Prime Money Market or Total Bond Market

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CoastalWinds
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Re: Prime Money Market or Total Bond Market

Post by CoastalWinds » Fri Jul 05, 2019 5:14 pm

Rob5TCP wrote:
Thu Jul 04, 2019 4:32 pm
If interest rates rise (as many are predicting right now) the value of the total bond market will increase in value while prime money market will decline. Prime should reflect declining values more quickly than the Prime. Prime probably won't break the dollar, but the rates will more quickly reflect the lower values.
Total bond, long term may have declining rates, but in the shorter term will get a boost from declining interest rates.

Of course, if/when interest rates raise again, the reverse may very well hold true.
There are so many false statements in this post, it ought to be removed.

mariezzz
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Re: Prime Money Market or Total Bond Market

Post by mariezzz » Tue Jul 09, 2019 1:52 pm

Thesaints wrote:
Fri Jul 05, 2019 4:30 pm
Stocks are not bonds.
Bonds are a covenant, stating "you'll receive this much money on this date". Stocks are a contract certifying fractional ownership of a certain company.
For others, I want to point out the difference between bonds and bond funds. Bond funds like VBTLX do not guarantee that "you'll receive this much money on this date".

S_Track
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Re: Prime Money Market or Total Bond Market

Post by S_Track » Tue Jul 09, 2019 2:25 pm

venkman wrote:
Thu Jul 04, 2019 11:32 pm
When you minimize duration risk, you maximize reinvestment risk.

The current small spread between PMM and TBM exists because the market thinks reinvestment risk is likely to show up soon, and is hedging against it. The market may turn out to be right or wrong, but in no way is PMM the obvious slam-dunk better choice, ex-ante.
Would you walk me through this using current nav of PMM and TBM? Is the reinvestment risk at this time interests rates falling in the near future? Thanks Bob

venkman
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Re: Prime Money Market or Total Bond Market

Post by venkman » Tue Jul 09, 2019 11:34 pm

S_Track wrote:
Tue Jul 09, 2019 2:25 pm
venkman wrote:
Thu Jul 04, 2019 11:32 pm
When you minimize duration risk, you maximize reinvestment risk.

The current small spread between PMM and TBM exists because the market thinks reinvestment risk is likely to show up soon, and is hedging against it. The market may turn out to be right or wrong, but in no way is PMM the obvious slam-dunk better choice, ex-ante.
Would you walk me through this using current nav of PMM and TBM? Is the reinvestment risk at this time interests rates falling in the near future? Thanks Bob
If/when a recession hits, the Fed will presumably drop the Fed Funds rate sharply. If that happens, the yield on MM funds will start to drop almost immediately, and will be at the new, much lower rate within a few months. Yields on longer-term bonds would likely also drop, as investors exit the stock market and buy safer assets. But, existing bondholders would see their bonds gain in value, and the income decline for bond funds would be much slower, as it would take longer for those bonds to "age out" of the fund and be replaced by new, lower-yielding bonds.

A 5-year Treasury note is yielding about 1.88% right now, while a MM fund is yielding 2.3%. Obviously, if the MM stayed at 2.3% for 5 years, it would end up being a much better deal (higher return with no interest rate risk). The only reason anyone would buy a 5-year note now is that they believe those 2.3% MM rates won't last for very long, and that a guaranteed 1.88% per year for 5 years will offer a better return than the highly variable rates of a MM. Essentially, the market is betting that MM rates will go a lot lower in the relatively near-term.

On the surface, it seems like the obvious play is to sell all those bonds that have had a nice run-up in price this year, move the money to MM funds that are yielding almost as much right now, then wait for bond yields to go up and buy back in. The below-the-surface risks (which the market is hedging against) are that 1. Bond yields may not go back up for a long time, and 2. For most of that time, your money will be earning 0.5% or less in a MM.

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RobG
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Re: Prime Money Market or Total Bond Market

Post by RobG » Wed Jul 10, 2019 12:17 am

Venkman - that was a great and informative reply. Thanks.
Stay thrifty my friends.

stm
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Re: Prime Money Market or Total Bond Market

Post by stm » Wed Jul 10, 2019 2:43 am

If one had a predetermined use and time frame for using funds (say 6 years for a college fund), what might be some considerations per the topic?

S_Track
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Re: Prime Money Market or Total Bond Market

Post by S_Track » Wed Jul 10, 2019 12:23 pm

venkman wrote:
Tue Jul 09, 2019 11:34 pm
S_Track wrote:
Tue Jul 09, 2019 2:25 pm
venkman wrote:
Thu Jul 04, 2019 11:32 pm
When you minimize duration risk, you maximize reinvestment risk.

The current small spread between PMM and TBM exists because the market thinks reinvestment risk is likely to show up soon, and is hedging against it. The market may turn out to be right or wrong, but in no way is PMM the obvious slam-dunk better choice, ex-ante.
Would you walk me through this using current nav of PMM and TBM? Is the reinvestment risk at this time interests rates falling in the near future? Thanks Bob
If/when a recession hits, the Fed will presumably drop the Fed Funds rate sharply. If that happens, the yield on MM funds will start to drop almost immediately, and will be at the new, much lower rate within a few months. Yields on longer-term bonds would likely also drop, as investors exit the stock market and buy safer assets. But, existing bondholders would see their bonds gain in value, and the income decline for bond funds would be much slower, as it would take longer for those bonds to "age out" of the fund and be replaced by new, lower-yielding bonds.

A 5-year Treasury note is yielding about 1.88% right now, while a MM fund is yielding 2.3%. Obviously, if the MM stayed at 2.3% for 5 years, it would end up being a much better deal (higher return with no interest rate risk). The only reason anyone would buy a 5-year note now is that they believe those 2.3% MM rates won't last for very long, and that a guaranteed 1.88% per year for 5 years will offer a better return than the highly variable rates of a MM. Essentially, the market is betting that MM rates will go a lot lower in the relatively near-term.

On the surface, it seems like the obvious play is to sell all those bonds that have had a nice run-up in price this year, move the money to MM funds that are yielding almost as much right now, then wait for bond yields to go up and buy back in. The below-the-surface risks (which the market is hedging against) are that 1. Bond yields may not go back up for a long time, and 2. For most of that time, your money will be earning 0.5% or less in a MM.
Thank you for taking the time to compose that detailed and informative response. Very helpful.

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Kenkat
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Re: Prime Money Market or Total Bond Market

Post by Kenkat » Wed Jul 10, 2019 1:09 pm

Artsdoctor wrote:
Fri Jul 05, 2019 12:09 pm
Interesting debate. I like having a plan like anyone else. At some point, I personally step back and ask myself if my next step makes sense.

Today, the 3-month treasury bill is yielding 2.22%. The 10-year bond is yielding 2.04%. You can say what you will regarding inverted yield curves, but I would not personally buy a 10-year treasury bond at this time with rates like this. One can continue to monitor and compare on a monthly or quarterly basis, but at some point, common sense has to at least be an integral part of decision-making.
What the market is saying here is that it does not expect that 3-month treasury bill to stay at 2.22% for long. It is pricing in a drop, likely due to anticipated rate cuts in response to a slowing economy - hence the inverted yield curve. The 10 year at 2.04% is perhaps attractive if you think the 3-month goes to 1.5% in a year or two.

Now what actually comes to pass is anyone’s guess.

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sometimesinvestor
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Re: Prime Money Market or Total Bond Market

Post by sometimesinvestor » Wed Jul 10, 2019 1:12 pm

I agree with the majority of comments. Its a time frame problem In the next few years no one knows.Over a long period of time greater risk (the bond fund) should result in greater reward. If you reinvest the interest payments and and interest rates go up the net asset value of the bond fund will go down but you will own more shares and it all should work out ok eventually.

MotoTrojan
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Re: Prime Money Market or Total Bond Market

Post by MotoTrojan » Wed Jul 10, 2019 1:22 pm

stm wrote:
Wed Jul 10, 2019 2:43 am
If one had a predetermined use and time frame for using funds (say 6 years for a college fund), what might be some considerations per the topic?
5 year CD then a money market if you want no lose of principal.

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Artsdoctor
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Re: Prime Money Market or Total Bond Market

Post by Artsdoctor » Wed Jul 10, 2019 7:31 pm

Kenkat wrote:
Wed Jul 10, 2019 1:09 pm
Artsdoctor wrote:
Fri Jul 05, 2019 12:09 pm
Interesting debate. I like having a plan like anyone else. At some point, I personally step back and ask myself if my next step makes sense.

Today, the 3-month treasury bill is yielding 2.22%. The 10-year bond is yielding 2.04%. You can say what you will regarding inverted yield curves, but I would not personally buy a 10-year treasury bond at this time with rates like this. One can continue to monitor and compare on a monthly or quarterly basis, but at some point, common sense has to at least be an integral part of decision-making.
What the market is saying here is that it does not expect that 3-month treasury bill to stay at 2.22% for long. It is pricing in a drop, likely due to anticipated rate cuts in response to a slowing economy - hence the inverted yield curve. The 10 year at 2.04% is perhaps attractive if you think the 3-month goes to 1.5% in a year or two.

Now what actually comes to pass is anyone’s guess.
Agreed. As mentioned above on this page, there is a good chance that the short-term rates will plummet. There's a good chance that a recession will hit within the next year, and that investors will sell off equities and buy bonds, and there's a good chance that longer-term bonds will increase in value because of the flight to quality.

The problem that I have personally making these decisions, is that trying to invest in a bet on future movement can be difficult and I don't feel qualified to make that bet. I can only invest in what I see in front of me now. In retrospect, anyone can look like a genius (or an idiot, which is what I'm trying to avoid).

We all have to make decisions on how far out we feel comfortable going with maturity. I don't know of any other way to decide on methodical fixed income investments besides being paid to go further out in maturity by having a higher coupon. But I'm also most interested in preserving wealth and am willing to forego a bit of interest by limiting risk if I'm not getting paid for it.

rossington
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Re: Prime Money Market or Total Bond Market

Post by rossington » Thu Jul 11, 2019 2:33 am

Rate cuts due to a slowing economy or recession? Don't see that happening anytime soon. Rate cuts to boost the economy even further seems more likely. In that respect Total Bond with reinvested dividends would have an edge over PMM....IMHO.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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ruralavalon
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Re: Prime Money Market or Total Bond Market

Post by ruralavalon » Thu Jul 11, 2019 8:37 am

Artsdoctor wrote:
Wed Jul 10, 2019 7:31 pm
Kenkat wrote:
Wed Jul 10, 2019 1:09 pm
Artsdoctor wrote:
Fri Jul 05, 2019 12:09 pm
Interesting debate. I like having a plan like anyone else. At some point, I personally step back and ask myself if my next step makes sense.

Today, the 3-month treasury bill is yielding 2.22%. The 10-year bond is yielding 2.04%. You can say what you will regarding inverted yield curves, but I would not personally buy a 10-year treasury bond at this time with rates like this. One can continue to monitor and compare on a monthly or quarterly basis, but at some point, common sense has to at least be an integral part of decision-making.
What the market is saying here is that it does not expect that 3-month treasury bill to stay at 2.22% for long. It is pricing in a drop, likely due to anticipated rate cuts in response to a slowing economy - hence the inverted yield curve. The 10 year at 2.04% is perhaps attractive if you think the 3-month goes to 1.5% in a year or two.

Now what actually comes to pass is anyone’s guess.
Agreed. As mentioned above on this page, there is a good chance that the short-term rates will plummet. There's a good chance that a recession will hit within the next year, and that investors will sell off equities and buy bonds, and there's a good chance that longer-term bonds will increase in value because of the flight to quality.

The problem that I have personally making these decisions, is that trying to invest in a bet on future movement can be difficult and I don't feel qualified to make that bet. I can only invest in what I see in front of me now. In retrospect, anyone can look like a genius (or an idiot, which is what I'm trying to avoid).

We all have to make decisions on how far out we feel comfortable going with maturity. I don't know of any other way to decide on methodical fixed income investments besides being paid to go further out in maturity by having a higher coupon. But I'm also most interested in preserving wealth and am willing to forego a bit of interest by limiting risk if I'm not getting paid for it.
An alternative to making all those decisions that come with market timing is to pick a duration that suits your risk tolerance for the long-term, buy a bond fund that matches that duration and stick with it.

We use Vanguard Intermediate-term Bond Index Fund (VBILX), and don't switch based on anybody's predictions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Artsdoctor
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Re: Prime Money Market or Total Bond Market

Post by Artsdoctor » Thu Jul 11, 2019 9:15 am

^ You can pick a duration and stick with it. A lot of people don't understand how duration is calculated or what it means. It's meant to reflect the degree of volatility and it is designed to help an investor compare funds (or individual bonds). As the interest rates falls, your duration is going to increase so that'll have to kept in mind. The issue with duration is that some people view it as a guarantee of return: if the duration in 6 years, I will break even after 6 years if interest rates increase 1%. While this might be a helpful concept, there's really no guarantee and 6 years is an awfully long time to break even. Nonetheless, having a metric for any investor is helpful.

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