Investing in bonds directly

So I’m strongly contemplating rotating out of most of our bond funds and into bonds directly. Vanguard and Fido have some decent online tools to build your own ladder. Still, I don’t know if I want to be bothered with managing a short-term bond portfolio and so am talking to a few advisors. Their fees suck though; 25-50bps on a portfolio generating gross 2-3% (avg. duration of 1-2 years). Further, half of the mock portfolios I’ve seen have 25-50% in treasuries and MMs with an avg. YTM of 1.5%. As such, they are effectively charging 50%-30% fees on the value they are actually adding (25-50bps over the 50-150bps spread from the managed bond side).

Any suggestions?

There you go. 2 percent for a 1 year no fees

How many bonds are you going to buy? Like 50 bonds? It seems reasonable to pay someone a sub 50bp fee to manage that.

You should aim for a higher yield than 2-3% though. You know 1y libor is over 2.7% now. There seem to be a lot of bond funds with trailing 4% returns.

For short duration exposure? Just buy Lord Abbett Short Duration Income. They do the best job around. No reason to do it yourself.

Thanks for the feedback guys. My thoughts:

@Ohai. 25-50bps on 2-3% seems quite high to me. I’d probably buy 20-ish bonds in bulk sizes so as to be liquid if we ever got in a very difficult position or saw an incredible buying opportunity elsewhere. I agree that 2-3% is low, though that’s what the IG bonds I’m seeing deliver; not sure why the seeming disconnect with LIBOR.

@STL. Not bad, but this gets me back to where I started with VG’s bond funds. I’m stuck with interest rate risk. LA’s fund is down YTD. To me, this defeats the purpose of owning bonds short-term. There shouldn’t be any loss of principal.

I am not sure what specific bonds you are looking at, but they probably trade below par now if they were issued when rates were lower. Do they have 2% yield or implied yield?

Ah yeah, that’s it. Most have a coupon that is a bit lower at say 2%, but they trade like 99/100 so the YTM is 2-3%.

Then you’d have to go into the ultrashort bond fund category. Even then, you could expect a few bps of volatility. If you want 2 years of duration, you’re going to risk a bit of your principal.

All I know is I was able to retire trading BBs during the boom, they are bound to come back eventually and then the sky is the limit! I’d get into BBs now while they’re cheap.

Lol why are you guys investing in high grade bonds when online saving accounts are yielding closer to 2.0% with no risk, even higher if you do a long-term CD.

BBs are actually very risky, but excellent returns. Made eleven or twelve times my money, before leverage, back in the day.


This is just semantics between how you experience your returns. Yes, if you buy a bond you’ll get interest over time and the full return of principal. But if you were to check the price of that bond daily, you’d see that resale value will fluctuate. If rates rise the day after you buy your bond, you’ve lost money, even though you don’t experience it. The only difference with a bond fund is you see that impact on a daily basis, but the return over that time frame will be nearly identical.

The reason to use a bond index fund is greater pricing power (reducing bid/ask spreads which are going to kill you buying individual bonds) and what essentially amounts to a DCA strategy to approaching the yield curve. Every month bonds are maturing and being reinvested in the fund.

This could have been crafted by our fixed income product manager. Perfect comment.

Also, Huskie, didn’t you have an avatar of, well, a husky? Or was that someone else…

Exactly. This is the argument peddled by a lot of asset managers and works great for most retail investors (see a lengthy white paper by Vangard: link) . However, the major assumption here is that this bond fund is held pretty much into perpetuity. Yes in that case, then there really isn’t much of a difference. We aren’t 60/40 buy and hold investors and so this assumption doesn’t hold for us.

We look out about 10-18 months and find you can still get money-good bonds (most have enough cash on the books & revolver & FCF, basically 0.0001% chance of default in our eyes) and get 2.7% yield for 1 year and about 3-3.2% yield for 1.5 years. So avg portfolio like that should yield 3.0%. Minus 30-40bps fee. 2.6-2.7%. 1 yr treasury at 2.25% and 2 yr at 2.5% currently so you are winning.

Problem is you aren’t getting paid anything extra to go out beyond a year and a half or so with the yield curve where it is, or much at all for taking crappier credits. Maybe a handful of basis points. It makes no sense currently. So yeah, that’s where we invest bond-wise. You are right to go in that direction.

If you want a lower fee you’d have to come with a lot of assets. How much are you thinking asset-wise?

So what makes those high grade 2-3% yield (less after management fees) strategies with duration risk attractive in a rising rate environment when you can get more than 2.5% on a 1-year CD at your local community bank? I can see the value of a good manager in the high-yield space just don’t see the merit of an investment grade bond funds at this point tbh with the principal at risk.

in terms of quality that shit is getting flatter. the average between junk and investment grade should be 500 bps. right now its like 300 bps, near the 20 year low. the 20 year high is like 1800 bps lol during the great recession! put your money in short term treasuries imo, and dont pay fees.

brokered cds are proly better than the comunity bank. local banks have high fees for selling. and cd’s are around 2%, similar to govt rates.

I just saw some 2.5% ones for 1-year CD and more than 3.0% for longer than a year at a few local banks last weekend.

What duration risk.

A portfolio 1-1.5 years till maturity? Stuff will roll off monthly and you can reinvest higher. That’s why you don’t go LT now.