Bond fund vs treasury or CD Ladder

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Dennisl
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Bond fund vs treasury or CD Ladder

Post by Dennisl »

I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
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Re: Bond fund vs treasury or CD Ladder

Post by vineviz »

Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
Presumably your bond funds own the same kinds of bonds you'd be using to build a ladder.

What do you think you'd gain by making a switch in strategy now?
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Re: Bond fund vs treasury or CD Ladder

Post by Gaston »

When Bill Bernstein was the guest on the Bogleheads On Investing podcast (episode 13), he favored a treasury ladder over a treasury ETF. This assumes 1) that the average maturity of the bonds in the ladder roughly matches that of ETF, and 2) that you always hold the bonds in the ladder until they reach maturity.

His reasoning was two-fold: First, holding treasuries in a ladder insulates you from capital losses (and capital gains, if interest rates decline). He saw this as an advantage if your bonds are your “safe” money.

His second reason was that you can buy and hold treasuries for free, hence there is no reason to pay even a few basis points for ETF management.

It does take a little work to set up your ladder. but Fidelity and others have tools to help you do this. And once set up, you need only make a single purchase each year to keep your ladder up to date.

Whether you should move right now from an ETF to a ladder is, of course, a market timing decision. On this question, your guess is as good as anyone else’s.
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Re: Bond fund vs treasury or CD Ladder

Post by vineviz »

Gaston wrote: Wed May 11, 2022 6:54 pm When Bill Bernstein was the guest on the Bogleheads On Investing podcast (episode 13), he favored a treasury ladder over a treasury ETF. This assumes 1) that the average maturity of the bonds in the ladder roughly matches that of ETF, and 2) that you always hold the bonds in the ladder until they reach maturity.

His reasoning was two-fold: First, holding treasuries in a ladder insulates you from capital losses (and capital gains, if interest rates decline). He saw this as an advantage if your bonds are your “safe” money.

His second reason was that you can buy and hold treasuries for free, hence there is no reason to pay even a few basis points for ETF management.
It's not enough to simply hold the bonds to maturity. There's an extra element required to make the ladder beneficial, which is that the maturity dates and amounts of the bonds should correspond to dates when you actually need to spend that amount of money.

And bond funds typically generate very little in the way of capital gains or capital losses, so I'm not sure why Bill thinks there is much advantage to be had on that front.

As for buying Treasuries for "free", that is generally only true for bonds purchased new at auction. It's pretty difficult (or, at least, time consuming) to build a full non-rolling bond ladder using only Treasury auctions. Any bonds bought and sold on the secondary market will have embedded trading costs, whether they are readily visible or not.

And it's completely impossible to rely on auctions or new issues if the investor wants to replicate a bond fund that contains corporate bonds or municipal bonds.
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Re: Bond fund vs treasury or CD Ladder

Post by Parkinglotracer »

I am with bill and have removed the majority of my interest rate risk from my fixed income portfolio a few years ago. No one knows where interest rates will go but why not eliminate this possibility?
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Re: Bond fund vs treasury or CD Ladder

Post by mega317 »

If you buy a bond (or a whole bunch of bonds) and close your eyes until they mature, you won’t be aware of price changes but that doesn’t mean they aren’t happening. If interest rates go up, existing bonds become less valuable. That is why bond funds are dropping. Maybe what you’re realizing now is you were holding an investment that wasn’t designed to accomplish what you needed?
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Re: Bond fund vs treasury or CD Ladder

Post by Corvidae »

Holding a ladder instead of a fund doesn't insulate you from interest rate risk.

Capital gains/losses are not the same thing as fluctuations in principal value. A ladder doesn't help with the latter, but it's the one more people seem to be concerned about.

One problem with a ladder is the discipline required to maintain it. Tinkering, second-guessing, procrastinating, forgetting... it's not free.
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Re: Bond fund vs treasury or CD Ladder

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Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
A liquid fixed income allocation that generates income without interest rate risk or state taxes - did you mean to say I Bonds? :wink:

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Re: Bond fund vs treasury or CD Ladder

Post by TBillT »

Right at this moment, I am more interested in Treasuries and broker CD's than funds. Interest rates bumped up suddenly and may have gone too far for the short term. JGrundlach the "new" bond king says 2-yr Treasury should be 2.5% but got up close to 3% ...now settling back towards 2.5% but on broker CD's think I got 2.95% on a 2-yr CD today at Fido. I have had fun with fixed income this week...I recall here on Bogleheads back in 2018 we had credit unions offering 3% for 7-yr CD, which I have been happy with doing that. Now you can beat that with broker CD's. If the recession theory is correct, this may be a good buy opportunity. Of course, who knows the future?
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Re: Bond fund vs treasury or CD Ladder

Post by jeffyscott »

vineviz wrote: Wed May 11, 2022 7:04 pmAs for buying Treasuries for "free", that is generally only true for bonds purchased new at auction. It's pretty difficult (or, at least, time consuming) to build a full non-rolling bond ladder using only Treasury auctions. Any bonds bought and sold on the secondary market will have embedded trading costs, whether they are readily visible or not.
Are the treasuries on the secondary market not just as "free" as ETFs, which are, similarly, also free of commission?
It's not enough to simply hold the bonds to maturity. There's an extra element required to make the ladder beneficial, which is that the maturity dates and amounts of the bonds should correspond to dates when you actually need to spend that amount of money.
Okay, but how do I get money out of a bond fund that holds bonds that mature in 1 to 10 years (or more)? Or even a short term fund that holds 1-5 year maturities? I spend an unplanned extra $10K on something and, in this market, I'd like to sell just the 1 year bonds from the fund to pay the credit card bill when it comes. How do I do that, if all my money is in funds? Is it just done by holding enough in cash, in a money market fund or saving account? But, if so, then how and when do I move more money from the bond fund(s) to the money market after I spent the $10K?

If I hold the bonds directly, maybe one of them matures at the right time to be used for the bill, or I can sell one that is less than a year from maturity. And, in any case, I can have one mature every 3 or 6 months to regenerate cash if it's needed and if not I just buy another 3 year or 5 year or whatever.
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Re: Bond fund vs treasury or CD Ladder

Post by Call_Me_Op »

FoundingFather wrote: Wed May 11, 2022 9:38 pm
Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
A liquid fixed income allocation that generates income without interest rate risk or state taxes - did you mean to say I Bonds? :wink:
IBonds are great - but the purchase limit is a big issue for many people - meaning they cannot be used to replace much of one's fixed-income.
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Re: Bond fund vs treasury or CD Ladder

Post by jeffyscott »

Call_Me_Op wrote: Thu May 12, 2022 7:56 am
FoundingFather wrote: Wed May 11, 2022 9:38 pm
Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
A liquid fixed income allocation that generates income without interest rate risk or state taxes - did you mean to say I Bonds? :wink:
IBonds are great - but the purchase limit is a big issue for many people - meaning they cannot be used to replace much of one's fixed-income.
Well, limit or no, they also don't do much for those of us with nearly all money in tax-advantaged accounts.

Thankfully, many TIPS now have real yields of 0 or above, and so make a good substitute. At this point the only difference, in terms of expected real return/yield (I know there are other significant differences in how the two things work), is getting that initial hit of 9.62% for 6 months, so a bit under a one time 5% bonus in favor the I-bonds.
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Re: Bond fund vs treasury or CD Ladder

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jeffyscott wrote: Thu May 12, 2022 6:51 am Okay, but how do I get money out of a bond fund that holds bonds that mature in 1 to 10 years (or more)? Or even a short term fund that holds 1-5 year maturities? I spend an unplanned extra $10K on something and, in this market, I'd like to sell just the 1 year bonds from the fund to pay the credit card bill when it comes. How do I do that, if all my money is in funds? Is it just done by holding enough in cash, in a money market fund or saving account? But, if so, then how and when do I move more money from the bond fund(s) to the money market after I spent the $10K?
If you had a ladder of individual bonds, with one group of bonds maturing every August for the next 10 years, it'd have an average duration of about 4.5 years.

Selling just the 2022 bonds would increase the average duration to 5 years, which is a fairly immaterial change. (I'm assuming the pre-sale total ladder is $100k).

But the bond ladder's duration could be matched with a portfolio that is 15% long-term Treasury fund and 85% short-term Treasury fund. Taking the full $10k from the short-term Treasury fund would have basically the same effect as selling only the nearest term bond.

In other words unless the withdrawals are very large relative to the portfolio AND the investor is micromanaging their duration exposure, an investor's desire to "sell just the 1 year bonds" is motivated by something other than economic considerations.
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Re: Bond fund vs treasury or CD Ladder

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vineviz wrote: Thu May 12, 2022 9:24 amBut the bond ladder's duration could be matched with a portfolio that is 15% long-term Treasury fund and 85% short-term Treasury fund. Taking the full $10k from the short-term Treasury fund would have basically the same effect as selling only the nearest term bond.
And then what would the subsequent action be to mimic what one would do with a ladder?

I am thinking, if it were me managing the two funds, I might reinvest dividends from the long term fund into the short term fund.

OTOH, if it were me, managing the ladder, what I think I would do would be just to wait for the next bond to mature and then reinvest that at 10 years and not worry about the resulting gap (this assumes some other unplanned expenditure does not comes up in the meantime).
In other words unless the withdrawals are very large relative to the portfolio AND the investor is micromanaging their duration exposure, an investor's desire to "sell just the 1 year bonds" is motivated by something other than economic considerations.
I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.

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Re: Bond fund vs treasury or CD Ladder

Post by secondopinion »

jeffyscott wrote: Thu May 12, 2022 10:40 am
vineviz wrote: Thu May 12, 2022 9:24 amBut the bond ladder's duration could be matched with a portfolio that is 15% long-term Treasury fund and 85% short-term Treasury fund. Taking the full $10k from the short-term Treasury fund would have basically the same effect as selling only the nearest term bond.
And then what would the subsequent action be to mimic what one would do with a ladder?

I am thinking, if it were me managing the two funds, I might reinvest dividends from the long term fund into the short term fund.

OTOH, if it were me, managing the ladder, what I think I would do would be just to wait for the next bond to mature and then reinvest that at 10 years and not worry about the resulting gap (this assumes some other unplanned expenditure does not comes up in the meantime).
In other words unless the withdrawals are very large relative to the portfolio AND the investor is micromanaging their duration exposure, an investor's desire to "sell just the 1 year bonds" is motivated by something other than economic considerations.
I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.

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That is not trivial in returns. Instead of paying an advisor 0.5% to do it for you, you pocket 0.5% for yourself. I always "micromanage" my fixed-income; so far, the returns have not been regrettable. And my emergency fund has had a heyday since I had one (instead of sitting in cash only). Making the extra 0.5%+ makes a major difference in the long term (and my emergency fund has so far surpassed that easily).
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Re: Bond fund vs treasury or CD Ladder

Post by 02nz »

TBillT wrote: Wed May 11, 2022 10:29 pm Right at this moment, I am more interested in Treasuries and broker CD's than funds. Interest rates bumped up suddenly and may have gone too far for the short term. JGrundlach the "new" bond king says 2-yr Treasury should be 2.5% but got up close to 3% ...now settling back towards 2.5% but on broker CD's think I got 2.95% on a 2-yr CD today at Fido. I have had fun with fixed income this week...I recall here on Bogleheads back in 2018 we had credit unions offering 3% for 7-yr CD, which I have been happy with doing that. Now you can beat that with broker CD's. If the recession theory is correct, this may be a good buy opportunity. Of course, who knows the future?
Brokered CDs seem to be a good options right now - I'm also seeing around 3% or higher for 2-5 year brokered CDs at E*Trade. There are some downsides to be aware of (may have to sell at a loss if you need the money early), but I like the competitive rates and ease of buying them at a brokerage, i.e., no need to set up another ACH link. Also, make sure you understand "callability" - the ability for the bank to end the CD early, which some of the higher-rate CDs have. I would generally advise staying away from callable CDs.
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Re: Bond fund vs treasury or CD Ladder

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jeffyscott wrote: Thu May 12, 2022 10:40 am I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.
Just to clarify, the kind of micromanagement I was talking about was regarding duration.

I know very few individual investors who can calculate the average duration of their fixed income portfolio to within one decimal place, much less effectively manage it that precisely. The difference in duration between a 5-year CD and a 5-year Treasury note is greater than the kind of duration change we were discussing earlier, for instance.
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Re: Bond fund vs treasury or CD Ladder

Post by secondopinion »

vineviz wrote: Thu May 12, 2022 11:26 am
jeffyscott wrote: Thu May 12, 2022 10:40 am I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.
Just to clarify, the kind of micromanagement I was talking about was regarding duration.

I know very few individual investors who can calculate the average duration of their fixed income portfolio to within one decimal place, much less effectively manage it that precisely. The difference in duration between a 5-year CD and a 5-year Treasury note is greater than the kind of duration change we were discussing earlier, for instance.
Right. With the ability to break into a non-brokered CD with penalty, this can reduce the duration as rates go up; it is a type of put option after all. It is hard to calculate the duration on such, but a ballpark figure is usually enough. Being off by 0.25-0.5 years is not a big deal for short-term fixed-income, nor is 2-3 years for long-term fixed-income.

But to your original point, selling the one year bonds is probably not worth the effort; this is especially true if we are talking ten year bond ladders. I can see with a persistent short-term fixed-income allocation to try for rolling returns, but then it be easier just to hold the short-term treasury fund that essentially does that.
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Re: Bond fund vs treasury or CD Ladder

Post by jeffyscott »

secondopinion wrote: Thu May 12, 2022 12:13 pm
vineviz wrote: Thu May 12, 2022 11:26 am
jeffyscott wrote: Thu May 12, 2022 10:40 am I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.
Just to clarify, the kind of micromanagement I was talking about was regarding duration.

I know very few individual investors who can calculate the average duration of their fixed income portfolio to within one decimal place, much less effectively manage it that precisely. The difference in duration between a 5-year CD and a 5-year Treasury note is greater than the kind of duration change we were discussing earlier, for instance.
Right. With the ability to break into a non-brokered CD with penalty, this can reduce the duration as rates go up; it is a type of put option after all. It is hard to calculate the duration on such, but a ballpark figure is usually enough. Being off by 0.25-0.5 years is not a big deal for short-term fixed-income, nor is 2-3 years for long-term fixed-income.

But to your original point, selling the one year bonds is probably not worth the effort; this is especially true if we are talking ten year bond ladders. I can see with a persistent short-term fixed-income allocation to try for rolling returns, but then it be easier just to hold the short-term treasury fund that essentially does that.
Is that what this duration difference is based on, the ability to break a non-brokered CD?

If, instead, we are comparing to a 5 year brokered CD, I assume the only difference would be due to the coupon rate? If there were a newly issued 5 year treasury it would pay about 2.9%, while the best (new issue) brokered CD would pay about 3.3%.

This discussion has made me realize that there can be issues with managing individual securities for the purpose of covering unexpected/unplanned expenditures (what I am planning to do with money from a matured CD). So, if my CD money ever actually gets back to my brokerage account :x , I think I am only going to use individual treasuries for things that I know are coming up in about the next year. Beyond that time frame, where things are less clear, I will still pick up some brokered CDs when there is a yield advantage, but will use a fund rather than a ladder of treasuries. I had already planned to put some of the CD money in a short term bond for flexibility, so this just means a bit more fund and a bit less individual securities.
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Re: Bond fund vs treasury or CD Ladder

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jeffyscott wrote: Thu May 12, 2022 8:32 am
Call_Me_Op wrote: Thu May 12, 2022 7:56 am
FoundingFather wrote: Wed May 11, 2022 9:38 pm
Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
A liquid fixed income allocation that generates income without interest rate risk or state taxes - did you mean to say I Bonds? :wink:
IBonds are great - but the purchase limit is a big issue for many people - meaning they cannot be used to replace much of one's fixed-income.
At this point the only difference, in terms of expected real return/yield (I know there are other significant differences in how the two things work), is getting that initial hit of 9.62% for 6 months, so a bit under a one time 5% bonus in favor the I-bonds.
I wouldn't say that's the only difference. If inflation rate goes negative, the TIPS bond can decrease on value. This does not happen to an IBond.
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Re: Bond fund vs treasury or CD Ladder

Post by AlwaysLearningMore »

Gaston wrote: Wed May 11, 2022 6:54 pm When Bill Bernstein was the guest on the Bogleheads On Investing podcast (episode 13), he favored a treasury ladder over a treasury ETF. This assumes 1) that the average maturity of the bonds in the ladder roughly matches that of ETF, and 2) that you always hold the bonds in the ladder until they reach maturity.

His reasoning was two-fold: First, holding treasuries in a ladder insulates you from capital losses (and capital gains, if interest rates decline). He saw this as an advantage if your bonds are your “safe” money.

His second reason was that you can buy and hold treasuries for free, hence there is no reason to pay even a few basis points for ETF management.
Are you sure this was discussed during that episode? By chance I re-listened to that episode today and do not recall him mentioning that.
(While his books do discuss holding individual Treasuries, that doesn't appear to have been discussed during the episode you cite.)
Last edited by AlwaysLearningMore on Fri May 13, 2022 7:45 pm, edited 1 time in total.
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Re: Bond fund vs treasury or CD Ladder

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Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
I don't understand the concept of taking the pain and then selling without reaping the benefits of that pain, in the form of higher interest payments. I suppose one could look at the entire market now and see where the best deal is. I doubt the trouble of individual bonds is worth it for most people, and think CDs are paying too little to be worth it right now. I would stay where you are assuming you have already maxed out I bonds for the year.
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Re: Bond fund vs treasury or CD Ladder

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Dennisl wrote: Wed May 11, 2022 4:17 pm I'm just curious. I'm a little frustrated by losses in my bond funds, but like the liquidity. Debating whether to just switch the Treasury ladders to avoid California state tax vs doing CD ladders. Historically, does anyone know how the rates/returns of the three compare? Thanks for any help. :beer
I'm not saying you should switch from bond funds to CD or Treasury ladders, but I'll give you my answer to your question: It doesn't matter how they compare historically. Regarding CDs and Treasuries, I would buy the one that has the highest yield (after tax if in taxable) for the maturity of interest. That changes over time.

Also, there are direct CDs and brokered CDs.

Sometimes direct CDs offer a nice yield premium over Treasuries, and you usually have an early withdrawal option as well, which can limit downside risk significantly. In the last year or two, direct CDs have not been competitive with Treasuries. But from about 20011 to a few years ago, I got an average yield premium of more 1 percentage point over Treasuries of comparable maturities (mostly 5-year terms, but anywhere from 2-year to 7-year). So if a 5-year Treasury had a yield of 2%, I got 3% or more from a 5-year CD. This plus the early withdrawal option made them a clear winner for me (but not necessarily for others).

Oh yeah, with direct CDs you usually can have the interest reinvested at the CD rate, which reduces reinvestment risk. This option is not available with brokered CDs or Treasuries.

Until the last couple of weeks, Treasuries had the highest yields, but recently brokered CDs are catching up and even exceeding the Treasury yields. For example, I now see at Vanguard 5-year CD at 3.25% and 5-year Treasuries at 2.89%. Of course Treasuries are more liquid (which only matters if you sell before maturity), and have the state tax exemption (only matters in taxable). Also, be sure the brokered CD isn't callable if you want to hold to maturity.

Personally, I've been buying shorter-term Treasuries lately (nominal and TIPS). But I still own bond funds and direct CDs (I think all of my brokered CDs have matured).

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Re: Bond fund vs treasury or CD Ladder

Post by pascalwager »

vineviz wrote: Thu May 12, 2022 11:26 am
jeffyscott wrote: Thu May 12, 2022 10:40 am I do micromanage, but it's mostly harmless or, I think, adding some minimal value...e.g. buying a CD that pays 3.5% instead of a treasury of equal term that pays 3.0%. And, unlike the idealized scenarios, I have both individual securities and (too many) bond funds. Anything resembling a "ladder" for me would be crooked and have very uneven rungs.
Just to clarify, the kind of micromanagement I was talking about was regarding duration.

I know very few individual investors who can calculate the average duration of their fixed income portfolio to within one decimal place, much less effectively manage it that precisely. The difference in duration between a 5-year CD and a 5-year Treasury note is greater than the kind of duration change we were discussing earlier, for instance.
It's easy adjusting overall duration using bond funds--by inspection, using a spreadsheet. The published fund durations are provided to one decimal place, so that's what I calculate.

For example, I make LTPZ the independent variable and SCHP the dependent variable such that the overall fixed-income value remains constant as I adjust LTPZ while observing the calculated overall duration. The required trades, of course, appear automatically. I also include a daily countdown function which is used in my two-person investment horizon calculator.

Literally, the only keystrokes needed are those used to adjust the fixed-income percentage of LTPZ.

Alternatively, one can write a formula, which I've done in the past.
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Re: Bond fund vs treasury or CD Ladder

Post by secondopinion »

Kevin M wrote: Fri May 13, 2022 9:30 pm Sometimes direct CDs offer a nice yield premium over Treasuries, and you usually have an early withdrawal option as well, which can limit downside risk significantly. In the last year or two, direct CDs have not been competitive with Treasuries. But from about 20011 to a few years ago, I got an average yield premium of more 1 percentage point over Treasuries of comparable maturities (mostly 5-year terms, but anywhere from 2-year to 7-year). So if a 5-year Treasury had a yield of 2%, I got 3% or more from a 5-year CD. This plus the early withdrawal option made them a clear winner for me (but not necessarily for others).

Oh yeah, with direct CDs you usually can have the interest reinvested at the CD rate, which reduces reinvestment risk. This option is not available with brokered CDs or Treasuries.
I have an add-on CD yielding 3% back from mid 2019. Still is a strong choice to store my emergency fund (as well as most of my proceeds of taxable bonds from 2020). Sometimes, it lines up really well for direct CDs; other times, it does not.

I keep an eye on that market because deals do not always last long. Right now, it is very disappointing.
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Re: Bond fund vs treasury or CD Ladder

Post by vineviz »

pascalwager wrote: Fri May 13, 2022 9:32 pm.
I know very few individual investors who can calculate the average duration of their fixed income portfolio to within one decimal place, much less effectively manage it that precisely. The difference in duration between a 5-year CD and a 5-year Treasury note is greater than the kind of duration change we were discussing earlier, for instance.
It's easy adjusting overall duration using bond funds--by inspection, using a spreadsheet. The published fund durations are provided to one decimal place, so that's what I calculate.
I am not saying that the math is complicated, just that most investors don’t perform it and probably couldn’t do it accurately if they tried.
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Re: Bond fund vs treasury or CD Ladder

Post by jeffyscott »

secondopinion wrote: Sat May 14, 2022 1:45 am
Kevin M wrote: Fri May 13, 2022 9:30 pm Sometimes direct CDs offer a nice yield premium over Treasuries, and you usually have an early withdrawal option as well, which can limit downside risk significantly. In the last year or two, direct CDs have not been competitive with Treasuries. But from about 20011 to a few years ago, I got an average yield premium of more 1 percentage point over Treasuries of comparable maturities (mostly 5-year terms, but anywhere from 2-year to 7-year). So if a 5-year Treasury had a yield of 2%, I got 3% or more from a 5-year CD. This plus the early withdrawal option made them a clear winner for me (but not necessarily for others).

Oh yeah, with direct CDs you usually can have the interest reinvested at the CD rate, which reduces reinvestment risk. This option is not available with brokered CDs or Treasuries.
I have an add-on CD yielding 3% back from mid 2019. Still is a strong choice to store my emergency fund (as well as most of my proceeds of taxable bonds from 2020). Sometimes, it lines up really well for direct CDs; other times, it does not.

I keep an eye on that market because deals do not always last long. Right now, it is very disappointing.

OTOH, brokered CDs are much more convenient.

It was just about 2 years ago, that I finally caved and transferred money to a couple direct CDs, due to the extremely low yields on brokered CDs, treasuries, and even bond funds vs. getting all of 1.9 and 2% on a couple direct CDs. But it is a hassle to move the money around for direct CD deals (mine's all IRA money). I am in the midst of a 2 week fiasco related to, now, transferring back to a brokerage. (Why they default to paper checks in the mail, like it's 1890, is beyond me.)

One of the two deals that I did get, though, was an add-on, variable rate, CD with a 2% floor. They are no longer offering this to new customers (it's now a 1% floor), but those who have the old one get renewed with the 2% floor. So I plan to leave a small amount in that account, in order to keep it as a permanent option.
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Re: Bond fund vs treasury or CD Ladder

Post by Gaston »

AlwaysLearningMore wrote: Fri May 13, 2022 7:22 pm
Gaston wrote: Wed May 11, 2022 6:54 pm When Bill Bernstein was the guest on the Bogleheads On Investing podcast (episode 13), he favored a treasury ladder over a treasury ETF. This assumes 1) that the average maturity of the bonds in the ladder roughly matches that of ETF, and 2) that you always hold the bonds in the ladder until they reach maturity.
Are you sure this was discussed during that episode? By chance I re-listened to that episode today and do not recall him mentioning that.
(While his books do discuss holding individual Treasuries, that doesn't appear to have been discussed during the episode you cite.)
Hmm, I’ll have to go back and check that. I listen to too many podcasts. :confused
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Re: Bond fund vs treasury or CD Ladder

Post by Gaston »

Gaston wrote: Sun May 15, 2022 7:15 pm
AlwaysLearningMore wrote: Fri May 13, 2022 7:22 pm
Gaston wrote: Wed May 11, 2022 6:54 pm When Bill Bernstein was the guest on the Bogleheads On Investing podcast (episode 13), he favored a treasury ladder over a treasury ETF. This assumes 1) that the average maturity of the bonds in the ladder roughly matches that of ETF, and 2) that you always hold the bonds in the ladder until they reach maturity.
Are you sure this was discussed during that episode? By chance I re-listened to that episode today and do not recall him mentioning that.
(While his books do discuss holding individual Treasuries, that doesn't appear to have been discussed during the episode you cite.)
Hmm, I’ll have to go back and check that. I listen to too many podcasts. :confused
Might have been during Mr. Bernstein's appearance on The White Coat Investor podcast. I didn't go back and re-listen to it, but here are the show notes: https://www.whitecoatinvestor.com/high- ... ernatives/
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Re: Bond fund vs treasury or CD Ladder

Post by MrJedi »

I am happy to pay a handful of basis points for a fund.

Personally I would only use individual treasuries, CDs, etc. if there is a specific liability/expense that I am timing the maturity with.

As part of my general open ended investment portfolio, Treasury/bond funds all the way.
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Re: Bond fund vs treasury or CD Ladder

Post by Doc »

jeffyscott wrote: Thu May 12, 2022 6:51 am
vineviz wrote: Wed May 11, 2022 7:04 pmAs for buying Treasuries for "free", that is generally only true for bonds purchased new at auction. It's pretty difficult (or, at least, time consuming) to build a full non-rolling bond ladder using only Treasury auctions. Any bonds bought and sold on the secondary market will have embedded trading costs, whether they are readily visible or not.
Are the treasuries on the secondary market not just as "free" as ETFs, which are, similarly, also free of commission?
It's not enough to simply hold the bonds to maturity. There's an extra element required to make the ladder beneficial, which is that the maturity dates and amounts of the bonds should correspond to dates when you actually need to spend that amount of money.
Okay, but how do I get money out of a bond fund that holds bonds that mature in 1 to 10 years (or more)? Or even a short term fund that holds 1-5 year maturities? I spend an unplanned extra $10K on something and, in this market, I'd like to sell just the 1 year bonds from the fund to pay the credit card bill when it comes. How do I do that, if all my money is in funds? Is it just done by holding enough in cash, in a money market fund or saving account? But, if so, then how and when do I move more money from the bond fund(s) to the money market after I spent the $10K?

If I hold the bonds directly, maybe one of them matures at the right time to be used for the bill, or I can sell one that is less than a year from maturity. And, in any case, I can have one mature every 3 or 6 months to regenerate cash if it's needed and if not I just buy another 3 year or 5 year or whatever.
Jeffy YEH. You get much better flexibility and with a slightly lower cost than a bond fund.

As far as the difficulty in building the ladder it is basically trivial. New Treasury obligations of several maturities are auctioned several times a week. And if you wanted a particular slot "now" and the auction for that particular slot wasn't available for a month or two just buying that one from the last auction on the secondary market is easy. There would be little price difference.

Another advantage of the ladder over a fund not mentioned is the ability to avoid wash sales if you needed the money for a short time and needed the money now.

Reinvestment of interest payment twice a year with direct Treasuries instead of every month with a fund is also less time consuming. This is an advantage in a taxable account since it avoids wash sale issues on future sales if you reinvest dividends in the fund..

In more normal times a ladder also gives some roll down yield advantages over a fund with a similar duration.
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Re: Bond fund vs treasury or CD Ladder

Post by secondopinion »

Doc wrote: Mon May 16, 2022 10:47 am
jeffyscott wrote: Thu May 12, 2022 6:51 am
vineviz wrote: Wed May 11, 2022 7:04 pmAs for buying Treasuries for "free", that is generally only true for bonds purchased new at auction. It's pretty difficult (or, at least, time consuming) to build a full non-rolling bond ladder using only Treasury auctions. Any bonds bought and sold on the secondary market will have embedded trading costs, whether they are readily visible or not.
Are the treasuries on the secondary market not just as "free" as ETFs, which are, similarly, also free of commission?
It's not enough to simply hold the bonds to maturity. There's an extra element required to make the ladder beneficial, which is that the maturity dates and amounts of the bonds should correspond to dates when you actually need to spend that amount of money.
Okay, but how do I get money out of a bond fund that holds bonds that mature in 1 to 10 years (or more)? Or even a short term fund that holds 1-5 year maturities? I spend an unplanned extra $10K on something and, in this market, I'd like to sell just the 1 year bonds from the fund to pay the credit card bill when it comes. How do I do that, if all my money is in funds? Is it just done by holding enough in cash, in a money market fund or saving account? But, if so, then how and when do I move more money from the bond fund(s) to the money market after I spent the $10K?

If I hold the bonds directly, maybe one of them matures at the right time to be used for the bill, or I can sell one that is less than a year from maturity. And, in any case, I can have one mature every 3 or 6 months to regenerate cash if it's needed and if not I just buy another 3 year or 5 year or whatever.
Jeffy YEH. You get much better flexibility and with a slightly lower cost than a bond fund.

As far as the difficulty in building the ladder it is basically trivial. New Treasury obligations of several maturities are auctioned several times a week. And if you wanted a particular slot "now" and the auction for that particular slot wasn't available for a month or two just buying that one from the last auction on the secondary market is easy. There would be little price difference.

Another advantage of the ladder over a fund not mentioned is the ability to avoid wash sales if you needed the money for a short time and needed the money now.

Reinvestment of interest payment twice a year with direct Treasuries instead of every month with a fund is also less time consuming. This is an advantage in a taxable account since it avoids wash sale issues on future sales if you reinvest dividends in the fund..

In more normal times a ladder also gives some roll down yield advantages over a fund with a similar duration.
Tax loss swapping is also helpful. If one is in a lower tax bracket, so is tax gain swapping. There are a lot of strategies for taxable accounts to cushion the blow of taxes that bonds have.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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