Bond vs. high yield savings

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whiteorgo
Posts: 3
Joined: Wed Jan 03, 2018 11:57 am

Bond vs. high yield savings

Post by whiteorgo » Thu Jun 14, 2018 9:15 pm

Hello, somewhat of a newbie and currently trying to learn and balance my portfolio. Would really appreciate some knowledge.

I'm currently trying to do the 3-fund portfolio, with US stock, International stock, and Bonds.

But when I look at bond funds in Vanguard (Vanguard Total Bond Market Index), the return seems pretty low (~2%). I'm currently earning 1.75% in my high yield savings account. So is investing in bonds worth is when you had no risk with savings, although the earning might be slightly lower? Am I missing something in understanding the proper return of bonds? Thanks!

grkmec
Posts: 75
Joined: Wed Jun 22, 2016 8:46 am

Re: Bond vs. high yield savings

Post by grkmec » Thu Jun 14, 2018 9:19 pm

Vanguard Total Bond Investor Class has SEC yield of 3.02% and carries a duration of 6.1 years.

1yr T-bill yields 2.34%, is state tax exempt and duration is 1yr.

Given how flat the yield curve is right now, and potential for future rate hikes, a 1yr T-bill seems far superior risk than a high quality bond fund.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Bond vs. high yield savings

Post by dbr » Fri Jun 15, 2018 9:11 am

Taken all in all, worry about your stock/bond allocation and don't fuss over exactly what to hold in fixed income. The exception would be someone holding a very high allocation to fixed income.

dkeeney
Posts: 9
Joined: Thu May 24, 2018 1:50 pm

Re: Bond vs. high yield savings

Post by dkeeney » Fri Jun 15, 2018 7:22 pm

In the current rising interest rate environment, the NAV of bond funds is heading down. As the Bogleheads here will point out, you never know when current trends might shift, so allocate and walk away. But it has been a long time since rates have gone up 200 (at least) or 300 (or perhaps more) basis points, and that will send the NAVs of bond funds down. My bond fund NAVs (Vanguard Total, Vanguard Total International, Vanguard Intermediate Term and Vanguard Short Term) have each gone down about 4% over the past year. Sure, the yield has been going up, but it will take a long time for a higher yield to make up for the loss of NAV. If you want the diversification and simplicity that come with a bond fund, a declining NAV is just part of the deal when interest rates are going up. One suggestion is to keep your bond fund short term or ultra short term (VUBFX). An alternative is to leave your funds on the sidelines in cash until there is some stability in rates. I'm sure I'll get kicked for that comment, but the Fed signaled two more hikes in 2018 and the market expects three or four more in 2019, which means rates are expected to go up another 150 basis points in the next 12-18 months. What I'm doing is moving my bonds to Vanguard's Ultra Short fund and also buying individual bonds that I'll keep to maturity -- so swings in the NAV aren't a worry. Government bonds are available through TreasuryDirect.com and Vanguard has a clearinghouse of Treasuries, Munis and Corporate bonds. It has required some research and dabbling, but I'm getting more accustomed to the array of variables to consider.

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