Practical Money: Time To Buy Bonds?, My Fixed Income Portfolio
With interest rate cuts looming, it might be time to snatch up bonds and CDs
Introduction
With inflation continuing to cool, the Federal Reserve is expected to begin cutting interest rates this month, with more cuts expected in the near future.
Interest rate cuts lower the cost of borrowing money, which means you should see things like credit card and mortgage rates come down. However, it also means lower returns on savings accounts, CDs, and other savings instruments. Lower interest rates result in bond yields dropping since stocks become more attractive than bonds.
With interest rates expected to drop soon, it might be time to load up on treasuries and CDs while their yields are still high. In this newsletter, I’ll discuss investing in bonds and CDs and reveal my fixed-income portfolio, which consists of treasury notes and bonds, CDs, agency bonds, and corporate bonds (I’ll discuss agency and corporate bonds in a future newsletter).
A quick reminder that this is not financial advice, just myself sharing my strategies, investments, stocks, index funds, what I'm buying, and where I plan to take those investments. Everyone’s financial goals are different. No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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Understanding Treasury Bonds
Treasury bonds are issued by the U.S. government and are considered one of the safest investments available. They offer a fixed interest rate and a guaranteed return of principal at maturity. Treasury bonds are typically long-term investments, with maturities ranging from 2 to 30 years.
Key Benefits of Treasury Bonds
Safety: Backed by the full faith and credit of the U.S. government.
Predictability: Offer a fixed interest rate, providing a known return.
Liquidity: Can be bought and sold in the secondary market.
Tax Advantages: Interest from Treasury bonds is generally subject to federal income tax but is exempt from state and local taxes.
Understanding CDs
CDs are time deposits offered by banks and credit unions. They offer a fixed interest rate for a specified term, and the principal is returned at maturity. CDs are generally shorter-term investments than Treasury bonds, with maturities ranging from a few months to several years.
Key Benefits of CDs
Safety: Insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank.
Predictability: Offer a fixed interest rate, providing a known return.
Liquidity: Some CDs offer early withdrawal options, but may incur penalties.
Convenience: Easy to open and manage.
How I Invest In Bonds And CDs, The Laddering Strategy
The decision between Treasury bonds and CDs depends on your individual financial goals and risk tolerance. For me, for long-term secure investments with a fixed return, I go with Treasury bonds. For shorter-term investments with a guaranteed return, I might pick CDs depending on the yield.
Until a few years ago, I had never bought a bond or CD due to their low yields. In 2022 with interest rates rising, I started laddering bonds and CDs. Laddering is a strategy to purchase multiple bonds and CDs with staggered maturity dates, creating a "ladder" effect. Instead of investing all your money in bonds and CDs that mature at the same time, you spread it out over a range of maturity dates.
Let's say you invest $10,000 in five bonds with maturities of one to five years.
Year 1: The one-year bond matures. You reinvest the $10,000 into a new five-year bond.
Year 2: The two-year bond matures. You reinvest the $10,000 into a new five-year bond.
Year 3: The three-year bond matures. You reinvest the $10,000 into a new five-year bond.
And so on...
Each year, when a bond matures, you get back the $10,000 principal plus the interest. By the end of the five years, you can start taking the income or you can reinvest and create a new ladder of bonds and CDs. It provides a predictable income and reduces risk, all while allowing flexibility in response to changing interest rates. With this strategy, I have interest income from bonds and CDs every month.
My Fixed Income Portfolio
Below is what I have invested each month. Note that most of these assets listed pay interest semiannually, so each month has a minimum of two interest payments. All of these have rates ranging from 4% -7.1%. Also note that Treasury notes and Treasury bonds are very similar, with the primary difference being in their maturity periods. Treasury notes have maturities of 2 to 10 years, while Treasury bonds have maturities of 20 to 30 years. Both notes and bonds pay interest every six months until they mature.
Also, I only buy new issues of treasury notes and bonds. I would be buying 20-year Treasury Bonds every month if I could, however, they are only issued four times per year (typically in the first half of February, May, August, and November).
January: 3-Year Treasury Note
February: 20-Year Treasury Bond
March: A mix of 7-year Treasury Notes, 5-year CDs, and a 15-year Agency Bond
April: 7-Year Treasury Note
May: 20-Year Treasury Bond
June: 5-Year CD
July: A mix of two 5-year CDs and a 15-year Agency Bond
August: One 20-Year Treasury Bond and one 5-Year CD
September: 5-Year CD
October: 1-Year CD maturing in October. I plan to buy a longer-term CD or bond after it matures.
November: 20-Year Treasury Bond
December: A mix of a 3-year Treasury Note, 5-year corporate bonds, 5-year agency bonds, and CDs with ranging maturities.
Conclusion
Treasury bonds and CDs offer a safe and reliable way to invest. By understanding the key benefits and drawbacks of each option, you can make an informed decision that aligns with your financial goals.
No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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