Last week we looked at options for stashing cash. This week lets add a layer by looking at bonds. The topic is timely because rates and prices have been on the move in the bond market. You might be looking to rebalance your portfolio by moving some money from stocks into bonds, or maybe moving longer-term money out of cash, but what should you look at buying?
Bonds have had a rough go over the past few years and I won’t detail that here. However, it’s important to remember that the relationship between interest rates and bond prices is fundamental. If rates are going up (anticipated or actual) bond prices should go down while declining rates should lead to higher bond prices. That’s a simplified way to think about it but that’s essentially how it works.
You may wonder why we’re even considering bonds when cash has been paying 5% or more for a while. The problem is that rates on cash have already declined to roughly 4.7% and bond investors are pricing in at least a few more rate cuts from the Fed heading into Spring. If cash rates come down in tandem with the Fed your bank account or money market mutual fund could be paying a lot less by this time next year. As we’ve discussed before, what you earn on your cash is secondary to easy access without market risk, but it’s not meant to be a set it and forget it sort of thing.
This is where bonds come in. They don’t have the volatility of stocks but they do come with market risk that should equate to better returns over time. Returns come from bond interest and, hopefully, price appreciation. How much time should you give them? I think at least three years but more is better.
Here are some investment options for bonds based on general timeframes. All are low cost, diversified in their space, and readily available from any worthwhile custodian.
Short-term:
We’re not talking about money you’ll need to spend in a year or two. That’s best left in cash equivalents like a money market account or mutual fund, a bank CD, or maybe an individual Treasury bond with a specific maturity date.
Good short-term bond investments are just beyond that timeframe, such as index funds tracking a 1–3 year or 1–5 year bond index. Two funds I like are the SPDR Short Term Treasury Fund, ticker SPTS, or Vanguard Short Term Bond Index, ticker BSV. SPTS is comprised of Treasuries while BSV is about 70% Treasuries and the remainder in high quality corporate bonds. Both funds have the overwhelming majority of their portfolio invested in 2–3-year bonds. Each has an SEC-Yield of about 4% and the average yield to maturity across their bond holdings is a smidgeon higher.
Alternatives might include buying individual Treasuries or bank CDs out to three or even four years. If so, as of this writing you’d earn about the same rate as the two fund options above but wouldn’t have much chance of appreciation. Technically you could sell your Treasury or CD early if the value rises, but you’d have to watch it closely and get lucky with the timing. So you’d essentially be locking in a flat rate for multiple years – not the end of the world but also not great if prices rise around you.
Medium-term:
Medium-term in this context means bonds with maturities from three years to maybe seven. This is going out on the risk spectrum a bit further since bonds get more sensitive to changes in the rate environment as maturities get longer.
I also like index funds in this space. Specifically, Vanguard Total Bond Market, ticker BND. The fund currently holds about 70% of its money in Treasuries and bonds from other government agencies. The rest is in high quality corporate bonds. The fund currently has an SEC-yield of 4.2% but has only grown about 2% in 2024 since this space saw value declines during the first half of this year.
The big custodians like Fidelity and Schwab, and product brands like iShares, have their own version of this “total bond market” fund and to a large extent they are interchangeable. Also, there are a wide variety of index funds that hold medium-term Treasuries. iShares, for example, has 29 different options. No, my industry isn’t complicated at all…
Beyond that, there are some actively managed mutual funds that could work versus the index fund approach. These include “intermediate” or “core” bond funds from Baird, Dodge & Cox, and maybe Metropolitan West. You’re really investing in the managers and their investment styles when you buy these funds, so research that and don’t just buy the label.
Long-Term:
While you can go out 20+ years with Treasuries, “long term” in my industry really means ten years or longer. The price of the 10yr Treasury is a key economic, banking and lending benchmark and has recently risen a bit to 4.3%.
Frankly and maybe simplistically, I think ten or more years in the bond market is better as a benchmark than as an investment. I mean, if you’re willing to part with your money for that long you’d likely do better by investing in a broad stock market index fund. The popular iShares 20+ Year Treasury Bond ETF, ticker symbol TLT, is nearly as volatile as the S&P 500 anyway. Last time I checked there hasn’t been a single rolling ten-year period where you would have lost money in the S&P 500. That said, maybe in a different rate environment or for other reasons, but I think most of the time you can skip buying long-term bonds. Buy stocks or other assets instead.
You’re probably getting the sense that there’s a lot of complexity to bonds and that you should have a variety of types and timeframes working in your portfolio. You can certainly punt by holding cash for a while longer, just don’t forget about it for too long because doing so will come with opportunity cost in the months, even years, ahead.
Have questions? Ask us. We can help.
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