FREE NEWSLETTER
Go to main Forum page »
I’ve never cared much for bond funds. They never mature. Their NAV is at the mercy of Federal Reserve policy.
I like how individual bonds mature and return my investment, but I don’t want the risk of owning individual issues.
I nearly brought this question up in Mark Corothers ‘Flipin’ post, but didn’t want to send his discussion about real bond returns down the wrong rabbit hole.
So here goes. I have a CD ladder to protect me from a lost decade. I had never heard of Target Maturity Bond Funds (TMBF) until a reader asked me why I used a CD ladder instead of TMBF. His bond ladder was earning about 4.75% vs my CD ladder’s 3.8%. As the CDs in my ladder mature I plan to replace them with TMBFs.
Is there any reason why the Target Maturity Bond Funds wouldn’t also be appropriate for the bond holdings in my IRAs?
Dan, I only became aware of them recently myself, if I’d known back then, I probably would have used TMBFs rather than going through the hassle of building an actual bond ladder. Sourcing individual issues, checking credit quality, staggering maturities… man, that was a pain in the butt. Wish someone had pointed me at these first.
I’m planning to use them going forward, though it’s a bit of a faff on my end — they’re a niche product in the UK, so I’ll actually need to open an account directly with BlackRock to get access to them.
One subtle disadvantage of TMBFs is what happens as they approach their target date. As bonds mature, the fund accumulates cash and short-term instruments, so its yield gradually converges toward cash yields — creating some “cash drag.”
An individual bond ladder doesn’t have this issue. Each bond continues earning its locked-in yield until maturity, returns principal, and I can immediately reinvest that principal into the next rung of the ladder.
Mark, thanks, I understand. Is it safe to assume that the bonds should be maturing relatively close to the funds target date, hopefully not causing very much damage to the yield?
Dan, that is a reasonable assumption.