tag:blogger.com,1999:blog-775967109474059335.post3999892548650672819..comments2023-11-13T00:52:34.306-08:00Comments on Kevin On Investing: CD 5-Year Report Card: Part 3Unknownnoreply@blogger.comBlogger10125tag:blogger.com,1999:blog-775967109474059335.post-85895420044499262632018-11-05T10:59:52.716-08:002018-11-05T10:59:52.716-08:00Good question, Marybeth. Sorry for the late reply....Good question, Marybeth. Sorry for the late reply. I'm just now going through my blog comments (mostly to remove the spam that has accumulated).<br /><br />It's true that Treasuries (bills/notes/bonds) often, but not always, have inverse correlation to stocks, but the long-term correlation is about 0 (about like cash). We saw good negative correlation in late 2008 when stocks tanked and Treasuries increased in price (yields decreased); this was a classic flight to safety scenario.<br /><br />Also important to point out that it was only nominal Treasuries for which this was true. Corporate, investment-grade, municipal, and other types of non-Treasury bonds, even TIPS, declined in value in late 2008--of course for the most part not nearly as much as stocks.<br /><br />To really take advantage of this, and not just have it show up as lower portfolio volatility on paper, you had to sell Treasuries and rebalance into stocks during a fairly short timeframe of a few months, as Treasuries fell in value in early 2009.<br /><br />A high enough yield premium on CDs can more than make up for the rebalancing bonus you might get by rebalancing from Treasuries into stocks when stocks tank. Even Larry Swedroe, who is one of the biggest proponents of looking at the whole portfolio, has generally preferred CDs to Treasuries when the yield premiums were large enough.<br /><br />Finally, it doesn't have to be all or none. You aren't going to need all of your fixed income for rebalancing into stocks when they tank. You could take advantage of the yield premiums of CDs for a portion of your fixed income, but also hold some Treasuries for the potential rebalancing bonus in a flight to safety scenario.<br /><br />Incidentally, the 5-year report card would favor CDs even more now than it did when I wrote this blog post, with the increasing yields and declining prices of bonds and bond funds since about mid-2017. The 5-year annualized return on the Vanguard Intermediate-Term Treasury fund is about 1%, while the CDs I have maturing in the near future have returned about 3%.<br /><br />On the other hand, the levels of CD yield premiums we were seeing five years ago generally are not available now, although there may be an exception now and then. <br /><br />I generally have been using proceeds of maturing CDs in taxable accounts to buy Treasuries from 6-month to 2-year maturities, as they actually provide higher taxable-equivalent yields (TEYs) than CDs at my tax rates, due to the state income tax exemption for Treasuries. The yield curve flattens out too much after two years for me to feel adequately compensated for taking the extra term risk. Someone who wanted a simpler, fund-based solution might use the Vanguard short-term Treasury index fund, which holds Treasuries in the 1-year to 3-year range, with average maturity of about two years.<br /><br />Treasury yields are higher than CDs even without the state tax exemption at maturities of less than one year, and they are about tied at 1-year maturity, so I would buy Treasuries out to 1-year even in an IRA, where the tax-exemption is irrelevant. CDs start to take the yield at 2-year maturity, and widen the gap as you extend further out. I would buy brokered CDs in an IRA from 2-year to about 3-year maturity at this point. Again, the CD yield curve is not steep enough beyond that for me to be comfortable taking the extra term risk.<br /><br />Note that with this approach I own both Treasuries and CDs, so I will have some potential rebalancing benefit if stocks tank and Treasuries increase in price, while still taking advantage of the CD yield premiums in my IRAs (although much smaller than in past years).<br /><br />KevinKevinhttps://www.blogger.com/profile/03576910288369216955noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-39116264988887353692018-06-10T10:10:14.440-07:002018-06-10T10:10:14.440-07:00Given it’s now June 2018, I guess I’m a little lat...Given it’s now June 2018, I guess I’m a little late to see this, but find it really interesting!<br />One question if you’re still taking them. The argument for bond funds is typically that they inversely correlate to stock returns. <br />So while on a “stand-alone” basis, they lose the horse race, is this still true if “paired” with stocks in say a balanced portfolio?Marybethhttps://www.blogger.com/profile/05914069187043500378noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-4216852622311214832018-01-16T19:17:57.859-08:002018-01-16T19:17:57.859-08:00It's been a long time since I took a statistic...It's been a long time since I took a statistics class, but it appears that you are doing arithmetic operations on ordinal data.Anonymoushttps://www.blogger.com/profile/14807217021180274353noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-26599264968996615422017-05-26T22:11:06.812-07:002017-05-26T22:11:06.812-07:00Thanks Kevin. I learned a lot from your posts!Thanks Kevin. I learned a lot from your posts!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-3898392135468877052017-01-04T09:21:37.823-08:002017-01-04T09:21:37.823-08:00Jim, glad you found it useful!
KevinJim, glad you found it useful!<br /><br />KevinKevinhttps://www.blogger.com/profile/03576910288369216955noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-4899594789406191922017-01-02T15:58:20.875-08:002017-01-02T15:58:20.875-08:00Kevin, this series is excellent. I have been strug...Kevin, this series is excellent. I have been struggling with rationalizing the bond funds in my portfolio. I had previously lowered my asset allocation by 5% in bonds due to concerns of a bond bubble. Your analysis has led me to move a portion of my total bond fund into direct CDs in an IRA from a CU. And I'll be going back to my original asset allocation. Just wanted to thank you, much appreciated.<br /><br />JimAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-44849816354720184392016-07-01T14:19:45.671-07:002016-07-01T14:19:45.671-07:00Thanks for the comment Rob.
Are you suggesting in...Thanks for the comment Rob.<br /><br />Are you suggesting increasing the values for credit risk, so for example, B rated bond funds might have a credit risk weighting in the range of 10-15 instead of the value of 5 that I assigned?<br /><br />Assuming this is the case, then of course, there are an infinite variety of numeric assignments that could be used. Assigning numeric values to credit risk and term risk, then adding them to get a value for overall risk already is a pretty rough approach, so I'm not sure that increasing the values for credit risk would necessarily be better.<br /><br />Also, note the observation that the long-term Treasury fund, with no credit risk but large term risk, has a higher standard deviation of annual returns than does the high-yield corporate bond fund, which has significant credit risk but much less term risk. So the rough scheme I've presented aligns fairly well with the common measure of risk, standard deviation of returns.<br /><br />With respect to return of money vs. return on money, we should remember that what matters is return of money in real terms, not nominal terms. Long-term nominal bonds, like those in the long-term Treasury fund, have significant risk of returning much less in real terms than in nominal terms, due to the risk of unexpected inflation. This basically is incorporated into the term risk.<br /><br />KevinKevinhttps://www.blogger.com/profile/03576910288369216955noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-78603815878054687802016-06-28T13:52:42.977-07:002016-06-28T13:52:42.977-07:00Your chart is quite invaluable. Once suggestion; y...Your chart is quite invaluable. Once suggestion; you can give different weights to (credit risk) vs. term risk. This would probably weigh even more heavily in the favor of CD's.<br />The adage about more concern about return of my money than on my money.<br />Still; this is a great chart to start with.<br />Many thanks.<br /><br />Rob5TCPAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-91068387929077788472015-11-08T10:36:51.248-08:002015-11-08T10:36:51.248-08:00Thanks Julieta! Always appreciate feedback.Thanks Julieta! Always appreciate feedback.Kevinhttps://www.blogger.com/profile/03576910288369216955noreply@blogger.comtag:blogger.com,1999:blog-775967109474059335.post-58072552884906529302015-11-08T05:12:38.951-08:002015-11-08T05:12:38.951-08:00Excellent articles!Excellent articles!Julietahttps://www.blogger.com/profile/09469386263854822070noreply@blogger.com