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Short Term High Yield vs. CDs vs. Treasuries vs. I-Bonds
With garden variety CDs offering 3.5-4% or more in FDIC insured interest (and I-Bonds offering north of 6.5%); is there any argument for buying into a Short-Term High-Yield Fund (RPHYX, TRBUX)?
Why are you not buying broker CD/Treasury? Fidelity treasuries pays 4.8% for 6 months (https://fixedincome.fidelity.com/ftgw/fi/FILanding) and you don't pay state tax. Can I trade back and forth with CD/Treasury? it's inconvenienced. Can I buy several hundreds thousands of I-bonds? I can't. This is why I use MM and trade anytime I want.
Do I want to own ST vehicles after bonds had one of the worse years in decades in 2022? Absolutely not. I said already in Nov 2022 that bond funds have a good chance to make 10+% and many of them, several % more.
I basically see bond funds as more of a sure thing in 2023 than stocks + much lower volatility.
Bond market anticipates 2-4 Fed rate hikes. The expectations now are of 2 more 25-bps hikes. So, this may be the tail end of the historic bond bear of 2022. It should be ok to start buying bond funds. High 30-day SEC yields point to potential future appreciations. One can also hold T-Bills.
Why are you not buying broker CD/Treasury? Fidelity treasuries pays 4.8% for 6 months (https://fixedincome.fidelity.com/ftgw/fi/FILanding) and you don't pay state tax. Can I trade back and forth with CD/Treasury? it's inconvenienced. Can I buy several hundreds thousands of I-bonds? I can't. This is why I use MM and trade anytime I want.
Do I want to own ST vehicles after bonds had one of the worse years in decades in 2022? Absolutely not. I said already in Nov 2022 that bond funds have a good chance to make 10+% and many of them, several % more.
I basically see bond funds as more of a sure thing in 2023 than stocks + much lower volatility.
Can most of America buy several hundreds thousands of anything??? no...
I bond is limited to $10K per person @0and additional $5K on their tax return.
CDs and T bills can be purchase in large sums. However, T bills are more liquid and can be sold through secondary market. T bill ladder is recommended so the shorter ones mature every several months. Not the same with CDs since the secondary market is much smaller and one have to watch for the penalty.
Many money market funds are yielding in 3-4% and they are most liquid.
Think you can do better. Large brokerages such as Fidelity offers one-yr non-callable brokered CDs yielding 4.85%. Just avoid callable CDs from JP Morgan. Bank CDs are not competitive for my $.
Even at current favorable rates, a minimum-allowable deposit gets you nowhere, really, for only one year's time. You really must commit a lot more than $1,000.00 for that 5% rate to make a real difference for you. 5% is pretty damn good, though. My bond funds offer a higher yield already. Given my current positioning, I can add to HYDB or SCHP, the latter being rather much safer. Meanwhile, back at the ranch, my T-IRA bond funds are doing their job for me, too. (I like the commercial. Cute.)
CDs vs bond funds are really apple-to-orange comparison. CDs are considered cash equivalent, i.e. saving accounts and money market funds. The credit risk is low since they are FDIC guarantee. Bond funds have their duration and credit quality risk. Even the total bond index had negative 13% loss last year while CDs did just fine.
@Sven, don't you mean apples and oranges comparison? It matters little that your bond fund is yielding 5% if your total return, even with that yield summed in, is down -10% in a year.
@MikeM, thank you for the correction. I corrected my post above. Holding CDs with decent yield ensure the principal plus interest will be there for emergency uses.
You got it right that the total return is much more important than the bond yield. Last year's rapid rise of Fed rates compressed the bond prices significantly so vast majority of bond funds suffered double digit loss.
Everyone's taxonomy is different. For me, cash equivalents are vehicles that I can cash out on relatively short notice (high liquidity) with virtually no credit risk and zero interest rate risk.
FDIC insured checking accounts check all the boxes. FDIC insured savings accounts may require seven day notice; short enough to be cash (for me) FDIC insured CDs issued at banks are subject to early withdrawal penalties but no interest rate risk; time restrictions same as savings accounts - close enough to be cash FDIC insured CDs sold through brokerages are subject to interest rate risk unless held to maturity - not cash for me; YMMV
Government MMFs - Treasury only funds have no credit risk, no notice requirement, no interest rate risk - cash equivalent Government MMFs - other - minuscule credit risk, no notice requirement, no interest rate risk - cash equivalent Prime MMFs - small credit risk, no notice requirement, no interest rate risk - close enough to cash for me; YMMV
Savings bonds - no credit risk, no notice requirement(*), no interest rate risk - cash equivalent for me after one year (* cannot be redeemed before one year, and like CDs subject to early withdrawal penalties); YMMV
Treasuries - no credit risk, no notice requirement, but interest rate risk
Here's a more authoritative definition. Notice that it includes short term (90 day) commercial paper as cash equivalent. If one is going to count prime MMFs as cash I suppose that makes some sense. Though the credit risk of a prime MMF is much less than that of an individual bond. And the pricing rules are different.
I maintain very little in cash. Some of my conservative allocation funds and diversified fixed income funds hold a certain amount - so I’ll let the managers work on that corner of investing.
Since I started using GNMA (etf) 3-6 months ago as a cash substitute it’s barely broken even. Not what I would have expected. But with the 10-year Treasury holding near 4%, that’s what happens. Still, I’d rather be in intermediate duration AAA fixed income than cash because (1) I don’t believe these high rates can persist and (2) high quality bonds should provide better protection in the event of a stock crash.
Not intended as advice. Indeed, am feeling more and more like a moss covered dinosaur in this era of cash-clamor.
Hi @hank. I guess I have an opposite view of this:
Still, I’d rather be in intermediate duration AAA fixed income than cash because (1) I don’t believe these high rates can persist and (2) high quality bonds should provide better protection in the event of a stock crash.
1- These high rates may not persist, but why not grab them while you can? I just picked up a 9 mo and a 12 mo treasury at ~5.1% today. So in that case that rate is locked in for at least those time frames. You'll make a little less moving out in duration but still can get 4.7 or 4.8 for a couple years anyway.
2- It's not a given high quality bonds will move opposite equities as we saw last year. I might argue stocks and bonds may stay correlated through this year too. That again makes locked in rates of 5%'ish a nice safe balance to falling equities.
Thanks @MikeM. Your take is much appreciated. Generally I’ve tried to add a bit when (10-year) rates approach 4% and sell a bit at under 3.5%. Explains the choice of an etf over a good mutual fund. That said - you may well be right … we dinosaurs are very slow in changing direction.
PS - I’m old enough to remember when money market funds yielded 15-20%.
2- It's not a given high quality bonds will move opposite equities as we saw last year. I might argue stocks and bonds may stay correlated through this year too. That again makes locked in rates of 5%'ish a nice safe balance to falling equities.
Just as the bulk of rate hike is behind us, there may be few more 25 bps hikes coming in March and May. Today both stocks and bonds are falling simultaneously and their asset correlation approach 1.0 similar to that of last year. Thus, bonds offer little protection to stocks in today’s environment.
Today, JUNK fell 2X that of BND and they truly track more of stocks than bonds. Likewise, I bought 6 and 12 mo T bills today as older ones matured. Who say cash is trash?
I adhere to an allocation model that’s served me well over time - albeit with occasional revision. The “target weighting” for all fixed income is 22%. That’s to be equally divided among diversified income funds, international bond funds, cash and / or AAA rated securities. So the nominal target for cash / AAA is just 7.33% of portfolio.
Because most risk assets have slumped over the past year I’ve gone slightly overweight into those areas of portfolio. So the allocation to all fixed income is currently just 19.4% ( 2.6% below target). The cash / AAA portion (about a third of that) sits at around 6% of portfolio. Might help explain my reluctance to lock-up that amount of cash for any length of time.
Where’s the rest of the $$? There’s a lot in various alternative funds. There’s a fair amount in a conservative allocation fund. Own a couple good consumers staples stocks. There’s a bit in precious metals and mining, real estate and infrastructure. I own a good balanced fund. There’s bit in Japan - and even less in EM. Spread the risk around. For better or worse …
No place to hide today. I suppose we might look on today as another instance of the market needing to take a breather from time to time. Mr. Market clearly does not enjoy the prospect of "higher for longer." Mr. Market has been ignoring the memo. So, today happened. Yux. Vomit. Anyone want to share about any odd winners on this cruddy, stinky, poopy day? Against all odds, I have one: NHYDY. Aluminum and green power. NorskHydro.
You are correct @Crash that there wasn't really any place to hide today. A bit odd ISTM. The Fed minutes (from the last meeting) come out tomorrow. I think either investors today were speculating that the minutes will be very “bearish” in tone or, possibly, a portion of them has been leaked in advance. The latter would, of course, be unheard of. As far as the “hit” to bonds today, I’m wondering if the recent flight into cash has played a part in “dinging” longer dated high quality bonds as people sell them in favor of cash? Eventually things tend to even out over time.
There weren’t many winners today, Some miners / materials sectors did OK - partially because increased warfare / participation of global powers in the Ukraine may further limit supplies of important resources. Funds that engage in options strategies to hedge risk may have done well on an individual basis. HSGFX gained more than 1%. RPIEX, which essentially “shorts” longer dated bonds, gained .71%.
Prob need to price in Uncle P 0.5% expect increased rate this month and market get ready for recession/poor WMT performance
Not sure if market and inflation remain sticky. We had a nice run up ast 6 7 wks so expect 7- 10% retracement but hopeful for smaller legs downturns (not reach spy 348.9 levels)
sticky it shall be, we already can see that. i won't be surprised to see 6 percent rates. but apparently, the rest of the world perceives such a prospect as a calamity like what happened to the Hindenburg at Lakehurst.
My indicators triggered a sell, in early Feb. Since then I'm at 99+%, mainly in two MM SWVXX-SNAXX paying 4.47-6.2%. I will join the next bond uptrend.
Comments
Can I trade back and forth with CD/Treasury? it's inconvenienced.
Can I buy several hundreds thousands of I-bonds? I can't.
This is why I use MM and trade anytime I want.
Do I want to own ST vehicles after bonds had one of the worse years in decades in 2022? Absolutely not. I said already in Nov 2022 that bond funds have a good chance to make 10+% and many of them, several % more.
I basically see bond funds as more of a sure thing in 2023 than stocks + much lower volatility.
CDs and T bills can be purchase in large sums. However, T bills are more liquid and can be sold through secondary market. T bill ladder is recommended so the shorter ones mature every several months. Not the same with CDs since the secondary market is much smaller and one have to watch for the penalty.
Many money market funds are yielding in 3-4% and they are most liquid.
Because of that, I went over to their webpage.
CD "Special" is for 8 months, 3% rate, 3.04% yield. Start with $1,000.00 minimum. I dunno how "special" that is, but now you know.
https://www.windsorfederal.com/Personal/Personal-Savings/CDs
Depends on the month and the bank.
Capital One - 5.00% 11 mo online CD
Ally Bank - 5.00% 18 mo online CD
BMO Harris Bank - 5.00% 12 mo online CD (rate depends on zip code)
Perhaps "you should have a Harris Banker" (pre BMO acquisition)
You got it right that the total return is much more important than the bond yield. Last year's rapid rise of Fed rates compressed the bond prices significantly so vast majority of bond funds suffered double digit loss.
FDIC insured checking accounts check all the boxes.
FDIC insured savings accounts may require seven day notice; short enough to be cash (for me)
FDIC insured CDs issued at banks are subject to early withdrawal penalties but no interest rate risk; time restrictions same as savings accounts - close enough to be cash
FDIC insured CDs sold through brokerages are subject to interest rate risk unless held to maturity - not cash for me; YMMV
Government MMFs - Treasury only funds have no credit risk, no notice requirement, no interest rate risk - cash equivalent
Government MMFs - other - minuscule credit risk, no notice requirement, no interest rate risk - cash equivalent
Prime MMFs - small credit risk, no notice requirement, no interest rate risk - close enough to cash for me; YMMV
Savings bonds - no credit risk, no notice requirement(*), no interest rate risk - cash equivalent for me after one year (* cannot be redeemed before one year, and like CDs subject to early withdrawal penalties); YMMV
Treasuries - no credit risk, no notice requirement, but interest rate risk
Here's a more authoritative definition. Notice that it includes short term (90 day) commercial paper as cash equivalent. If one is going to count prime MMFs as cash I suppose that makes some sense. Though the credit risk of a prime MMF is much less than that of an individual bond. And the pricing rules are different.
https://fmx.cpa.texas.gov/fmx/training/wbt/cashflow/281.php
Two and three years CDs are 0.25 and 0.4 % ahead, but who knows what interest rates will be then.
I had a CD got bust in 1984 or 5. While I got my money back it took many months.
Since I started using GNMA (etf) 3-6 months ago as a cash substitute it’s barely broken even. Not what I would have expected. But with the 10-year Treasury holding near 4%, that’s what happens. Still, I’d rather be in intermediate duration AAA fixed income than cash because (1) I don’t believe these high rates can persist and (2) high quality bonds should provide better protection in the event of a stock crash.
Not intended as advice. Indeed, am feeling more and more like a moss covered dinosaur in this era of cash-clamor.
There are also Money Market ACCOUNTS by banks that are FDIC insured.
2- It's not a given high quality bonds will move opposite equities as we saw last year. I might argue stocks and bonds may stay correlated through this year too. That again makes locked in rates of 5%'ish a nice safe balance to falling equities.
Different view. No right or wrong.
PS - I’m old enough to remember when money market funds yielded 15-20%.
Today, JUNK fell 2X that of BND and they truly track more of stocks than bonds. Likewise, I bought 6 and 12 mo T bills today as older ones matured. Who say cash is trash?
I adhere to an allocation model that’s served me well over time - albeit with occasional revision. The “target weighting” for all fixed income is 22%. That’s to be equally divided among diversified income funds, international bond funds, cash and / or AAA rated securities. So the nominal target for cash / AAA is just 7.33% of portfolio.
Because most risk assets have slumped over the past year I’ve gone slightly overweight into those areas of portfolio. So the allocation to all fixed income is currently just 19.4% ( 2.6% below target). The cash / AAA portion (about a third of that) sits at around 6% of portfolio. Might help explain my reluctance to lock-up that amount of cash for any length of time.
Where’s the rest of the $$? There’s a lot in various alternative funds. There’s a fair amount in a conservative allocation fund. Own a couple good consumers staples stocks. There’s a bit in precious metals and mining, real estate and infrastructure. I own a good balanced fund. There’s bit in Japan - and even less in EM. Spread the risk around. For better or worse …
Cheers!
There weren’t many winners today, Some miners / materials sectors did OK - partially because increased warfare / participation of global powers in the Ukraine may further limit supplies of important resources. Funds that engage in options strategies to hedge risk may have done well on an individual basis. HSGFX gained more than 1%. RPIEX, which essentially “shorts” longer dated bonds, gained .71%.
Did not buy spy puts today
Prob need to price in Uncle P 0.5% expect increased rate this month and market get ready for recession/poor WMT performance
Not sure if market and inflation remain sticky. We had a nice run up ast 6 7 wks so expect 7- 10% retracement but hopeful for smaller legs downturns (not reach spy 348.9 levels)