Money market funds have same yield as intermediate bond funds - why choose bonds?

[rm]

I saw my govt mm funds like SPAXX has 7 day yield of 3.97%

BND dividend yield is 2.26%
https://ycharts.com/companies/BND/dividend_yield

I'm confused how can this happen. BND has more risk than SPAXX, shouldn't we get compensated by higher yields. Should we just move our fixed income portfolio (40% of assets) to MM funds from bond funds.

[pizzy]

When do you make the switch back?

[JoMoney]

If you expect interest rates could fall, or even if you just don't know but want to be assured of the interest rate over some time period, buying longer term bonds allows you to lock in that interest rate for the term of those bonds.

Many speculate that the Fed will "pivot" for a recession, lowering interest rates, which will raise the value of longer term bonds promising a higher a yield.

The "distribution yield" you're looking at for the bond fund isn't the expected return for the bonds in the fund, many of those bonds were issued at much lower rates with a lower current distribution, but the expected yield to maturity when the principal value is returned will be higher. The "SEC Yield" for the fund is a better measure.

[CPA_RIA]

intermediate corporate bonds will produce a greater total return over a L-T investment horizon than MMF's. sure, there will a modest amount of additional volatility - but outside of a 6-month rainy day fund there's little reason for MMF's in a L-T allocation

[muffins14]

You are buying a stream of coupon payments.

If you want those coupon payments to be the same in 5 years, you need to be buying intermediate bonds. If you buy money market funds, their yields can change quickly, such that in 3-5 years they might be giving you much smaller coupon payments than the bonds would be giving you.

That would present a risk to you, if you were depending on those coupon payments for income 3-5+ years from now.

There is risk in the ability to meet your medium-term and long-term goals, not only risk about the price volatility tomorrow or next week or next month.

As a concrete example, say you need to pay yourself $1000 in 10 years as some retirement expense.

If you buy a 10-year bond, you can probably buy about $820 of a treasury fund, and the coupon payments will get you to $1000 at year 10. You know this with near certainty when you purchase the bond. If the price fluctuates up and down by +/- 10% every year (wow, scary) who cares? You want this money in 10 years and you know for a fact that you will get it.

If you do this with a money market, what happens if you buy $820 of a money market fund, and in 2024 the yield in money market accounts is 0.5% again, or 0%? You are not going to meet your goal of $1000 in 10 years, whereas with the 10-year bond, you locked it in up-front. The price of your money-market fund never fluctuates (yay, good), but who cares? You missed your actual goal of having $1000.

[NiceUnparticularMan]

See this prior post (and the post it links before that):

viewtopic.php?p=7074059#p7074059

Long story short, more often than not what happens after the yield curve inverts is that MM rates come down but longer-term bond rates also come down:



And so if you wait to buy longer-term bonds, you end up buying them at a significantly higher price, and you could easily lose more by waiting than you gain from the relatively small amount of additional interest you get during the brief period of inversion.

Indeed, in a way you can think of an inverted yield curve as basically a market prediction this is going to happen soon. And while the markets are not always right, generally speaking betting against market predictions tends to be a loser more often than it is a winner.

[dbr]

One thing is that the mechanism for the fastest recovery of an investment in BND after the rise in interest rates would be a fall in interest rates.

This is not a prediction.

[CPA_RIA]

If you expect interest rates could fall, or even if you just don't know but want to be assured of the interest rate over some time period, buying longer term bonds allows you to lock in that interest rate for the term of those bonds.

Many speculate that the Fed will "pivot" for a recession, lowering interest rates, which will raise the value of longer term bonds promising a higher a yield.

The "distribution yield" you're looking at for the bond fund isn't the expected return for the bonds in the fund, many of those bonds were issued at much lower rates with a lower current distribution, but the expected yield to maturity when the principal value is returned will be higher. The "SEC Yield" for the fund is a better measure.

I'd opine that YTM...or even Yield-to-worst are better measurements than both Distribution and SEC yields

[livesoft]

I'm confused how can this happen. BND has more risk than SPAXX, shouldn't we get compensated by higher yields. Should we just move our fixed income portfolio (40% of assets) to MM funds from bond funds.

BND as of yesterday at a total return in 2023 (23 days) of 2.85%. The SPAXX has no chance of realized nor unrealized capital gains. Its total return for 2023 as of yesterday was 0.25%.

That why I choose bond funds -- especially after they have had a subpar year as in 2022.

There is also no guarantee that SPAXX will continue to pay that particular yield through the next 12 months.

[livesoft]

When do you make the switch back?

In hindsight that is an easy question to answer: October 21-24, 2022.

In the past 3 months intermediate-term bond funds are up about 7%.

[nisiprius]

I saw my govt mm funds like SPAXX has 7 day yield of 3.97%

BND dividend yield is 2.26%
https://ycharts.com/companies/BND/dividend_yield

I'm confused how can this happen. BND has more risk than SPAXX, shouldn't we get compensated by higher yields. Should we just move our fixed income portfolio (40% of assets) to MM funds from bond funds.

We should get compensated by higher yields, but in order to be pretty sure of actually getting the expected yield, we should plan to hold them for a period of time roughly equal to the fund's duration. The duration of BND is 6.5 years. In other words, if we need money in the next year or two, yes, it would make more sense to buy a money market mutual fund or high yield bank account. But if our time horizon is more than 6.5 years or so we would still expect to make significantly more money in a bond fund like BND, and this has been pretty reliable. For example, even after 2022, over the last ten years BND has had an average annual return of 1.01%, while SPAXX has had only 0.54%.

Now I agree that personally I'd be glad to sacrifice such a small amount of performance to get a perfectly smooth growth curve that never goes down. But the point is that yes, over long periods of time you'd expect the bond fund to have higher return--although 2022 was such an extraordinary event that it has wiped most of it out even over a ten-year period.

[dbr]

When do you make the switch back?

In hindsight that is an easy question to answer: October 21-24, 2022.

In the past 3 months intermediate-term bond funds are up about 7%.

Right. The whole question is plagued by timing. The time to have gotten out of BND was months before that. Usually timing is too late both going in and going out.