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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: Corporate vs Treasury Bonds Date: 8/5/1999 9:01 PM
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What are you fellow retirees doing for the fixed income portion of your portfolios held within a tax defered account?

I am thinking of starting a 5 step bond ladder that will contain non-callable, Moody AA (or better) rated corporate bonds. The first step will contain bonds that mature in five years. The second rung will hold 4 year maturities. This will continue thru the 5th (and last) step which will hold bonds maturing in a year.

My thought is that this will provide a 5 year income buffer should the balance of my portfolio (which is in the equity market) turn sour for a time.

Does this seem like a reasonable approach to sleeping well at night?

Do any of you use Treasury Bonds in tax defered account? If so would you be will to share your reasoning for passing up on the better yields from corporate bonds when you can't take advantage of the tax benefit of the Treasuries?

Thanks for any response and forgive me if this has be addressed previously.

Craig
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12873 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/5/1999 11:11 PM
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JCMcCarter asks,

What are you fellow retirees doing for the fixed income portion of your portfolios held within a tax defered account?

I have a "5 step" bond ladder equal to 5 years worth of living expenses. I had been using US Treasury notes. But now that 5-year CDs yield about 1% above 5 year Treasuries, I'm replacing the Treasury notes with CDs as they mature. (Check www.bankrate.com for the highest yielding CDs.)

I avoid bond funds because I prefer holding my fixed income securities to maturity. I avoid buying individual corporate and municipal bonds in the after market because I don't like the large gap between bid and asked prices. The bond market isn't nearly as efficient as the stock market for small trades.

intercst

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12874 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/5/1999 11:26 PM
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intercst Date: 8/5/99 11:11 PM Number: 12873
I have a "5 step" bond ladder equal to 5 years worth of living expenses. I had been using US Treasury notes. But now that 5-year CDs yield about 1% above 5 year Treasuries, I'm replacing the Treasury notes with CDs as they mature

I assume this is bonds maturing 1 year apart, each with about one year's living money. Have you considered stretching it to 10 steps, each with 1/2 year living money. You would get each year's money partly from selling stock this year and partly from the maturing bond, buying 10 year bonds instead of 5 year bonds. Longer duration bonds tend to pay higher interest rates, so it seems to me this could boost your yield a bit.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12876 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/5/1999 11:43 PM
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WilliamLipp asks,

intercst Date: 8/5/99 11:11 PM Number: 12873
I have a "5 step" bond ladder equal to 5 years worth of living expenses. I had been using US Treasury notes. But now that 5-year CDs yield about 1% above 5 year Treasuries, I'm replacing the Treasury notes with CDs as they mature.
-------------------------------------------

I assume this is bonds maturing 1 year apart, each with about one year's living money. Have you considered stretching it to 10 steps, each with 1/2 year living money. You would get each year's money partly from selling stock this year and partly from the maturing bond, buying 10 year bonds instead of 5 year bonds. Longer duration bonds tend to pay higher interest rates, so it seems to me this could boost your yield a bit.


The small difference in yield between 5 and 10 year notes isn't attractive enough to me to tie up my money for 10 years. (But reasonable people can differ on that assessment.)

If I still believe in Harry S. Dent's prediction of a prolonged recession/depression starting in the year 2008, I might put as much as 50% of my portfolio in 30 year Treasuries starting in 2006. We'll see.

intercst

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Author: x4a54 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12877 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/6/1999 12:12 AM
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inter.,

just curious --
my Mom buys a lot of CD's and complains (tho it's
been a while) about the good ones being called...
do you look for uncallable ones ? or don't consider
it an issue ?

if you hold your bonds to maturity, isn't the spread
irrelevant ? in that wouldn't you just compare yield
based on Ask to alternative investments ?


jp

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12878 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/6/1999 12:37 AM
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x4a54 asks,

just curious --
my Mom buys a lot of CD's and complains (tho it's
been a while) about the good ones being called...
do you look for uncallable ones ? or don't consider
it an issue ?


I'm not sure that's much of a problem today. It was more of a concern in the early 80's when a 5 yr CD yielded 14% as failing banks boosted yields to attract deposits. When the bank failed, and the new owners came in, FDIC rules allowed them to cut the interest rate on the high yield CDs. This was probably what precipitated "the good ones being called." With the strong economy, few banks are failing today.

if you hold your bonds to maturity, isn't the spread
irrelevant ? in that wouldn't you just compare yield
based on Ask to alternative investments ?


I guess it's just me, but I refuse to be hosed by the market makers. (That's the nice thing about Treasury Direct. If you put in a "non-competitive" bid, you actually get a better yield than half the big Wall Street firms that participated in the auction.)

intercst

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Author: yr2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12891 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/6/1999 11:44 AM
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Tell your mom to buy you some U.S. Savings bonds. I know they don't pay much right now, but for 30-yrs outward, they will increase in value.

If she has some currently, and they're getting close to maturity, she should convert them to HH bonds, which are paying 6% interest, semi-annually. This way she avoids paying the taxes for another 10 yrs. Unfortunately you cannot buy these bonds outright. You can only convert from E & EE to HH.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12898 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/6/1999 2:05 PM
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Hi, JCMcCarter--
I think your idea is reasonable. I like treasury bonds OUTSIDE my IRA because there is no state tax on them and that feature can't be used in your IRA.
If you pick good corporations, there isn't much risk and the yield is better than CDs; worry about what YOU are making rather than what the spread is and the bond market maker makes. A bond is something you OWN, not something you trade. In 1993 I learned not to own a bond fund--it doesn't mature. A bond matures, and you get face.
You might also stagger the payment month so that you get monthly income. If you do 6 years instead of 5, and each bond pays a different month, you can have monthly income. Or if you must pay taxes on your house or insurance, work it so you have most of your income in those months. Good luck!

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13009 of 76397
Subject: Re: Corporate vs Treasury Bonds Date: 8/9/1999 2:57 PM
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There a Bonds and Fixed Income board at --

http://boards.fool.com/Message.asp?id=1030062000001000&sort=id

Its just beginning, but its a good place to continue this discussion. It contains links to other similar discussions.

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