vanbogle59 wrote: ↑Mon Jan 17, 2022 7:34 am
CraigTester wrote: ↑Mon Jan 17, 2022 7:03 am
HomerJ wrote: ↑Sun Jan 16, 2022 2:43 pm
CraigTester wrote: ↑Sun Jan 16, 2022 2:38 pm
Therefore given that the market doesn’t offer much of a rate spread between them right now, I’ll stick to MMF and you can buy a bond fund.
That's certainly fair. Nothing wrong with that. I have money in CDs and money-market funds as well.
My only point is that just because the Fed announces rate hikes, that doesn't mean bond funds will automatically lose value. They are not directly related like that. It's not "just math".
It's not easy to market time with bond funds OR stock funds.
If you want to focus on Taylor’s secondary goal goal for fixed income, we can.
And as long as we agree on how the math works, the only thing left to talk about is the crystal ball stuff.
And yes, I believe it’s just about impossible to accurately forecast interest rates.
And yes, the Fed has traditionally only directly impacted short term rates….But this time is different. As they withdraw monthly purchases of bonds across the spectrum, the party responsible for 57% of purchases will be going away.
Couple that with 7% inflation, and it becomes very difficult to conclude that rates are likely to go down.
Therefore, what is a reasonable reason to believe it’s a good moment to lock in todays rate when they barely exceed rates at online FDIC insured MMF’s?
What are you missing out on by waiting?
PS. As a courtesy, please don’t crop out one or two of my sentences and respond out of context.
Are you still talking about BND? There is no way to meaningfully apply the "lock in todays rate" concept to BND (or any bond fund for that matter).
Apples and oranges.
It seems to me your real question is simple, short-term market timing: BND vs CD for 1 yr starting today. Which one wins?
Bottom line: no one knows.
But if that is your investment objective, BND is probably not the vehicle you should be looking at in the first place. It's not designed to guarantee 1 year returns.
BND is fine as an example of a bunch of individual bonds that have been priced based on today's rates. (I've actually owned a lot of it over the years....)
Per Fidelity, BND's SEC yield is 1.6%; and its duration is 6.8 years.
I know of three online banks that currently yield 0.65% for their savings accounts.
So BND's "spread" is less than 1%.
This means if I hold it for 1 year, and rates don't move, I get an "extra" 95 cents on a $100 investment.
Meanwhile the FED, which has clearly demonstrated its abilities to move rates by purchasing 57% of all treasuries this past year, is telling us they will discontinue this action by March (with rate hikes to follow).
So far the bond Market has not priced this in, but it is what the FED is saying they intend to do.
Now by example, if the consequence of this change results in a 1% increase in rates, BND will lose $6.80 on a $100.
(And if you don't like 1%, try 0.5% which would still translate to a $3.40 loss on a $100).
Now I get that there are a LOT of "what ifs" in this example, but it is certainly a "reasonable" straw man to consider in a possible spectrum of outcomes.
So my simple takeaway is that 95 cents is not sufficient reward to offset a reasonable expectation of losing $6.80 in an asset class that is supposed to be representing my "safe" money.
Note that historically, spreads have been much higher, and we weren't bumping up against a 0% floor. That's why I historically owned BND because I deduced that it offered a reasonable risk-reward trade-off. This is no longer true today, IMHO.