If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bonds?

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VTI
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If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bonds?

Post by VTI »

Many folks here advise against trying to time the bond market. Would this principle apply even if you had access to free checking/savings accounts and bond yields were 0%? What if bond yields were negative?
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nisiprius
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by nisiprius »

The big division is between "stocks" and "bonds-and-cash." By almost any measure of distance, the distance between stocks and bonds is large... and the distance between all kinds of low-risk assets--core bond funds with high credit quality and low or medium interest rate risk, TIPS, short-term bond funds, international dollar-hedged, GNMA bond funds, money market mutual funds, Treasury bills, bank accounts, savings bonds... they're all in a tight cluster together.

If you have any "normal" stock allocation, it is going to dominated your portfolio, and differences in what you use in the "safer" portion are going to have surprisingly little difference.

I don't think Bogleheads have ever been doctrinaire about this, although it isn't spelled out in the investing philosophy.

Why yes, investment firms sell products based on securities, and asked to solve a problem will always limit themselves to securities-based answers. Don't expect Vanguard or anybody else to recommend putting money in a bank or buying savings bonds.

FDIC-insured bank accounts and savings bonds have the characteristic that they are not useful (FDIC-insured accounts) or available (I bonds) for institutional investing. There is a case to be made that they represent a break or a good deal for the little guy, and contain at least an element of social welfare in them. So there's a case that they are indeed "better" than, say, Treasury bills.

Risk and return do go together. My own feeling, which has not changed, is that "core" bond funds have very low risk over holding periods of five to ten years; that they have had and are expected to have enough higher return than cashlike investment to care about; and that swapping bond funds for cashlike investments reduces risk a bit less than you might think because of the correlation-and-covariance math--not a huge amount but some.

What seems to be happening is that some investors have never looked at the bond proposition carefully and have just held them on the basis of some very short sound-bite throwaway about "safety." They are surprised to find that funds which Vanguard says "may be appropriate for investors with medium-term investment horizons (4 to 10 years)" have noticeable fluctuations over shorter time periods; and that stocks and bonds move independently, not in opposite directions.

I don't think there's a compelling reason to hold "core" bond funds instead of carefully chosen, competitive bank CDs, but I do think on the whole it is a move to lower risk and lower return.

And I do need to mention my personal paranoid thought. The terms and conditions of CDs are not identical. If you read them, you will find that quite a lot of them contain language saying that the bank has the right to deny an early withdrawal; early withdrawals are "with the bank's permission" or "at the bank's discretion." So we have this really uncomfortable situation where a) the banks have the right to deny early withdrawal, but b) virtually never do it. If you ask "under what circumstances might they," the obvious answer is "if a really big increase in interest rates caused a tsunami of requests for early withdrawals, and the banks were just a little bit shaky and actually couldn't afford to bleed any deposits they could stanch..."
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by Phyneas »

When bonds had a nominal yield of 0%, this is exactly what I did, CDs and HYSAs, sometimes getting 2-3%, spread across different banks to get them all under the FDIC limits. I didn't like the CDs though as they were usually the non-cashable type (and the bank enforced that, I was told even without asking that barring a medical/family emergency, they weren't breaking the CD), and as Nisiprius mentions, I was always worried about the market crashing and not being able to take advantage of it and re-balance into stocks aggressively, so I abandoned it and went into short bonds instead.
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by patrick »

I definitely would favor them over nominal bonds. By the way, for small amounts the checking and savings rates are currently higher than bonds:

6.17% at Digital Credit Union. $1,000 limit.
6% at H-E-B Debit. $2,000 limit. Requires some activity every 90 days to avoid fees, a $1 ACH push is sufficient.
4.07% at Genisys Credit Union. $7,500 limit, requires 10 debit purchases of $5 or more each month.
4% at Current. $6,000 limit.
3.3% at Evansville Teachers Federal Credit Union. $20,000 limit, requires 15 debit purchases (any amount) each month and an electronic deposit.
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by dbr »

nisiprius wrote: Fri May 13, 2022 6:46 am The big division is between "stocks" and "bonds-and-cash." By almost any measure of distance, the distance between stocks and bonds is large... and the distance between all kinds of low-risk assets--core bond funds with high credit quality and low or medium interest rate risk, TIPS, short-term bond funds, international dollar-hedged, GNMA bond funds, money market mutual funds, Treasury bills, bank accounts, savings bonds... they're all in a tight cluster together.

<snip>
My view as well. I would add that if a choice in fixed income seems of too low return it is also an option to elect a little higher allocation to stocks.

The problem starts with first understanding what your risky asset/not risky asset allocation is for.
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by Call_Me_Op »

Nisi,

The post above is one of your better ones - and that's saying something!
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by NiceUnparticularMan »

So on this assumption, it appears there is no term premium. Meaning you can lend out your money and get it back in full whenever you want, or lend out your money and have to wait to get it back in full, at the exact same rate (0% nominal).

Given that assumption, it would indeed make no sense to do the latter.

Unless you thought that nominal lending rates could go even lower than 0% nominal.

But then it would not make sense for people to lend out money at all.

OK, so working back from the other side end:

It doesn't make sense for nominal lending rates to go much below 0% on a sustained basis, because then people would just stop lending. You'd be better off just with cash in a vault.

It also doesn't make sense for there to be no term premium on a sustained basis, because then people would just stop lending over longer terms. You'd be better off just lending very short.

OK, so probably your hypothetical cannot actually happen in any sort of sustained/systematic way.

Nonetheless, it is certainly true that personal investors sometimes have not-generally-marketed products available to them that offer better terms than marketed bonds, for a variety of reasons.

Preferring those alternatives under those circumstances is not trying to time the bond markets. They are not bonds, they are not even marketed like bonds, so the assumption any benefits would be arbitraged away does not actually apply to such products. They could just be on better terms.
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by nisiprius »

patrick wrote: Fri May 13, 2022 9:16 am...by the way, for small amounts the checking and savings rates are currently higher than bonds:...

6.17% at Digital Credit Union. $1,000 limit.
6% at H-E-B Debit. $2,000 limit. Requires some activity every 90 days to avoid fees, a $1 ACH push is sufficient.
4.07% at Genisys Credit Union. $7,500 limit, requires 10 debit purchases of $5 or more each month.
4% at Current. $6,000 limit.
3.3% at Evansville Teachers Federal Credit Union. $20,000 limit, requires 15 debit purchases (any amount) each month and an electronic deposit.
I believe these are essentially phony, in the sense that they are just an obfuscated form of "free money sign-on bonus." Notice that 6.17% x $1,000 = $62, 6% x $2000 = $120, 3.3% x $20,000 = $660. The cost of customer acquisition for a financial firm is said to be in the mid three figures, so it makes sense that they would be willing to pay a new customer several hundred dollars. "Free money" offers in the $200-$300 range are pretty common. I've taken them and successfully obtained what was promised, but eventually decided it wasn't worth it to me.

If they think "high interest rates" are what will sell, then instead of offering it as a sign-on bonus they offer it as a high rate on a small amount of money. It won't be annual because (the times I've fallen for them) they cleverly keep ramping down the interest rate and the amount it applies to. So the first year you score--in this case $660. Next year they cut the rate--maybe to 3% and $10,000 = $300, but you stick because it is still "more" than the competition. And you pay for it in attention needed to jump through the hoops. Once you've reorganized your life to be sure you do 12 point-of-sale swipes within each billing cycle--with uncertainty about what date counts--it feels natural to just continue it, even as the value of the deal fades to nothing.

That's not saying not to do it. I decided a long time ago that it is not possible for me, or for most people, to build a better life and retire earlier by continuously and systematically exploiting"free money" scores. (Nor to feed a family of four for $168/month by getting really organized with grocery coupons).

The point is this is not really a way to get a higher interest rate, it's a way to make a one-time score of free money--disguised as a high "rate." Why, yes, just printing "6.17%" does get your attention.
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Re: If bonds had a nominal yield of 0%, would you fill up free checking/savings accounts before buying (or holding) bond

Post by patrick »

nisiprius wrote: Fri May 13, 2022 9:58 am
patrick wrote: Fri May 13, 2022 9:16 am...by the way, for small amounts the checking and savings rates are currently higher than bonds:...

6.17% at Digital Credit Union. $1,000 limit.
6% at H-E-B Debit. $2,000 limit. Requires some activity every 90 days to avoid fees, a $1 ACH push is sufficient.
4.07% at Genisys Credit Union. $7,500 limit, requires 10 debit purchases of $5 or more each month.
4% at Current. $6,000 limit.
3.3% at Evansville Teachers Federal Credit Union. $20,000 limit, requires 15 debit purchases (any amount) each month and an electronic deposit.
I believe these are essentially phony, in the sense that they are just an obfuscated form of "free money sign-on bonus." Notice that 6.17% x $1,000 = $62, 6% x $2000 = $120, 3.3% x $20,000 = $660. The cost of customer acquisition for a financial firm is said to be in the mid three figures, so it makes sense that they would be willing to pay a new customer several hundred dollars. "Free money" offers in the $200-$300 range are pretty common. I've taken them and successfully obtained what was promised, but eventually decided it wasn't worth it to me.

If they think "high interest rates" are what will sell, then instead of offering it as a sign-on bonus they offer it as a high rate on a small amount of money. It won't be annual because (the times I've fallen for them) they cleverly keep ramping down the interest rate and the amount it applies to. So the first year you score--in this case $660. Next year they cut the rate--maybe to 3% and $10,000 = $300, but you stick because it is still "more" than the competition. And you pay for it in attention needed to jump through the hoops. Once you've reorganized your life to be sure you do 12 point-of-sale swipes within each billing cycle--with uncertainty about what date counts--it feels natural to just continue it, even as the value of the deal fades to nothing.

That's not saying not to do it. I decided a long time ago that it is not possible for me, or for most people, to build a better life and retire earlier by continuously and systematically exploiting"free money" scores. (Nor to feed a family of four for $168/month by getting really organized with grocery coupons).

The point is this is not really a way to get a higher interest rate, it's a way to make a one-time score of free money--disguised as a high "rate." Why, yes, just printing "6.17%" does get your attention.
They can last longer than you might expect. Credit unions can explicitly favor small depositors, and interchange fees mean the reward checking accounts do not cost the financial institution as much as it might seem.

Digital Credit Union only paid 5.12% when I first joined, but rather than cutting rates later, they increased it to 6.17% in 2018. The rate had been steady since then.

They do not always last, but I have in fact left accounts that got worse. I consider bonds the main competition (beyond a very small amount) rather than other deposit accounts so I would not keep money in a 2.5% account and even 3% is marginal.

Even accounts that do not last could be worth it. HMBradley recently lowered their rate but their limit was high enough one could get thousands in interest before they did so.
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