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Money Market Funds or Bond Funds?

I would be curious to know what you are investing in now? I sold out of my bond funds at the beginning of 2023 for a nice tax loss. I decided to invest the proceeds into MM funds, which were, and still are paying north of 5%. I am still happy to collect 5% instead of worrying about losing money again in bond funds. "Bond funds are back" is proclaimed now. Is it really time to get back into bond funds? I am investing for income now since I am retired at 65. I am still invested in balanced funds and PIMIX. What do you think?
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Comments

  • edited January 16
    This investor will be 70, come July. I bought (junk) bond funds at just the wrong time, at the start of '22. I've been riding them DOWN, with fatter yields, but the value sank. Now they are doing better in anticipation of rate cuts. But I'm not wanting to get "smoked" on BOTH sides of this proposition. The funds have brought me back to almost -even- right now. I'll be holding onto them. The monthlies are just getting reinvested. USING the dividends will just lengthen your runway, extending the time before you see profit. But it's coming. Better days. Although I do not think we'll see rate cuts from the Fed before the END of this year or into '25. Bond market is outrunning itself.
    PRCPX TTM yield = 6.86%
    TUHYX TTM yield =7.39%

    PIMIX TTM yield =6.21%, looks fine. Stay domestic. PRSNX is the same flavor, but global, rather than domestic only. Its TTM yield is just 4.60%. I'm doing fine for myself with my domestic junk funds, as opposed to EM or anything fancy or complicated. I'd just say: keep it domestic.

    MM Treasuries, are you in? We are good there, unless we "break the buck" again. A virtually guaranteed 5.1% in PRTXX is tough to beat, for peace of mind. Is the extra 1 or 2 percent yield worth it to you, if you were to move your dough? Maybe not, and I'd not argue with you.
  • edited January 17
    ”Money Market Funds or Bond Funds? … Is it really time to get back into bond funds? “

    I’m currently weighing the question. I’ll get back to you when I know for sure.:)

    Honestly, I have a little in a money market fund, a little in a short-term bond fund and a bit in an intermediate-term global bond fund. Roughly equal amounts. I’ve resisted the temptation to play around with HY or inflation hedged products - neither of which I understand very well.

    Fido’s analysis tool has me 45% equities / 32% bonds / around 20% short-term paper & money market, with the rest classified as “other” (probably metals). Most of that bond component comes from asset allocation, arbitrage, or L/S type funds, however.

    Just watching the action today … Most bond etfs I watch are off .50% - give or take. The 10-year had jumped back above 4% at last look. Much better performance on the short end.
  • @Soupkitchen. Of course your balanced funds have bonds, perhaps as much as 65% of assets in vanguard Wellesley or the like.
  • larryB said:

    @Soupkitchen. Of course your balanced funds have bonds, perhaps as much as 65% of assets in vanguard Wellesley or the like.

    Good point Larry. Best to run an analytical tool to get the true concentration.

  • edited January 16
    In the IRA I might rebalance some from USFR to VRIG. Thinking about what to do with a CD coming due at the end of the month. Looking at FHYS and FLBL. So keeping it ultrashort.

    Anything longer is whatever is going on at DSEEX, VWELX, VWINX, FBALX, and PRWCX. I haven't seen anything that tempts me to venture too far out on my own. I think people are dreaming about rate cuts.

    The only thing bond-like in the taxable is PFF, which has done better than most things I own YTD.
  • The first Treasuries I invested in at Vanguard matured today (actually, the maturity date was 1/15/2024). At Fidelity the money shows up in my account in the AM on the maturity date. The matured T-Bill is still in my Holdings at Vanguard and no activity in the Recent Transactions. Any experience you guys could share about Treasuries maturing at Vanguard would be appreciated.
  • Fido credits maturing T-Bills ON the morning of the maturing date, Schwab on the afternoon, Vanguard in the evening or the next morning.

    Everything is normal on the day AFTER maturity.

    I think that Treasury has until midnight of the maturity date to actually send money to firms. But firms have their own policies when to credit the money.
  • edited January 16
    Thanks, Yogi.

    I was looking at Boeing bonds. The one with CUSIP - 097023AE5. Why does Fidelity show a cCurrent yYield so different from Yield to worst (see below) when there is call protection. Am I not paying attention to something obvious or do I need to read the issuing document?

    Basic Analytics
    Ask Yield to Worst 5.364%
    Ask Yield to Maturity 5.364%
    Current Yield 7.229%
  • From what I read the "Market" is priced to perfection and that includes rate cuts starting in March with multiple cuts to follow. If this happens it will be great for bonds, but you have to ask why would this happen? Many people think the cause would be a recession with significantly higher unemployment. In that case, stocks will tank, and Bonds will do well and MMF rates will drop.

    However, a lot of other folks think a recession is unlikely soon, with employment holding up, and therefor inflation will come back without any rate cuts by May. Bad for Bonds but good for MMF

    The old adage that the expected return from a bond or bond funds is likely it's current yield is probably reasonable. So with yields running 5 to 6% for exotic funds and 4.2 % for "core" that is likely what you will get long term. Inflation may go up but that much? Who knows?

  • @BaluBalu - To expand a bit on Yogi's answer above, Schwab shows the price to buy that Boeing bond as 121.14. Since you would be paying 21% more than the face value (100) for that bond, your return rate of 5.346% would be much less than the original coupon rate of 8.75%.

    The interest rate return on older bonds sold on the secondary (resell) market will tend to approximate interest rates on currently issued bonds at par 100.

    If the original bond paid, say 2.5%, then on the secondary market it would have to pay a lot more than that right now or nobody would want it. To get an interest rate approximating newly issued bonds the seller would have to give you a significant discount. This is the exact opposite situation to the Boeing bond that you wondered about.

    The same general mechanism is found on CDs and Treasuries being offered on the secondary markets. At times I've bought discounted CD offerings, for a number of reasons... perhaps I couldn't find what I wanted in new current issues.

    Why could that be? Well, perhaps I wasn't thrilled about the CD issuers at a particular point in time... maybe just a bunch or "who knows?" banks in "who knows where". Or perhaps I couldn't find newly issued CDs with the maturity that I wanted. So I might look for an older CD on the secondary market from a major bank whose operating situation is easy to verify.
  • edited January 17

    That is a premium bond, so YTM, YTW would be lower.
    https://www.investing.com/rates-bonds/ba-8.75-15-sep-2031-scoreboard

    @yogibearbull,

    By this time in the interest rate cycle, hopefully, it is second nature for everyone here to know that. I was asking why the Current Yield (i.e., interest amount over market price) is [so much] higher than YTW when the bond can not be called.

    ******
    Fido Current Yield definition - "the ratio of the annual dollar amount of interest paid on a security to the purchase price or market price of the security, stated as a percentage. For example, a $1,000 bond purchased at par with a 3 percent coupon pays $30 per year, or a current yield of 3 percent. The same bond, if purchased at a discount price of $800, would have a current yield of 3.75 percent. A $1,000 bond purchased at a premium price of $1,200 would have a current yield of 2.50 percent."

    ******
    Based on that definition, I expected Current Yield and YTW to be similar when the bond can not be called.

    On a page different from the page where Current Yield was quoted, Fidelity shows "Current Rate Effective Date 10/07/1991", which is about a month after the original issue date. If the Current Yield is being calculated as of 10/07/1991, then it makes sense it is so high relative to current YTW / YTM. Not sure why it is important for us to know what the yield was as of 10/07/91 but I am not going to worry about it.

  • edited January 16
    @BaluBalu, %coupon adjusted for current price is NOT YTM (or close to it).

    YTM come from IRR or XIRR like Functions in Excel, or P-A-F-i analysis on generic calculators.

    Funds use the current yield trick to boost current yield by buying premium bonds (at the expense of NAV deterioration), or go for gains by buying discount bonds. While both have the same YTM, the effects on current fund income and taxation are different.
  • then and now, supply chains, shipping, job churn, lags, and core harmonization:

    https://www.nytimes.com/2024/01/16/opinion/red-sea-houthis-shipping-inflation.html
  • The effect on duration is also different (higher coupon = shorter duration).

    We can try this another way, using the Socratic method.

    1. Suppose you buy a bond at $102 with a 5% coupon. Do you have enough information to calculate current yield? See Fido Current Yield definition. If you have enough info, what is that yield (rounding is fine here, this isn't an arithmetic quiz)? If not, what other information do you need?

    2. Suppose further that the bond has an annual coupon (most bonds pay semiannually). Also suppose that the bond is callable in a year (right after making a coupon payment). How much money do you receive after a year: coupon + redemption? What is its YTW?

    3. Suppose the bond is not callable, but matures in a year. How much money do you receive after a year: coupon + redemption? What is its YTM? Is this the same or different from the answer in #2? If it is different, why is it different? Is it the same or different from the answer in #1?
  • msf said:

    The effect on duration is also different (higher coupon = shorter duration).

    We can try this another way, using the Socratic method.

    1. Suppose you buy a bond at $102 with a 5% coupon. Do you have enough information to calculate current yield? See Fido Current Yield definition. If you have enough info, what is that yield (rounding is fine here, this isn't an arithmetic quiz)? If not, what other information do you need?

    2. Suppose further that the bond has an annual coupon (most bonds pay semiannually). Also suppose that the bond is callable in a year (right after making a coupon payment). How much money do you receive after a year: coupon + redemption? What is its YTW?

    3. Suppose the bond is not callable, but matures in a year. How much money do you receive after a year: coupon + redemption? What is its YTM? Is this the same or different from the answer in #2? If it is different, why is it different? Is it the same or different from the answer in #1?

    "Mr. WABAC, what do you think you're doing in this class?"

    "Flunking sir."

    "And what do you intend to do about it?"

    "Buy some tooth paste and pay my utility bills sir."

    "Be on your way."
  • edited January 17
    You ain't the only one. Now I'm embarrassed by my simplistic earlier post.
  • My apologies to the OP.
  • edited January 17
    @Soupkitchen and others might want to take a look at CVSIX. Uses somewhat complex arbitrage / equity hedging strategies to produce bond-like returns. One way of culling some of the interest rate risk associated with bonds (while accepting other types of risk along with higher fees). I view it as a complement to other income generating holdings - including bonds.- inside a diversified portfolio.
  • Old_Joe said:

    You ain't the only one. Now I'm embarrassed by my simplistic earlier post.

    All in good fun. No reason I can't have a little fun knowing what I don't know.

  • I too have been hiding out in MMs, 3/6 month T-bills and RPHIX since early into the Great Bond Meltdown. I didn't sell at the top, but started shedding IT/HY funds one by one and missed the worst of it. I've said (too many times already) that I didn't see any reason to crawl out from under my rock while rates were still being hiked. (The only exception is that I ventured out into PIMIX last year.)

    Now that rates have more or less plateaued, I am willing to get out of cash. However, the yield curve is still inverted (though not as badly as before; see here: https://fixedincome.fidelity.com/ftgw/fi/FILanding) and as long as the yield curve IS inverted, I see no reason to go long-term. When the curve corrects, LT yields will probably rise and prices fall. Or, even if not, why take LT risk when ST is paying higher yields?

    I had a T-bill mature this week, and I plowed the proceeds into FTBFX yesterday. I have two more T-bills maturing in April and May, and will decide what to do with them when the time comes. With rates peaked and likely to fall, I don't want to be stuck in cash and miss the rising NAVs. So I will likely use FTBFX, PIMIX, maybe BINC.

    I am keeping RPHIX (for the time being). It may be too defensive, but I'll deal with the maturing T-bills first, and then decide about RPHIX. That fund has been a gem.
  • I agree the inverted yield curve has yet to play out. Sound like you gave a good plan.
  • RSIIX was +0.15% yesterday if my quote services are correct.

    I never got an answer for my perhaps impolite question asking why RSIIX was not able to protect investors better during March 2020. Not that I am anticipating another pandemic but I always like to understand what happened. Other than that one incident, I think it is a good fund.
  • edited January 17
    RSIIX fell in March 2020 because it was a black swan, even RPHIX with much lower volatility fell. Investing based on a black swan is a bad idea long term.
    When rates are not stable, especially when they go up/down more stable funds are recommended such as RPHIX, CBUDX, CBLDX, RSIIX, DHEAX,OSTIX.
    RPHIX is the closest to a MM, the next step is CBUDX and the rest.

    I'm invested at 99+% in 2 very low SD bond funds + high yield + good performance in 2023 and YTD.
  • WABAC said:

    msf said:

    The effect on duration is also different (higher coupon = shorter duration).

    We can try this another way, using the Socratic method.

    1. Suppose you buy a bond at $102 with a 5% coupon. Do you have enough information to calculate current yield? See Fido Current Yield definition. If you have enough info, what is that yield (rounding is fine here, this isn't an arithmetic quiz)? If not, what other information do you need?

    2. Suppose further that the bond has an annual coupon (most bonds pay semiannually). Also suppose that the bond is callable in a year (right after making a coupon payment). How much money do you receive after a year: coupon + redemption? What is its YTW?

    3. Suppose the bond is not callable, but matures in a year. How much money do you receive after a year: coupon + redemption? What is its YTM? Is this the same or different from the answer in #2? If it is different, why is it different? Is it the same or different from the answer in #1?

    "Mr. WABAC, what do you think you're doing in this class?"

    "Flunking sir."

    "And what do you intend to do about it?"

    "Buy some tooth paste and pay my utility bills sir."

    "Be on your way."
    My intent here was to inform. Given the posted definition of current yield, and given the statement that it was understood that YTW on a callable bond could be worse, I tried to build upon that understanding (and some 7th grade math, i.e. simple interest calculations).

    1. Current yield is annual dollar amount (i.e. coupon rate x $100) / current price
    So current yield = 5% x $100 / $102 = $5/$102, or roughly 5%.

    2. This is a simple interest problem, because there is only one coupon payment - at the end of a year. And the principal is also returned (called) then.

    Principal = $102
    Coupon = 5% x $100 (par) = $5
    Redemption amount = $100
    Final value in a year = $105
    Simple interest = final value - principal = $105 - $102 = $3

    Simple interest = principal x rate x time
    $3 = $102 x rate x 1
    YTW = rate = $3/$102 ~= 3%

    The YTW is less than the current yield because $2 of the $5 coupon goes toward returning principal; it isn't interest.

    3. Under the same conditions except that the bond matures in a year instead of being called in a year, all of the numbers above are the same. Same $105 payout in a year, same $102 principal. And the same $2 of the $5 coupon goes toward returning principal.

    It makes no difference why the bond is redeemed - whether it is called or whether it matures. The calculations are the same, the yields to redemption are the same. YTM will be less than current yield for the same reason that YTW is less than current yield - part of the coupon constitutes return of principal, not interest.

    And that return of principal is not taxed as income. Only $3 is taxed. See amortization of bond premium (ABP) in Form 1040 Schedule B.
    https://support.taxslayerpro.com/hc/en-us/articles/360031245634-Schedule-B-1099-Transactions

    (For taxable bonds, one can choose not to amortize bond premium annually. But that results in higher taxes being paid now, and at best recovery of the excess down the road when the bond is sold or redeemed. )
  • edited January 17

    .....
    Funds use the current yield trick to boost current yield by buying premium bonds (at the expense of NAV deterioration), or go for gains by buying discount bonds. While both have the same YTM, the effects on current fund income and taxation are different.

    I created an example to show this:

    10 Yr Bond in 5% YTM Environment, par 100
    3% coupon, price 84.56, current yield 3.55% << YTM
    7% coupon, price 115.44, current yield 6.06% >> YTM

  • edited January 17
    FD, Unless you are getting paid by RSIIX or otherwise chose to do their bidding, why are you trying to bury my question by replying with an obvious?

    There is no reason to think or assume that posters here asking questions or raising issues are incompetent. If those replying assume that posters asking are the same or more competent as the ones replying, the quality of replies are bound to elevate if not for anything those replying are likely to read the posts carefully / closely before drawing their bazookas.
  • msf said:

    My intent here was to inform.

    And I sincerely believe that most here understood your comments to begin with, or were educated by your efforts.

    At the time I wrote the post I was remembering my last interaction with my college advisor.

    "You're not thinking about going to graduate school. Are you?"

    "Oh no professor. Not me."

    "Well. That's fine. Go forth and something something something."

  • BaluBalu said:

    FD, Unless you are getting paid by RSIIX or otherwise chose to do their bidding, why are you trying to bury my question by replying with an obvious?

    There is no reason to think or assume that posters here asking questions or raising issues are incompetent. If those replying assume that posters asking are the same or more competent as the ones replying, the quality of replies are bound to elevate if not for anything those replying are likely to read the posts carefully / closely before drawing their bazookas.

    You asked, I answered. I didn't bury or assume anything. Pretty simple. You just made up the rest.
  • edited January 18
    BaluBalu said:


    ”I never got an answer for my perhaps impolite question asking why RSIIX was not able to protect investors better during March 2020.”

    There were serious liquidity issues in the financial system, beginning in early March 2020. My ultra-short (investment grade) fund at the time (TRBUX) fell off a cliff for a few weeks before slowly recovering to near its nominal $10.00 NAV. The crisis was so extreme across the bond markets that the Federal Reserve announced a plan to back investment grade corporate bonds (something it had never done before) a few days into the crisis (which in turn sent those bonds’ prices soaring, led to an equity rally and calmed the markets. There are times (albeit rare) when T-Bills trump lesser quality paper - no matter how well researched it might be.

    These types of issues can surface rapidly and unexpectedly, but are rare. The other one that stands to mind is at the beginning of the ‘07-‘09 financial crisis. Early in, the Fed stepped in to back money market funds, some of which would have fallen below their $1.00 NAV.

    Sorry if this has already been answered or if I’ve missed the point of the question. I didn’t understand FD either.

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