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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Can you shed any light on this? Date: 11/8/2006 7:18 PM
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I am confused. I decided to try to learn about buying individual bonds, rather than using bond funds exclusively for my fixed income allocations. In studying what Vanguard and Fidelity have available, it appears that it is very difficult to find bonds that beat the money market. Now I realize that the MM could drop its yield again, and that if you hold a bond to maturity, you are more or less sure to get at least the yield to worst.

However, it seems like a dubious proposition to buy a bond that will pay less than current mm yields, unless you strongly believe that interest rates will drop. What am I missing here?
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18789 of 35357
Subject: Re: Can you shed any light on this? Date: 11/8/2006 8:14 PM
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However, it seems like a dubious proposition to buy a bond that will pay less than current mm yields, unless you strongly believe that interest rates will drop. What am I missing here?

I don't think you are missing anything. The problem is, typically, the yield curve has longer maturities with higher yields, so you lose out sticking with shorter maturities (or money market). Currently yields are flat or inverted, so money markets (at least the ones paying top dollar) are competitive, so you only lose out if interest rates go down.

Where you will lose out is if the Fed cuts rates and money market rates, which track the Fed rate more closely that long bonds do, go down, then long and short rates all stay down. In that case you will wish you had locked in higher rates on longer bonds.

This is where I like TIPS, because I can set a yield above inflation that seems comfortable to me and buy, even if there might be higher rates at the moment.

Personally, for now, I'm accumulating for January, when I hope TIPS will be up or Pen Fed has higher rate CDs. With the recent drop in intermediate yields, I see no reason to jump. However, I am always wrong on these matters.

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