Fixed income - what should I do?

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stocknoob4111
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Fixed income - what should I do?

Post by stocknoob4111 »

I have $205,000 in cash (Money Market - FZFXX at 5%) that represents 13% of my entire portfolio. Currently the amount I have in VBTLX (Vanguard Total Bond) is around 4%, the rest of my portfolio is in equities (split between US Large, US Small and Total International).

I am wondering what I should do with this cash. I ultimately want to get to a 80/20 asset allocation. Would you put the entire cash as a lumpsum into BND (Total Bond)? Or would you rather buy 3 year or 5 year Treasury bonds?

The only thing I know is that I need to get this money OUT of cash right now since rates will be coming down soon, but I am torn between BND and Treasuries. I think the recent bond carnage is giving me a pause - which may or may not be irrational fear, however, BND has already dropped 20% from it's highs and any downside going forward should be limited, is that a logical thought?
delamer
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Re: Fixed income - what should I do?

Post by delamer »

I’d vote for Treasuries because they shift volatility risk to your stocks, assuming that you are prepared to hold them until maturity.

But this isn’t an either/or decision. Put half in Treasuries and half in BND if you truly see pros and cons to both options.
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retired@50
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Re: Fixed income - what should I do?

Post by retired@50 »

Which account type is holding the cash?

IRA, Roth, Taxable?

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stocknoob4111
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Re: Fixed income - what should I do?

Post by stocknoob4111 »

delamer wrote: Fri Feb 09, 2024 9:52 am assuming that you are prepared to hold them until maturity.
I just retired so in drawdown, I will be withdrawing amounts in excess of my dividends each January so even if I buy Treasuries some will have to be sold prior to maturity which is why it may not make sense to buy Treasuries I am thinking, but is selling Treasuries on the secondary market that functionally different than if I were to buy Total Bond (BND) and sell that?
retired@50 wrote: Fri Feb 09, 2024 10:04 am Which account type is holding the cash?
All in Taxable
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retired@50
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Re: Fixed income - what should I do?

Post by retired@50 »

stocknoob4111 wrote: Fri Feb 09, 2024 10:18 am
retired@50 wrote: Fri Feb 09, 2024 10:04 am Which account type is holding the cash?
All in Taxable
Depending on the size of your tax-deferred account(s) in relation to your overall portfolio, you could go another way...

Put all the money in the taxable account in tax-efficient stock index funds, and put all the bonds in your tax-deferred accounts. When selling is necessary, harvest any losses from the taxable account if they exist, and then re-balance your stocks/bonds to your desired asset allocation in the tax-deferred account. If your taxable account shows no losses, then sell shares with small gains.

This line of thinking doesn't work for everyone, but it's usually more tax efficient.

Regards,
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Re: Fixed income - what should I do?

Post by Tom_T »

stocknoob4111 wrote: Fri Feb 09, 2024 9:47 am I have $205,000 in cash (Money Market - FZFXX at 5%) that represents 13% of my entire portfolio. Currently the amount I have in VBTLX (Vanguard Total Bond) is around 4%, the rest of my portfolio is in equities (split between US Large, US Small and Total International).

I am wondering what I should do with this cash. I ultimately want to get to a 80/20 asset allocation. Would you put the entire cash as a lumpsum into BND (Total Bond)? Or would you rather buy 3 year or 5 year Treasury bonds?

The only thing I know is that I need to get this money OUT of cash right now since rates will be coming down soon, but I am torn between BND and Treasuries. I think the recent bond carnage is giving me a pause - which may or may not be irrational fear, however, BND has already dropped 20% from it's highs and any downside going forward should be limited, is that a logical thought?
Who said rates are coming down soon? Not the market. Powell said exactly the opposite. The 10-year went from 3.85% to 4.18% in the last eight days. MM funds might well be "higher for longer."

Also, let's forget about 2022. Do you know that the total return for BND last year was +5.7%?
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Re: Fixed income - what should I do?

Post by BolderBoy »

stocknoob4111 wrote: Fri Feb 09, 2024 9:47 am I am wondering what I should do with this cash. I ultimately want to get to a 80/20 asset allocation. Would you put the entire cash as a lumpsum into BND (Total Bond)? Or would you rather buy 3 year or 5 year Treasury bonds?
How old are you? To some extent the fixed income duration plays into what you may want to do (if younger then a longer term duration is okay).

What is your purpose for the fixed income allocation? Income? Portfolio stability? Both?

Then there is the issue of quality. Lower quality bonds tend to pay higher interest for the risk you accept. Currently the yield curve is somewhat inverted so that isn't a hard and fast rule.
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Re: Fixed income - what should I do?

Post by LeslieSmiley »

Diversify the amount into brokered CDs, treasury bills, notes, and bonds in various durations that would ideally match your future liability obligation.
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Re: Fixed income - what should I do?

Post by bonesly »

Tom_T wrote: Fri Feb 09, 2024 10:35 am Who said rates are coming down soon? Not the market. Powell said exactly the opposite. The 10-year went from 3.85% to 4.18% in the last eight days. MM funds might well be "higher for longer."
The Fed has a 2% inflation target, so rates will be coming down as inflation is brought under control. A rate cut is likely in March and/or April; maybe later, but they will be coming down baring some other unexpected geopolitical/pandemic type event that causes high gov't spending and sparks inflation higher.
Tom_T wrote: Fri Feb 09, 2024 10:35 am Also, let's forget about 2022. Do you know that the total return for BND last year was +5.7%?
Well the gov't spending during COVID sparked inflation and you saw the result on intermediate/long bond funds NAVs. There will be times in the future that inflation sparks again but historically those have been far and few between compared to periods of lower inflation at/near the Fed's target.
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Re: Fixed income - what should I do?

Post by stocknoob4111 »

LeslieSmiley wrote: Fri Feb 09, 2024 12:03 pm Diversify the amount into brokered CDs, treasury bills, notes, and bonds in various durations that would ideally match your future liability obligation.
This is a long term asset allocation so I can target it to my future spending otherwise I will be on a 100% equity glide path since I will be consuming more and more of my fixed income as it matures.

I perpetually want to be 85/15 - 80/20, I would be ok with 85/15. This requires me to put all my current cash into either BND or 3 or 5 year Treasuries.

So the summary of my original question is: If invested for the next 30 years, are the following 2 options going to make any sort of significant difference in a) volatility b) Portfolio longevity

1. Dump everything into BND now and withdraw as needed to maintain asset allocation (standard Bogleheads approach)

2. Invest in 3 or 5 Year Treasuries, renew every term, to withdraw have to sell needed amount on the secondary market

Both choices will incur a loss if interest rates rise. Choice 2) has more fine grained control over what you want to do post maturity but since I intend to permanently maintain this asset allocation it's implied that i'll just renew bonds as they mature so it may be analogous to a bond fund in this regard.

FYI, my total portfolio withdrawal rate is around 2.75% typical, upper bound is 3%.
Last edited by stocknoob4111 on Fri Feb 09, 2024 12:58 pm, edited 1 time in total.
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Re: Fixed income - what should I do?

Post by stocknoob4111 »

delamer wrote: Fri Feb 09, 2024 9:52 amPut half in Treasuries and half in BND if you truly see pros and cons to both options.
Originally considered this, splitting the difference but simply because I couldn't make up my mind. Now I am questioning if the additional burden of buying/selling Treasuries on the secondary market is worth it as the BND option is significantly simpler. By "worth it" I mean if, over the very long term, it's going to make any material difference to the volatility and longevity of my portfolio.
Lambert Strether
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Re: Fixed income - what should I do?

Post by Lambert Strether »

If you live in a state with a significant state income tax, as I do, you have a reason to consider holding Treasuries in a taxable account. The interest on my T-Bills is not subject to the 8.9% state tax that otherwise applies to my income.
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Re: Fixed income - what should I do?

Post by stocknoob4111 »

Lambert Strether wrote: Fri Feb 09, 2024 1:09 pm If you live in a state with a significant state income tax, as I do, you have a reason to consider holding Treasuries in a taxable account. The interest on my T-Bills is not subject to the 8.9% state tax that otherwise applies to my income.
Thanks, I live in Texas so no income taxes :)
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Re: Fixed income - what should I do?

Post by Tom_T »

bonesly wrote: Fri Feb 09, 2024 12:21 pm
Tom_T wrote: Fri Feb 09, 2024 10:35 am Who said rates are coming down soon? Not the market. Powell said exactly the opposite. The 10-year went from 3.85% to 4.18% in the last eight days. MM funds might well be "higher for longer."
The Fed has a 2% inflation target, so rates will be coming down as inflation is brought under control. A rate cut is likely in March and/or April; maybe later, but they will be coming down baring some other unexpected geopolitical/pandemic type event that causes high gov't spending and sparks inflation higher.
Tom_T wrote: Fri Feb 09, 2024 10:35 am Also, let's forget about 2022. Do you know that the total return for BND last year was +5.7%?
Well the gov't spending during COVID sparked inflation and you saw the result on intermediate/long bond funds NAVs. There will be times in the future that inflation sparks again but historically those have been far and few between compared to periods of lower inflation at/near the Fed's target.
Do you think that the bond market hasn't taken things imto account? Rates beyond the short end have declined quite a bit since late last year.

Fedwatch currently shows an 82.5% probability of no rate cut in March. It's not "likely" unless you're saying that you know something others do not.
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Re: Fixed income - what should I do?

Post by lakpr »

Unless you are prepared to wait "6 to 7 more years" into the future whenever there is a rate hike and subsequent decline in bond funds, and yet another "6 to 7 more years" if there is yet another rate hike, and yet another "6 to 7 more years" if there is a third rate hike ... JUST TO REGAIN YOUR PRINCIPAL, sell BND. I am soured on these "constant duration" bond funds in general.

Would you be older than 59.5 soon (if not now, in 5 or 7 or 10 years)? If so, MYGAs might be a good option. On the "blueprintincome.com" site, I saw MYGAs going out as far as 10 years and guaranteeing 5.35% yield for the entire 10 years. You will be able to withdraw the interest and let only the principal ride; the interest is paid quarterly [ be aware though, that if you choose this option while younger than 59.5 there is a 10% penalty on the taxes ]. OR you can let the interest be rolled into the principal of the MYGA and let it compound.

Treasuries, of course are a great option as well, but since you live in a no-income tax state, may not be as much benefit to you as to us folks living in high tax states (I live in NJ).

A third option would be to by the "defined maturity" ETFs being offered by BlackRock. They invest in bonds, both treasuries and corporates, all maturing at around the same time. At maturity, the ETF will be liquidated and the proceeds distributed to the shareholders. This way you get the diversification (hundreds of bonds, not a single bond), and as long as you are prepared to hold until that defined maturity, you will get your principal back as well as the coupon payments along the way.

A fourth option -- temporary though -- is to chase CD bonuses. To give you an example, Wells Fargo is offering a $525 bonus if you invest $25k for 90 days. It pays peanuts in interest, but if you open the savings account and fund the savings account for exactly 90 days, the bonus will come to approximately 8.25% yield. Much better than any treasuries or MYGAs. You just have to leave the savings account open for 90 more days to receive the bonus, after which you can close the account. The account also should have $300 minimum to avoid fees. So simply deposit $25,300, mark your calendar for 90 days to drain $25k out of it, and mark a second date on your calendar at the 180 day mark to close the account.

There are plenty of banks offering bonuses like this. It is definitely a bit of work, not a lazy invest and forget type of investment.
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Re: Fixed income - what should I do?

Post by HanSolo »

lakpr wrote: Fri Feb 09, 2024 6:41 pm Unless you are prepared to wait "6 to 7 more years" into the future whenever there is a rate hike and subsequent decline in bond funds, and yet another "6 to 7 more years" if there is yet another rate hike, and yet another "6 to 7 more years" if there is a third rate hike ... JUST TO REGAIN YOUR PRINCIPAL, sell BND. I am soured on these "constant duration" bond funds in general.
As discussed in another thread, it depends on one's use case. For me, fixed-income involves using mainly balanced funds for my long-term assets, and for short-term assets, I use short-term bond funds and money markets.

It works for my purposes.
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Re: Fixed income - what should I do?

Post by Outer Marker »

retired@50 wrote: Fri Feb 09, 2024 10:29 am Put all the money in the taxable account in tax-efficient stock index funds, and put all the bonds in your tax-deferred accounts. When selling is necessary, harvest any losses from the taxable account if they exist, and then re-balance your stocks/bonds to your desired asset allocation in the tax-deferred account. If your taxable account shows no losses, then sell shares with small gains.

This line of thinking doesn't work for everyone, but it's usually more tax efficient.
+1. Get bonds/fixed income out of taxable. Your bond/fixed income choices may be limited by what your 401K plan offers. All else being equal, I'd prefer short term treasuries. That provides better stability, which is what fixed income is for. Take all your risk on the equity side (which at 80/20, you're doing.).
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Re: Fixed income - what should I do?

Post by Stinky »

lakpr wrote: Fri Feb 09, 2024 6:41 pm Unless you are prepared to wait "6 to 7 more years" into the future whenever there is a rate hike and subsequent decline in bond funds, and yet another "6 to 7 more years" if there is yet another rate hike, and yet another "6 to 7 more years" if there is a third rate hike ... JUST TO REGAIN YOUR PRINCIPAL, sell BND. I am soured on these "constant duration" bond funds in general.

Would you be older than 59.5 soon (if not now, in 5 or 7 or 10 years)? If so, MYGAs might be a good option. On the "blueprintincome.com" site, I saw MYGAs going out as far as 10 years and guaranteeing 5.35% yield for the entire 10 years. You will be able to withdraw the interest and let only the principal ride; the interest is paid quarterly [ be aware though, that if you choose this option while younger than 59.5 there is a 10% penalty on the taxes ]. OR you can let the interest be rolled into the principal of the MYGA and let it compound.

Treasuries, of course are a great option as well, but since you live in a no-income tax state, may not be as much benefit to you as to us folks living in high tax states (I live in NJ).

A third option would be to by the "defined maturity" ETFs being offered by BlackRock. They invest in bonds, both treasuries and corporates, all maturing at around the same time. At maturity, the ETF will be liquidated and the proceeds distributed to the shareholders. This way you get the diversification (hundreds of bonds, not a single bond), and as long as you are prepared to hold until that defined maturity, you will get your principal back as well as the coupon payments along the way.

A fourth option -- temporary though -- is to chase CD bonuses. To give you an example, Wells Fargo is offering a $525 bonus if you invest $25k for 90 days. It pays peanuts in interest, but if you open the savings account and fund the savings account for exactly 90 days, the bonus will come to approximately 8.25% yield. Much better than any treasuries or MYGAs. You just have to leave the savings account open for 90 more days to receive the bonus, after which you can close the account. The account also should have $300 minimum to avoid fees. So simply deposit $25,300, mark your calendar for 90 days to drain $25k out of it, and mark a second date on your calendar at the 180 day mark to close the account.

There are plenty of banks offering bonuses like this. It is definitely a bit of work, not a lazy invest and forget type of investment.
I am definitely a fan of both MYGAs and defined maturity ETFs. I personally own both.

I have soured on bond funds, and currently don’t own any.
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Re: Fixed income - what should I do?

Post by id0ntkn0wjack »

Tom_T wrote: Fri Feb 09, 2024 1:54 pm

Fedwatch currently shows an 82.5% probability of no rate cut in March. It's not "likely" unless you're saying that you know something others do not.
Forecasts for rate changes have, historically, been frequently wrong according to the WSJ, fwiw:

https://www.wsj.com/finance/investing/i ... _permalink
I moved 10% of my equities into BLV (Vanguard Long Term Bond ETF) in January 2021. Follow my advice at your own peril.
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Re: Fixed income - what should I do?

Post by lakpr »

id0ntkn0wjack wrote: Sat Feb 10, 2024 8:48 am
Tom_T wrote: Fri Feb 09, 2024 1:54 pm Fedwatch currently shows an 82.5% probability of no rate cut in March. It's not "likely" unless you're saying that you know something others do not.
Forecasts for rate changes have, historically, been frequently wrong according to the WSJ, fwiw:

https://www.wsj.com/finance/investing/i ... _permalink
That may be, but it also means that your constant duration bond fund is either taking a beating or rising randomly based on the forecasts. If the forecasts turn out to be wrong, then the NAV of the bond fund tanks. The question is: are you (the generic 'you', not any specific person) prepared to ride out these fluctuations in value? The value of YOUR MONEY, is changing based on SOMEONE ELSE'S FORECAST.

As I asked in my previous post, are you prepared to wait 6 to 7 more years after one forecast gone wrong / your bond fund tanked, just to get back your principal? And if another forecast gone wrong, are you prepared to wait 6 to 7 more years from THEN on just to get back to even ... yada yada.

If your time horizon is at least 15 years or more (two "6 to 7" year cycles), then these constant duration funds may make sense for you. Then again, if your time horizon is indeed 15+ years, take the risk on the equities side; much better reward for your patience.
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Re: Fixed income - what should I do?

Post by Tom_T »

id0ntkn0wjack wrote: Sat Feb 10, 2024 8:48 am
Tom_T wrote: Fri Feb 09, 2024 1:54 pm

Fedwatch currently shows an 82.5% probability of no rate cut in March. It's not "likely" unless you're saying that you know something others do not.
Forecasts for rate changes have, historically, been frequently wrong according to the WSJ, fwiw:

https://www.wsj.com/finance/investing/i ... _permalink
Perhaps, but I keep reading posts that are quite certain that "rates are coming down." The Treasury bond market had already reacted to that possibility, so some of that has already been priced in (and was priced out when Powell threw cold water on a March hike.) Any Fed action will directly affect money market rates, but intermediate rates might not move much. I'm just not sure how some people can be so certain what rates will do, given that nobody has shown any ability to predict rate movement with any consistency.
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Re: Fixed income - what should I do?

Post by placeholder »

My method devised for my original asset allocation was to have the fixed income 50/50 with bond index and stable value although recently I have swapped the stv with money market to take advantage of the difference in rate then will go back when rate normalize.
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Re: Fixed income - what should I do?

Post by nedsaid »

stocknoob4111 wrote: Fri Feb 09, 2024 9:47 am I have $205,000 in cash (Money Market - FZFXX at 5%) that represents 13% of my entire portfolio. Currently the amount I have in VBTLX (Vanguard Total Bond) is around 4%, the rest of my portfolio is in equities (split between US Large, US Small and Total International).

I am wondering what I should do with this cash. I ultimately want to get to a 80/20 asset allocation. Would you put the entire cash as a lumpsum into BND (Total Bond)? Or would you rather buy 3 year or 5 year Treasury bonds?

The only thing I know is that I need to get this money OUT of cash right now since rates will be coming down soon, but I am torn between BND and Treasuries. I think the recent bond carnage is giving me a pause - which may or may not be irrational fear, however, BND has already dropped 20% from it's highs and any downside going forward should be limited, is that a logical thought?
I share the common conviction that interest rates should drop later on in 2024 but this is not guaranteed. Interest rates for U.S. Treasuries are actually rising so far in 2024 both nominal rates for Treasuries and real rates for TIPS. Predicting the direction of interest rates is not so easy.

Probably the best choice would be an Intermediate Term US Treasury Bond Index fund but Total Bond Market Index would be almost as good. You could also buy FDIC Insured Certificates of Deposit at a brokerage, these would be good particularly for a tax deferred IRA. Lots of good choices right now for fixed income investors. Fidelity can build CD ladders for you, you can also do this with Treasuries, and with individual TIPS.
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Re: Fixed income - what should I do?

Post by Parkinglotracer »

I do a 5 year treasury bond ladder and vanguard mm fund … helps me ignore the interest rate chatter.
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Re: Fixed income - what should I do?

Post by stocknoob4111 »

The problem I have with BND is that the coupon is stuck at a ridiculously low level 3.4% due to the bond fund having older bonds in the mix that were probably obtained during the ZIRP days. Now, how long will it take for the Distribution Yield to get to the current SEC Yield of 4.34% is a great question.

It seemed to be steadily going up but then it started to drop again, why I don't understand since regardless of interest rate movements the Distribution Yield should be going UP since it's significantly under the SEC yield.

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Re: Fixed income - what should I do?

Post by S_Track »

stocknoob4111 wrote: Sun Feb 11, 2024 8:44 am It seemed to be steadily going up but then it started to drop again, why I don't understand since regardless of interest rate movements the Distribution Yield should be going UP since it's significantly under the SEC yield.

Image
I bet the price increase of the fund between November and December caused this. If the price of the fund increases, the distribution yield of the fund will be reduced considering the coupons distribution probably didn't change much between Nov and Dec.
Last edited by S_Track on Mon Feb 12, 2024 2:19 pm, edited 1 time in total.
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Re: Fixed income - what should I do?

Post by mhadden1 »

LeslieSmiley wrote: Fri Feb 09, 2024 12:03 pm Diversify the amount into brokered CDs, treasury bills, notes, and bonds in various durations that would ideally match your future liability obligation.
This seems optimal. I have done similar things in the past. Full disclosure - I got kind of lazy after I retired so now I just use BND and intermediate treasury funds for long term holdings.
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Re: Fixed income - what should I do?

Post by HanSolo »

stocknoob4111 wrote: Sun Feb 11, 2024 8:44 am The problem I have with BND is that the coupon is stuck at a ridiculously low level 3.4% due to the bond fund having older bonds in the mix that were probably obtained during the ZIRP days. Now, how long will it take for the Distribution Yield to get to the current SEC Yield of 4.34% is a great question.
That was discussed in depth, in a previous thread:

viewtopic.php?t=360575
It seemed to be steadily going up but then it started to drop again, why I don't understand since regardless of interest rate movements the Distribution Yield should be going UP since it's significantly under the SEC yield.
It might make more sense (cents?) if you look at cents per share rather than yield (or similarly, yield relative to your cost basis rather than relative to current share price).
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