8 ms·

Why not just buying bonds?

by smy20011 4y ago

rabuse 4y ago
Most people don't even know what a bond is. This is enticing for the average person who has an iPhone, and just wants a better savings rate than the laughable big banks currently at 0.01%.
thewataccount 4y ago
I'm one of the people my sibling comments talks about - I barely know what a bond is. But are bonds liquid? Part of the appeal of a savings account is that it's still cash you can spend immediately by check/debit/cash with no need to sell/transfer to an account. I agree that a 4% savings account is not a good way to invest money - but that's why I don't think they're comparable to bonds.
- adam_arthur 4y ago
  Yes, can buy a T-Bill fund like SGOV and get ~5%. Can buy/sell it as you would any other stock. Carries no credit/duration risk (effectively)
  - anotherman554 4y ago
    I just went to the Ishares web site and 3.55% is the reported yield to maturity for SGOV.
    - adam_arthur 4y ago
      “30 day SEC yield: 4.68%” The fund will lag Fed hikes by a few months, but otherwise will yield the same as buying T-Bills directly. Using trailing distribution data to compute yields will not work for a T-Bill fund in the middle of a Fed hiking cycle.
      - deleted 4y ago
        [deleted]
      - anotherman554 4y ago
        You could be right but that doesn't explain why the yield to maturity is reported so low. The yield to maturity should be the earning you get if you hold the fund until maturity and interest rates stay as they are today. It's possible Ishares is not reporting this number accurately.
        adam_arthur 4y ago
        They own T Bills, so the yield you get is the same as on the T Bill. Any difference is from the management fee (0.05%) or due to T Bills that haven’t matured yet which don’t reflect current rate. There are different ways of measuring a fund’s yield, but at the end of the day this is mechanically how this fund works.
        mbesto 4y ago
        https://www.etf.com/etf-education-center/etf-basics/how-do-bond-etfs-work https://www.etf.com/etf-education-center/etf-basics/how-do-b...
  - thewataccount 4y ago
    Thanks for the explanation! I guess to answer your question of why not get bonds - they just aren't comparable. One's effectively an investment that requires multiple steps to be used to purchase that expensive computer monitor on amazon, and the other you just select your payment to be a debit card and click purchase. T-Bills sound relatively liquid, but a savings account still beats it at the cost of 1% interest (assuming 5% for the bonds).
    - adam_arthur 4y ago
      Sure, though anybody with a moderate networth should have their money in a brokerage or other assets rather than savings/checkings. For many reasons. If you’re living paycheck to paycheck and need to move money around to make small purchases, then it’s not for you, yeah. Money market funds are for savings, not money that will be imminently spent. But then so are savings accounts at banks (vs Checking accounts)
      - thewataccount 4y ago
        > But then so are savings accounts at banks (vs Checking accounts) Yeah this is the part that I'm confused about because I think that savings accounts are federally restricted to 6 withdrawls a month? I could be completely wrong on that. But yeah the target audience for this IMO - people who have maybe a few thousand saved up that they keep for emergency funds or semi-hot money for larger purchases. which matches the target iphone audience I think pretty well. I bet they restricted accounts to less then 250k because they don't want to bother splitting it across banks when the target audience would be expected to only have several thousand.
jmyeet 4y ago
Because bonds change value when interest rates change. You buy a bond paying 3%, bond yields go up to 4% and you want to sell your bond, it will be less than the face value you bought it for. This isn't an issue if you want to keep it to maturity. But that's what SVB (and others) did and that creates its own problems. If you're buying bonds, you're either parking money for a long time or you're betting on interest rates going down.
- randomopining 4y ago
  Buy them in the next 3 months as the rates peak
- smabie 4y ago
  or you're like.. buying a short term bond?
stu2b50 4y ago
Liquidity?
mbesto 4y ago
Exactly this. I had a bunch of cash sitting in a Marcus account until I discovered I can just buy ICSH[0] and get another 50~100 bps by doing what the banks do - which is taking your deposits and buy bonds. This Apple savings account will likely go down over time. Any time new branded savings accounts are marketed they always put super high returns to foster deposits and then they slowly trickle them down to a mean value that sits somewhere between 50~100 bps from what you get from a money market play. As of 4/13 30-day SEC yield on ICSH is: 4.92% As of 4/17, Marcus HYS is: 3.90% [0] - https://www.ishares.com/us/products/258806/ishares-liquidity-income-etf https://www.ishares.com/us/products/258806/ishares-liquidity...
- user_named 4y ago
  Did you discover duration risk too?
  - daydream 4y ago
    > Did you discover duration risk too? ICSH is an ultra-short bond fund with average duration of 0.42 years. So very little duration risk. That said for the GP it’s only slightly more work to buy actual treasury bonds. Hold them to maturity and there’s no risk of losing money from interest rates going up. You know exactly what you’re getting and when. And if interest rates drop suddenly you can decide if you want to sell the bond and take a gain.

Why not just buying bonds?

Most people don't even know what a bond is. This is enticing for the average person who has an iPhone, and just wants a better savings rate than the laughable big banks currently at 0.01%.

thewataccount 4y ago

I'm one of the people my sibling comments talks about - I barely know what a bond is. But are bonds liquid? Part of the appeal of a savings account is that it's still cash you can spend immediately by check/debit/cash with no need to sell/transfer to an account. I agree that a 4% savings account is not a good way to invest money - but that's why I don't think they're comparable to bonds.

adam_arthur 4y ago
Yes, can buy a T-Bill fund like SGOV and get ~5%. Can buy/sell it as you would any other stock. Carries no credit/duration risk (effectively)
- anotherman554 4y ago
  I just went to the Ishares web site and 3.55% is the reported yield to maturity for SGOV.
  - adam_arthur 4y ago
    “30 day SEC yield: 4.68%” The fund will lag Fed hikes by a few months, but otherwise will yield the same as buying T-Bills directly. Using trailing distribution data to compute yields will not work for a T-Bill fund in the middle of a Fed hiking cycle.
    - deleted 4y ago
      [deleted]
    - anotherman554 4y ago
      You could be right but that doesn't explain why the yield to maturity is reported so low. The yield to maturity should be the earning you get if you hold the fund until maturity and interest rates stay as they are today. It's possible Ishares is not reporting this number accurately.
      - adam_arthur 4y ago
        They own T Bills, so the yield you get is the same as on the T Bill. Any difference is from the management fee (0.05%) or due to T Bills that haven’t matured yet which don’t reflect current rate. There are different ways of measuring a fund’s yield, but at the end of the day this is mechanically how this fund works.
      - mbesto 4y ago
        https://www.etf.com/etf-education-center/etf-basics/how-do-bond-etfs-work https://www.etf.com/etf-education-center/etf-basics/how-do-b...
- thewataccount 4y ago
  Thanks for the explanation! I guess to answer your question of why not get bonds - they just aren't comparable. One's effectively an investment that requires multiple steps to be used to purchase that expensive computer monitor on amazon, and the other you just select your payment to be a debit card and click purchase. T-Bills sound relatively liquid, but a savings account still beats it at the cost of 1% interest (assuming 5% for the bonds).
  - adam_arthur 4y ago
    Sure, though anybody with a moderate networth should have their money in a brokerage or other assets rather than savings/checkings. For many reasons. If you’re living paycheck to paycheck and need to move money around to make small purchases, then it’s not for you, yeah. Money market funds are for savings, not money that will be imminently spent. But then so are savings accounts at banks (vs Checking accounts)
    - thewataccount 4y ago
      > But then so are savings accounts at banks (vs Checking accounts) Yeah this is the part that I'm confused about because I think that savings accounts are federally restricted to 6 withdrawls a month? I could be completely wrong on that. But yeah the target audience for this IMO - people who have maybe a few thousand saved up that they keep for emergency funds or semi-hot money for larger purchases. which matches the target iphone audience I think pretty well. I bet they restricted accounts to less then 250k because they don't want to bother splitting it across banks when the target audience would be expected to only have several thousand.

jmyeet 4y ago

Because bonds change value when interest rates change. You buy a bond paying 3%, bond yields go up to 4% and you want to sell your bond, it will be less than the face value you bought it for. This isn't an issue if you want to keep it to maturity. But that's what SVB (and others) did and that creates its own problems. If you're buying bonds, you're either parking money for a long time or you're betting on interest rates going down.

randomopining 4y ago
Buy them in the next 3 months as the rates peak
smabie 4y ago
or you're like.. buying a short term bond?

stu2b50 4y ago

Liquidity?

mbesto 4y ago

Exactly this. I had a bunch of cash sitting in a Marcus account until I discovered I can just buy ICSH[0] and get another 50~100 bps by doing what the banks do - which is taking your deposits and buy bonds. This Apple savings account will likely go down over time. Any time new branded savings accounts are marketed they always put super high returns to foster deposits and then they slowly trickle them down to a mean value that sits somewhere between 50~100 bps from what you get from a money market play. As of 4/13 30-day SEC yield on ICSH is: 4.92% As of 4/17, Marcus HYS is: 3.90% [0] - https://www.ishares.com/us/products/258806/ishares-liquidity-income-etf https://www.ishares.com/us/products/258806/ishares-liquidity...

user_named 4y ago
Did you discover duration risk too?
- daydream 4y ago
  > Did you discover duration risk too? ICSH is an ultra-short bond fund with average duration of 0.42 years. So very little duration risk. That said for the GP it’s only slightly more work to buy actual treasury bonds. Hold them to maturity and there’s no risk of losing money from interest rates going up. You know exactly what you’re getting and when. And if interest rates drop suddenly you can decide if you want to sell the bond and take a gain.