Short-Term Fixed Income: CDs vs Bond Funds
The interest rates are really low these days. If you are trying to rollover a matured CD or if you want to save for something you need in a few years, it's not easy to find a good option.
After rolling over my IRA to my solo 401k at Fidelity, I want invest a small sum in the solo 401k account in short-term fixed income. I went and looked at my options.
Treasuries
Where Can I Buy California IOUs?
California IOUs (aka "registered warrants") are all over the news. The SEC ruled that they are considered securities. They basically told people not to sell except to established muni bond dealers.
I think the 3.75% tax free yield together with the short maturity (< 3 months) make these IOUs attractive even at face value. Yet no brokerage firms I have account with buy them from the IOU holders, let alone sell them to customers. I'm guessing that's because these IOUs are in paper form, which makes them difficult to buy, sell, and transfer. The brokerage firms' computer systems are just not set up for these.
A legit broker-dealer called SecondMarket* has set up a process for buying and selling these IOUs. It looks quite convoluted to me.
Vanguard TIPS Fund Portfolio Changes
I return to one of my favorite topics: TIPS. For new readers, TIPS are Treasury Inflation Protected Securities. They are a type of bond which pays interest indexed to inflation. In a previous post, Individual TIPS Or TIPS Mutual Fund, I said it's a good idea to buy TIPS in a mutual fund and that buying individual TIPS is like becoming an amateur manager for your own bond fund. The real yields on TIPS bonds bounced around quite a bit in the fourth quarter of 2008: reaching a peak in October, falling back down at the end of the year.
The longer term TIPS became very attractive in October 2008, relative to the historical real returns on bonds. I was tempted to buy more TIPS and/or lock in the good yield for longer time by selling my shorter term TIPS bonds for longer term TIPS bonds. An amateur like me thinks that's the best thing to do. What about the professional bond fund managers? Did they also see the longer term bonds as a good buying opportunity?Vanguard has a TIPS fund: Vanguard Inflation Protected Securities Fund (VIPSX and VAIPX). They report their portfolio holdings four times a year, after the end of each quarter. The latest holdings are on their web site. I tracked down the quarterly holdings in 2008 from the reports they filed with the SEC. There were only fewer than 30 TIPS bonds ever issued. The Vanguard fund owned about 25. The small number of holdings make it easy to compare the portfolio changes from one quarter to the next. Because market prices fluctuate, I compared the changes in the face amount, which reflect the fund managers' buying and selling activities.
| Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | |
| Number of bonds held | 24 | 23 | 24 | 23 |
| New position | 2 | 0 | 1 | 0 |
| Added to position | 18 | 11 | 11 | 9 |
| Reduced from position | 3 | 5 | 4 | 10 |
| Position eliminated | 1 | 1 | 0 | 1 |
| Position unchanged | 1 | 7 | 8 | 4 |
TIPS During Deflation
[Updated on Oct. 28, 2008. All yields are real yields, after inflation/deflation adjustments.]
While the stock market was in turmoil, the real yields on Treasury Inflation Protected Securities (TIPS) rose to an attractive level. The real yield on 10-year TIPS broke the magic 3% number, a level that hasn't been reached for many years. Many TIPS buyers including myself thought the high real yields in the first few years after TIPS first came out in late 1990s were a fluke. The real yields were high because TIPS were new and illiquid. I thought we'd never see 3% again. It's amazing how fast things change. Back in the spring, the 10-year TIPS real yield was under 1% while the 5-year TIPS real yield was negative (please note all yield numbers for TIPS are expressed as real yield, which is on top of inflation).
It's always hard to explain why the market moved the way it did because previously when the stock market ran into trouble, the bond prices went up (real yields down ). The concern for deflation was raised as one possible explanation for the rising TIPS real yields. A poster on the Bogleheads forum asked whether the real Yield to Maturity (YTM) number quoted when an investor buys a TIPS on the secondary market will still hold if there is deflation instead of inflation.
TIPS Auction Step By Step: Read the Results
[An updated version of this article appears in my new web site Explore Bonds, together with many other articles on investing in bonds.]
This is the fourth installment in my TIPS auction series. The previous posts in this series were:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Place Order
TIPS Auction Step By Step: Place Order
[Updated on July 11, 2008: added related posts in the series.]
This is part three of the TIPS auctions series. Other posts in this series are:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Read the Results
If you are interested in TIPS but you don't want to be bothered with auctions, you can buy TIPS in a mutual fund or ETF. See Individual TIPS Or TIPS Mutual Fund.
TIPS Auction Step By Step: Read the Announcement
[Updated on July 11, 2008: added related posts in the series.]
This is part two of the TIPS auctions series. The other posts in the series are:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Place Order
- TIPS Auction Step By Step: Read the Results
If you are interested in TIPS but you don't want to be bothered with auctions, you can buy TIPS in a mutual fund or ETF. See Individual TIPS Or TIPS Mutual Fund.
TIPS Auction Step By Step: Know the Schedule
[An updated version of this article appears in my new web site Explore Bonds, together with many other articles on investing in bonds.]
There will be two auctions for Treasury Inflation Protected Securities (TIPS) in July. I will follow these auctions in a series posts. This is the first post in this series. Other posts in the series include:
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Place Order
- TIPS Auction Step By Step: Read the Results
Not Too Thrilled About 1.2% I Bonds
A reader asked a few weeks ago if I'd write something about the Series I Savings Bonds (or "I Bonds" in short). I was thinking of doing it but I now see Jonathan at My Money Blog already did a very good job on this topic. There is also a long thread on the Bogleheads forum about it.
If you are not familiar with I Bonds, please read:
A Business That Punishes Its Largest Customers
Here's a Jeopardy question.
A financial service charges no fee if you have less than $100,000 with them. If your account has $100,000 or more, they charge you $100 a year account maintenance fee. If you create multiple accounts, each with less than $100,000, then you will pay no fee for all your accounts.
The answer: What is Legacy Treasury Direct?
"Legacy Treasury Direct is a program in which investors buy Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS) directly from the U.S. Treasury, without a broker.
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