With online savings accounts still paying pretty good interest rates and with Fidelity’s money market SPAXX paying good rates as well, why bother with bonds?
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We do the same thing as Olin re SPAXX and FZDXX. However I’m likely to move some to a short term treasuries fund in a taxable account. Over time, the bond fund should return more with similar safety and tax impact and only mild volatility.
Currently by far the bulk of our cash allocation is in a 401(k) Common Assets fund, and all our bonds are currently in tax-advantages accounts; the above move would change the second part of that statement.
We’re also likely to move some to another institution – a high yield savings account/CDs at a bank, or a money market fund at a different brokerage – to have instantly reachable cash in another institution for purposes of cyber-diversification.
I probably should have called it a stable value fund; my plan calls it common assets. It’s a short-term fixed income fund that can invest in longer maturities than a money market fund so can get a bit better return but still manages them to a $1 share price so is effectively cash. My particular one has done about the same as a MM lately, but in the higher inflation we had recently it strongly outperformed.
As the old saying goes, there is no such thing as a free lunch. We all know that higher yields reflect higher risk of loss. The high yield and floating rate funds mentioned below will suffer the biggest losses if the economy takes a downturn, so be careful chasing those attractive yields. Barron’s has a good article this week on the Private Credit market and the inherent risks of investing in the debt of lower quality companies. As Andy Sipowicz used to say on NYPD Blue, hey, let’s be careful out there.
For taxable accounts, consider also FDLXX or similar “Treasury Only” money market funds. A high proportion of income is exempt from state tax, yet the yield is virtually identical to SPAXX.
I like TIPS intermediates. I get 2%+ in real interest and do not have to worry about inflation. I agree that SPAXX is a good place to park money and have a fair amount there as well.
In 2021 and 2022, bond funds experienced a historic downturn as the Federal Reserve rapidly hiked interest rates to combat soaring inflation. Leading to some of the worst performance in the history of the fixed-income market. The NAV of the bond fund went down!
I take a little more risk to get yield. A general bond fund has yielded 5.25% over the last 3 years; an Intermediate fund 6.5%; and 2 high yield corporate bond funds 10.0% and 10.2%.
If you’re interested in mixing/matching bond types, interest rates and time horizon inside an ETF instrument, you may want to consider iShares iBond or Invesco’s Bulletshare ETF products. Easy to construct a bond ladder and matching time horizon with your investment needs. Websites below:
It is compelling to just keep it simple for the interest rate from SPAXX. We don’t own individual bonds, bond mutual fund or ETFs. A couple of funds we own have a percentage of bonds within them. We also have SPAXX as a default for transfers in/out, but a larger portion is in FZDXX. With the rates coming down, FLOT, a floating rate bond fund, may be up for consideration.
Brian, that’s the same thought I’ve been having. I have quite a bit of cash in the same account as you. I also have some in short and medium duration bond funds, and am hoping for some appreciation if rates come down further. For now, however, the money market is doing just fine. I’m looking forward to replies from some of our investment nerds.
Have you ever considered creating an actual bond ladder with individual bonds maturing annually? It would let you lock in current rates with some of that cash.
Or maybe the VG Treasury Money Market Fund – VUSXX. Current 7 day yield at 3.64%. Not subject to state income tax.
Very short-term bond funds are very important.
I use VMFXX and ICSH for bonds in my asset allocation.
My favorites
Money Market: VMFXX
Half year duration bond: ICSH
One year duration bond: VUSB (or VUSFX)
Select SPAXX for your CMA checking with Fidelity.
What’s a savings account? : )
In 2022 I took a bath with my highly rated Vanguard intermediate term bond. For now on it’s short term bonds for my bond exposure.
We do the same thing as Olin re SPAXX and FZDXX. However I’m likely to move some to a short term treasuries fund in a taxable account. Over time, the bond fund should return more with similar safety and tax impact and only mild volatility.
Currently by far the bulk of our cash allocation is in a 401(k) Common Assets fund, and all our bonds are currently in tax-advantages accounts; the above move would change the second part of that statement.
We’re also likely to move some to another institution – a high yield savings account/CDs at a bank, or a money market fund at a different brokerage – to have instantly reachable cash in another institution for purposes of cyber-diversification.
Michael1, could you elaborate a little more what a Common Assets fund is? Is that a Target Date or Asset Manager type fund?
I probably should have called it a stable value fund; my plan calls it common assets. It’s a short-term fixed income fund that can invest in longer maturities than a money market fund so can get a bit better return but still manages them to a $1 share price so is effectively cash. My particular one has done about the same as a MM lately, but in the higher inflation we had recently it strongly outperformed.
Thanks for the additional information.
As the old saying goes, there is no such thing as a free lunch. We all know that higher yields reflect higher risk of loss. The high yield and floating rate funds mentioned below will suffer the biggest losses if the economy takes a downturn, so be careful chasing those attractive yields. Barron’s has a good article this week on the Private Credit market and the inherent risks of investing in the debt of lower quality companies. As Andy Sipowicz used to say on NYPD Blue, hey, let’s be careful out there.
Floating rate funds should not lose value when interest rates rise since their duration is effectively zero.
For taxable accounts, consider also FDLXX or similar “Treasury Only” money market funds. A high proportion of income is exempt from state tax, yet the yield is virtually identical to SPAXX.
Thanks for the tip
Thanks for the info. I hadn’t thought about state taxes. I just transferred my SPAXX investment to FDLXX.
I like TIPS intermediates. I get 2%+ in real interest and do not have to worry about inflation. I agree that SPAXX is a good place to park money and have a fair amount there as well.
In 2021 and 2022, bond funds experienced a historic downturn as the Federal Reserve rapidly hiked interest rates to combat soaring inflation. Leading to some of the worst performance in the history of the fixed-income market. The NAV of the bond fund went down!
I take a little more risk to get yield. A general bond fund has yielded 5.25% over the last 3 years; an Intermediate fund 6.5%; and 2 high yield corporate bond funds 10.0% and 10.2%.
If you’re interested in mixing/matching bond types, interest rates and time horizon inside an ETF instrument, you may want to consider iShares iBond or Invesco’s Bulletshare ETF products. Easy to construct a bond ladder and matching time horizon with your investment needs. Websites below:
iShare – https://www.blackrock.com/us/financial-professionals/tools/ibonds
Invesco – https://www.invesco.com/bulletshares/tools/bond-ladder
It is compelling to just keep it simple for the interest rate from SPAXX. We don’t own individual bonds, bond mutual fund or ETFs. A couple of funds we own have a percentage of bonds within them. We also have SPAXX as a default for transfers in/out, but a larger portion is in FZDXX. With the rates coming down, FLOT, a floating rate bond fund, may be up for consideration.
Brian, that’s the same thought I’ve been having. I have quite a bit of cash in the same account as you. I also have some in short and medium duration bond funds, and am hoping for some appreciation if rates come down further. For now, however, the money market is doing just fine. I’m looking forward to replies from some of our investment nerds.
Have you ever considered creating an actual bond ladder with individual bonds maturing annually? It would let you lock in current rates with some of that cash.
Yes, that has been on my mind. I’ve been checking out bonds and CDs on Fidelity’s website.