No. of Recommendations: 2
I'm a few years from retirement and in the process of reorganizing my IRA. From everything I read, it seems that it would be prudent to have some part of it in short term bonds for their 'safety.'
What's confusing me is that bond funds, individual high quality bonds, money market funds, and short term CD's all seem to be returning just about 5% (even after fund expenses). A lot of research and a little bit of risk, in other words, might at best return only a few basis points more (and possibly less), a fairly insignificant amount on the approximately $15,000 that I'm talking about.
Is there any real reason for me to forego the liquidity of the MMF I'm currently in, or the FDIC protection of a CD in favor of bonds? It appears not, but since I never really thought about bonds before, I'm wondering if there's something I may be missing.


This discussion has been about short term T-bills, or their equivalents in liquidity and safety (FDIC insured short term CDs or Money Markets). The question is where to get the maximum yield for money you want to keep liquid (available soon, if not immediately).

Short term bonds/fixed-income is for people who want to keep substantial amounts of money liquid (not just enough to pay the bills). Mostly this is for people who are active market players waiting for the right investment to come along. Others are convinced interest rates will be going up and want to wait (which doesn't hurt too much at the moment, since the yield curve is flat, unless they guess wrong and rates go down). For others, liquidity is important because the money is for a downpayment or an emergency fund.

We've also been talking about taxable accounts, not IRAs (you can't do T-direct for an IRA, though you can bid at Treasury auctions if you have an IRA brokerage account).

In your situation, you are probably looking for a fixed-income/bond allocation long term. The only reason for getting short term bonds/CDs/money Market is if you are convinced rates are going up, or if you want to build a 5-10 year ladder gradually and want to keep the money somewhere as you build that ladder.

Bond funds are a different animal. If bond funds are returning 5% (presumably 5% yields) that doesn't mean you will get that in the long run. You can't hold bond funds to maturity and get your 5%, as with a 5% CD or Treasury. You are dependent on interest rates holding steady. If interest rates go up, the bond fund will return less than 5%. If rates go down, you do better than 5%. I don't know where rates are going in the near future, but I still wouldn't touch bond funds long term, with debt levels where they are.
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