Recession and Fixed Income?

August 17, 2019 9:05 AM

As luck would have it, I just had some treasuries come due, the bulk of the fixed income in my portfolio. My plan (based on advice from a fixed income specialist), was to reinvest the money in more treasuries using the ladder technique, something new to me. But now, with things changing so rapidly, it doesn't seem like that advice is relevant anymore, and I am not sure what to do. Move to CDs? Invest in a money market fund? Keep to the treasury plan? None of the above?

I am going to get back in touch with my advisor, but I would love to hear some wider perspectives if you have them.

posted by nanook to Work & Money (4 answers total)

Trying to predict the future of interest rates can be a fool's game. So sticking to your plan might be the best strategy rather than trying to guess the direction of future rates.

A bond ladder is a way of reducing risk of changing interest rates by spreading the maturity dates of your bonds over a range of time. However, this requires a certain amount of discipline and work on your part.

You can get effectively the same result by buying an intermediate term bond index fund that does the same laddering for you automatically with less effort. Examples are the Vanguard Intermediate-term Treasury Index Fund or the Vanguard Total Bond Index Fund.

If you are planning on holding long term, the index bond funds will give you similar results as the bond ladder but with less work on your part.

If, on the other hand, you have expected dates in the near future when you need cash, then you can have a mix of short term and intermediate term bond index funds that would approximate termination of a bond ladder.

But there's nothing wrong with a bond ladder if you are willing to keep on top of it.
posted by JackFlash at 9:58 AM on August 17, 2019 [8 favorites]

Also, I would not pay an advisor to manage a bond ladder for you. Buying an index fund will be cheaper.
posted by JackFlash at 10:02 AM on August 17, 2019 [4 favorites]

The next 2 years are extremely unpredictable, investing in stock or bond index funds could be very good or very bad, and interest rates will likely stay very low so fixed income is difficult. I don't know much about bonds ladders specifically, but after research I've decided to park a lot of my money in high interest FDIC insured savings accounts. Last time I looked the rates were still pretty good and as long as you stay below the 250k cap per bank your investment is federally guaranteed. I've been happy with CIT bank but there are a bunch of them periodically reviewed for best rates. They can be much easier to get money into and out then CDs and money market funds, I get 6 free transfers a month on my CIT account and I can do it online.
posted by JZig at 12:07 PM on August 17, 2019 [1 favorite]

The bond ladder gives you the advantage of coming in over time so with things changing rapidly you are spreading your bets. So if you want something that will come due in a predictable way at a known time, that works. Personally I find Vanguard fixed income funds work better for me. If treasuries make sense from a tax perspective, they have that. If you are really concerned, you move your money into the mutal fund over time - maybe divide into chunks over whatever time period you were going to do the ladder and set up an automatic transfer to do the re-investment every month. Once the month is in, it will get reinvested for you with no effort, unliked a bond ladder which comes due and has to be reinvested actively.
posted by metahawk at 1:16 PM on August 17, 2019 [2 favorites]