emergency fund: bond etf's vs savings account

[Self-tought-investor]

Do not use a bonds for your emergency fund, you will lose money when rates rise.
Do not invest emergency money in anything. That's asking for trouble when a real emergency comes and you need the money immediately.

The most you can do it put the money in the highest-interest savings account you can find.

[acegolfer]

Originally Posted by StAcKhOuSe

does anybody use bond etf's as an alternative to a savings account for an emergency fund? i currently have an ally savings earning .87% interest. ive been doing some research and i think this might be a legitimate option with returns of around 2-4% after the nominal fees of .05-.15%.

i would use this fund primarily for short term savings of 6 months to 5 years for cars, vacations, unexpected expenses, etc. basically a rainy day fund.

Is your "2-4%" yield? If so, you can't compare bond's 2-4% yield with savings account's 0.87% interest rate. Those 2 rates are different.

Remember yield is yield to maturity not how much the bond will earn in 1 year.

[mathjak107]

Nothing worse than matching short term needs with longer term investments.

That usually never ends well.

[mysticaltyger]

Originally Posted by Self-tought-investor

Do not use a bonds for your emergency fund, you will lose money when rates rise.
Do not invest emergency money in anything. That's asking for trouble when a real emergency comes and you need the money immediately.

The most you can do it put the money in the highest-interest savings account you can find.

I'll partially disagree on this one.

I certainly wouldn't put ALL of my emergency savings in a bond fund. For instance, I have about about 6 months' worth of living expenses in savings, and another 3 months' worth in savings bonds. I have several bond funds that I sort of use as a hedge. They're not funds I want to tap, but funds I could tap if I lost my job or I had to get another car, etc. Over a decade ago I invested in Loomis Sayles Bond and it's a racy fund that has had its ups and downs, but it sure has had great returns over the last decade (~8.5%). I also invested in a junk bond fund over a decade ago that has had lousy returns for its category....but I've still made about 6.75% annualized over a decade in that fund. Glad I didn't keep all those funds in cash.

I think a short term bond fund like Baird Short Term Bond isn't a bad place to keep some money, provided you have a minimum of 3 months' living expenses set aside in cash (although preferably more like 6 months' worth).

[mathjak107]

Originally Posted by TwoByFour

I have no idea why people consider a bond fund in this era of low interest rates. The fund's yield will drop as Interest rates rise, which is about the only way they can go at this point. You might get some income from interest pay-outs, but effectively with the drop in yield, you are losing principal.

Another option is a TIPS or I Savings bond, which is a good inflation hedge.

negative interest rates on tips make tips awful at this stage.

everyone keeps talking about bonds being awful and the more they do the lower rates have been going.

we all know one day rates may rise but that could well be years from now. in fact with only 1 exception every time the fed has raised the feds fund rate by 1% or more bonds went up not down.

i am not saying buy bonds with your emergency cash but for an investment that has been shunned the last few years they are just doing better and better.

this is quite interesting: in the last 35 years with only one exception everytime the fed raised interest rates on the short end bonds went up instead of down.


since 1980 the fed has raised the funds rate higher than 1% in a year 6 times. only once in 1994 did the 10 year lose money and fell only a fraction of what you would have calculated it would.. below are the returns the 10 year saw every time time the feds fund rate was raised more than 1% in a year and the fed tried to raise rates.. just the opposite happened and bonds went up in value just about everytime the fed pushed short term rates higher.

1989 saw the fed funds rate raised 1.64% the 10 year increased 12.74% in value

1994 it was raised 1.18% 10 year fell 1.93 %

1995 the feds fund rate was raised 1.62% while the 10 year soared 15.30%

2000 saw it raised 1.27% ,the 10 year was up 10.10%

2005 feds fund rate raised 1,.87% 10 year up 1.57%

2006 feds fund rate up 1.75% 10 year up 4.08%

[acegolfer]

Originally Posted by mathjak107

negative interest rates on tips make tips awful at this stage.

everyone keeps talking about bonds being awful and the more they do the lower rates have been going.

we all know one day rates may rise but that could well be years from now. in fact with only 1 exception every time the fed has raised the feds fund rate by 1% or more bonds went up not down.

i am not saying buy bonds with your emergency cash but for an investment that has been shunned the last few years they are just doing better and better.

this is quite interesting: in the last 35 years with only one exception everytime the fed raised interest rates on the short end bonds went up instead of down.


since 1980 the fed has raised the funds rate higher than 1% in a year 6 times. only once in 1994 did the 10 year lose money and fell only a fraction of what you would have calculated it would.. below are the returns the 10 year saw every time time the feds fund rate was raised more than 1% in a year and the fed tried to raise rates.. just the opposite happened and bonds went up in value just about everytime the fed pushed short term rates higher.

1989 saw the fed funds rate raised 1.64% the 10 year increased 12.74% in value

1994 it was raised 1.18% 10 year fell 1.93 %

1995 the feds fund rate was raised 1.62% while the 10 year soared 15.30%

2000 saw it raised 1.27% ,the 10 year was up 10.10%

2005 feds fund rate raised 1,.87% 10 year up 1.57%

2006 feds fund rate up 1.75% 10 year up 4.08%

In your example, the Fed raised the Fed Funds target rate, which is the overnight (1-day) lending rate not the overall interest rates. Most ppl think that this will increase the 10-yr yields, which isn't true. But the term structure doesn't always move parallely. A "tilt" in the term structure can lower long term yields, which explains higher 10-yr bond prices. As you stated this happened quite often empirically. It's not hard to understand the economics behind it.

[mathjak107]

Correct!

When the investment world talks about the fed raising rates it is the short term rates like the fed funds rate that is being referred to since it is the only one the fed directly controls along with the discount rate and bank reserves.

Investors of the world control bond rates. Even the feds buying at the full 85 billion a month couldn't alter the course of a 100 trillion dollar world bond market.

It is really a symbolic gesture and they hope investors will follow papa feds lead but as we see it isn't always the way investors see things.

It took us 35 years to get rates to these levels. The ride back to even normal can take a decade with the sluggish economy the world is in.

The world is deleveraging and reducing debt.if lots of borrowing can be inflationary then paying down debt can be deflationary in nature. Good for bonds.

over all .after a knee jerk reaction and the fed cutting buying the worlds investors took bonds back down in rates once more increasing their value.

as usual the worlds talking heads and small investors trying to out guess things called it wrong once again..

to date my total bond fund is up almost 4% despite the warning to flee bonds when the feds cut back was announced.

the longer term bonds and bond funds like TLT are up a whopping almost 14% ytd.

if anyone rembers 2 years ago when everyone was chanting how bonds are doomed i said if i was going to speculate in any asset class i would have picked the 30 year treasury bond.

with a floor of 3% and potential to fall another 1% in any flight to safety you could reap as much as a 30% gain and have a floor of 2.5%-3% insurance until you sold out if things turned the other way.

with the outlook for bond rates rising much pretty slim in the near future if anything happens to equities via a black swan event that treasury bond could shoot way up still.

the name of the game for bonds is capital gains not income at this stage.

but again , speculating in bonds is not for short term emergency money.