediately obvious.
How are bond funds easier to manage? Is there a document somewhere that explains how to manage the duration on these funds in the withdrawal stage or close to it, and how to manage rebalancing when you have a bunch of bond funds with different durations?

Regarding brokered CDs... The yield on a 5-year brokered CD is currently 2.8%. The SEC yield on Vanguard total bond (VBTLX) is 2.86% with a duration of 6.1 years. With the 5-year CD, I know that I'm getting my principal with 2.8% interest per year after 5 years. With VBTLX, it's possible that I'll just get the principal back after 6.1 years. How is the risk the same?

I could go with a shorter duration fund - VBIRX with a duration of 2.7 years, so that I get the principal back with the interest based on the original yield after 4.4 years (2D-1), but then the SEC yield is only 2.36%.

User avatar
ogd
Posts: 4854
Joined: Thu Jun 14, 2012 11:43 pm

Re: Why not just do CDs and skip bonds?

Post by ogd » Fri Feb 16, 2018 2:49 am

visualguy wrote:
Fri Feb 16, 2018 12:29 am
How are bond funds easier to manage? Is there a document somewhere that explains how to manage the duration on these funds in the withdrawal stage or close to it, and how to manage rebalancing when you have a bunch of bond funds with different durations?
It's easier to manage because I don't have a use case for withdrawing $X exactly 5 years from now from bonds specifically. If I did have the need to withdraw $X, it would be far more likely to be from stocks. And if stocks don't do well, it would be far more likely that I need more than $X before 5 years to buy depreciated stocks, than it is for everything to align so that 5 years from now, but not before, the best place to withdraw from is bonds. So for me, I'd end up managing many brokered CDs and constantly worrying about their liquidity.

I'd think it likely that you don't have that use case either, but you're putting the cart before the horse in this discussion and deriving the use case from the instrument. Maybe I'm wrong. Like I said, it can be done; a recent discussion by bobcat2 (who I believe used to be an ardent proponent of using individual bonds to match liabilities, but now is perfectly fine with funds): viewtopic.php?f=10&t=240325
visualguy wrote:
Fri Feb 16, 2018 12:29 am
Regarding brokered CDs... The yield on a 5-year brokered CD is currently 2.8%. The SEC yield on Vanguard total bond (VBTLX) is 2.86% with a duration of 6.1 years.
Unfortunately, the SEC yield has a built-in imprecision during periods when rates are moving sharply because it's a 30 day average. Right now it's one of those periods and the 30 days still cover a period of significantly lower market yield. If nothing else happens the SEC yield should settle to about 3.00% in my estimation.

An easier thing to compare right now is a 5 year Treasury, with yield updated daily. That's 2.65%, so the CD still has slightly better yield because of its lower liquidity -- the Treasury has virtually zero spread -- and its slightly inferior guarantees -- the FDIC won't reimburse any more interest after a bank failure.
visualguy wrote:
Fri Feb 16, 2018 12:29 am
With VBTLX, it's possible that I'll just get the principal back after 6.1 years. How is the risk the same?

I could go with a shorter duration fund - VBIRX with a duration of 2.7 years, so that I get the principal back with the interest based on the original yield after 4.4 years (2D-1), but then the SEC yield is only 2.36%.
Like I said, you are misusing the 2D - 1 factoid and it doesn't mean what you say at all. In more ways than one: you have a way to get your principal plus yield D years after whatever happens, so buying VBTLX for a horizon 6.1 years from now is entirely appropriate. But also, VBTLX will be grossly inappropriate for that horizon 5 years from now, and so will be VBIRX despite your 2D -1 calculation. At that point you will need a 1.1 duration fund. If that's the actual use case and not just an argument. (I'm also realizing now that I said these exact things in the second post in the thread you quoted, btw)

Also, I don't know where you got the "just the principal after D years", as in without any yield. There is no duration math that says anything of the sort.

Your CD, as of right now, is exactly as risky as a 5 year Treasury fund. Over time, it will get less and less risky, but that's like saying that a Target Retirement fund is safer than the corresponding stock/bond/international combination: right now, it's not, and its trajectory over time is something that can be reproduced if desired.

ColoradoRick
Posts: 40
Joined: Sat Aug 27, 2016 12:06 pm

Re: Why not just do CDs and skip bonds?

Post by ColoradoRick » Wed Apr 18, 2018 9:31 pm

Carl53 wrote:
Tue Feb 13, 2018 5:48 am
ColoradoRick wrote:
Mon Feb 12, 2018 8:37 pm
+1 - - I decided on a 7 year brokered CD ladder through Vanguard of FDIC insured with a death put (if I die, my wife gets the face value.) Disadvantage with a brokered CD is that if you need the funds before maturity, you can't return it to the bank, but have to sell on the open market and that usually means you will get a haircut. But it is my method of eliminating interest rate risk that you take on NAV of a b and fund because every January a CD matures and I can use it to live on or roll it over. In periods of rising interest rates I usually roll it over. I don't intend on ever cashing out early but it is a risk I am taking.
If you buy these through a joint account will your death trigger the put? Or are you buying these in your individual account with her as a beneficiary to the brokerage account?

I happened to look yesterday at Vanguard and believe at that time there were no new issue longer term CDs but there were some secondary CDs with yields in excess of 3%. Some of these could be bought at a discounted price as the coupon rate was lower than current rates.

Carl53 its my personal rollover IRA with my wife as beneficiary. You raise a good question about a joint tenants account. I don't know but maybe someone here does or a quick call to vanguard brokerage might answer it.

Post Reply