8 ms·

Unless something very different in the US is available to what I can get in the UK, I think this is very dangerous advice. If I put £100 in a savings account w

Unless something very different in the US is available to what I can get in the UK, I think this is very dangerous advice. If I put £100 in a savings account with 4% interest, I can withdraw that £100 (plus interest) at any time. If I buy put £100 into government bonds with 4% yield and I check back in a year's time, if bond yields have increased (say, due to increased base rate) then the "balance" I can withdraw is _less_ than £100, since the underlying bond is less valuable! Putting money in bonds exposes you to market volatility, which banks shield you from (which is why they get to take a cut) Edit: a money market fund appears to absorb this volatility for you by balancing their bond portfolio, but ultimately you are still relying on the fund being well managed. The failure mode here isn't the govt not paying the coupon on the bond - it's the fund not having the liquidity to pay you if you withdraw. I don't understand enough how money markets are regulated to understand the risk, whereas banks are required to have deposit insurance in UK & US.

esaym 2y ago
lol, my bank's rate is 0.3% on savings account.
_uhtu 2y ago
Money market funds and short term t-bills are basically always liquid at face value, unlike longer term bonds. They fall below investment value maybe once per 50 years and that usually lasts a couple days.
- tompccs 2y ago
  See my edit. What protects you from the fund being mismanaged?
  - zbobet2012 2y ago
    Depends on the money market fund. There are US treasury only funds like FDLXX, basically the only situation it would become unable to meet it's cash flow obligations is if there where no buyers for US treasuries at face value. And frankly if that's the case I wouldn't be betting on FDIC or equivalent insurance actually working anyways. But even "less" secure ones are heavily regulated to be kept at 1$ of NAV and SPIC backed.
    - ryandrake 2y ago
      Just buy the short term T-bills directly and hold them. They're as liquid and you don't have to worry about any risk besides US government default. Why pay a fund even 5 basis points simply to build a ladder that you can build yourself?
      - loeg 2y ago
        > Why pay a fund even 5 basis points simply to build a ladder that you can build yourself? Convenience is easily worth it.
  - toomuchtodo 2y ago
    US money market funds fall under strict regulations (including around liquidity and redemption) post global financial crisis to preserve their net asset value at $1 (to prevent “breaking the buck” or losing value). Can you be more specific as to what mismanagement looks like? https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/what-sipc-protects https://investor.vanguard.com/investor-resources-education/mutual-funds/money-market-reform https://investor.vanguard.com/investor-resources-education/m...
firsthummus 2y ago
It should be clarified that the advice is to purchase short-dated Treasuries, which have negligible exposure to short term volatility (and are typically the place people park money in times of distress). Also, an important note is that none of the major banks in the US pay 4% or anywhere near that amount on deposits. Think 0.01%. Long term bonds, as you correctly point out are extremely sensitive to changes in interest rates. In the current (rather unusual) situation, where deposits pay nothing and short term Treasuries pay reasonably well, this advice is sound.
- tompccs 2y ago
  if savings rates in the UK were as bad as they seem to be in the US then I admit I would be tempted. However, a shock at the wrong time can cause those "safe" T-bills to suddenly be much less than what was paid for them. Something similar happened to Silicon Valley bank - it wouldn't have been a problem if their depositors hadn't all demanded their money at once, but these are the scenarios that banks are regulated to avoid.
  - zbobet2012 2y ago
    You've a mis-understanding of how funds like FDLXX are managed. In a T-BILL only fund even a decrease in past asset value doesn't matter because they are by law managed to 1$ of net asset value. That is they most hold 1$ of _current_ asset value for every 1$ deposited _at all times_. The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either.
    - tivert 2y ago
      > The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either. I don't think so: suppose the company offering the fund was mismanaged and failed to comply with the regulations. Maybe not likely, but definitely more likely than the "collapse of US currency."
cls59 2y ago
That depends on whether you need to sell the bond before its maturity date. Supposing it is a 1 year bond, if you hold it for the full year you get your £100 back. If you need to sell early, then you might get less back if rates have risen. A money market fund operates differently from holding individual bonds and aims to provide you with the ability to sell at any time without a loss --- but the monthly interest paid out will fluctuate according to market rates.
vladd 2y ago
Since bonds are always reaching their promised payout terms upon their maturity, you can manage that risk through proper alignment in maturity dates. You can purchase multiple bonds that are spread around their term duration. E.g. buy now 1-year bonds, and repeat every 3 months. After 4 such cycles, you will now always have bonds reaching maturity every 3 months. Or just buy shorter term ones to begin with (if the interest is still appealing), and move to longer term ones once you have enough maturity diversity for the advice in the previous paragraph.
- koliber 2y ago
  This works if you never need to liquidate early. For most people such a need to get their cash out occasionally happens. Regardless of how you stagger your bonds, if you need to sell before maturity, there is a chance they will be worth less.
  - thanksgiving 2y ago
    The only money if buy a bond with is money I'd put in a certificate of deposit (CD) anyway.
  - nly 2y ago
    You can sell gilts early. There's just a chance of a small loss. Unlikely ATM while rates are expected to fall.
- FooBarBizBazz 2y ago
  Bond ladders are almost exactly the same as CD ladders. Bonds and CDs are almost exactly the same thing, mathematically. The tax treatment is a tiny bit different. T-bill interest is exempt from state/local tax. CD interest is not. Default risk is the tiniest bit different, but not by much. With the CD, there is some probability that the bank will fail, at which point you then need to wait for the gears of the FDIC to slowly turn to pay you your CD insurance. The FDIC actually doesn't have that much money, so in a sufficiently large bank run the Federal Reserve will have to backstop it. On the other hand, you can just buy a T-bill directly from the Treasury, which is also backstopped by the Fed. So there are some additional middlemen in the case of the CD. Maybe that's good -- more failures in a row are necessary before you get to the Fed. Maybe that's bad -- there are more parties and more bureaucracy involved in the unlikely event of a bank failure. I think you might as well go straight to the Treasury for the high rate and better tax treatment. (Or I'd plow it into the S&P 500 because T-bills ain't never gonna outpace inflation, no matter what they say the numbers are.)
cma 2y ago
If inflation is rising along with interest rates, treasury inflation protected securities will drop a lot less on rising rates than just plain treasuries.
HenryBemis 2y ago
> £100 If you have £100 then go eat a sammich :) If you have £100k then it is worth 'spreading' it in various assets, including what the article talks about. There is also a 'recognised practice' that slowly/over time you move some of your stocks/indexes/etc. positions into bonds as you grow older/getting close to pension. Unless you got enough ££££ in the bank and you plan to leave your portfolio as inheritance, in which case leave it where it is.
skybrian 2y ago
If you prefer to buy something FDIC insured, you can buy CD’s through your brokerage. You can pick them from whichever banks pay the most interest and you can also sell them early on the secondary market rather than paying an early withdrawal penalty.
- hiatus 2y ago
  How do you access the secondary market for selling CDs early? It doesn't appear to be an option offered by the bank.
  - skybrian 2y ago
    I haven’t done it, but here is what Schwab has in their FAQ [1]: > While we can't guarantee there will be a market for it, we'll help you sell the CD at the current market rate by requesting bids on your CD and contacting you with the highest one. If you decide to sell, you'll receive the bid price plus any accrued interest. There are no guarantees that you'll get what you originally paid for the CD. [1] https://www.schwab.com/fixed-income/certificates-deposit https://www.schwab.com/fixed-income/certificates-deposit
globular-toast 2y ago
But when you withdraw that £100 it will be worth less due to inflation. You can't eat money.
pjc50 2y ago
Also a UK consideration which may apply in the US: in the UK, you really want to have all your savings in an ISA wrapper, because then you don't have to pay income tax on the interest.
- justincormack 2y ago
  You really want to put shares not cash in an ISA so you also dont pay capital gains tax, and hold for the long term.
- gpderetta 2y ago
  if you are UK tax resident, there is no CGT on gilts, which make some low-interest-paying bonds interesting to hold outside a tax wrapper.
vegabook 2y ago
The whole idea of the yield curve is that you (generally) get compensated for that risk with higher rates. That is why (outside of crises) the yield curve is upward sloping. It follows that if you buy shorter dated T-bills or bonds, the liquidation loss risk you mention is low, and you’ll still usually make out better than with the bank because you’re not paying any middleman.
nly 2y ago
You just need to match your gilt holdings in terms of maturity with your desired access date. They are a valid alternative for fixed term deposits (and vastly more tax efficient for higher earners)
FooBarBizBazz 2y ago
The distinction to make isn't between CDs and bonds. They're actually just-about identical instruments. The key issue is the duration of the bond or CD. Longer duration bonds (and CDs!) expose you to more interest rate risk. If you buy and then rates go up, then nobody will want to accept your bond/CD on the secondary market at the old face value; you'll need to sell it for less, so the rate they get from it is on par with the new prevailing one. With CDs some of these dynamics are more hidden, because most people cannot access a secondary market for their CDs and do not see what they are worth on a given day. They just hold to maturity. But -- -- you can also just hold a bond to maturity, and -- if you buy your bank CD through a brokerage account (e.g. Fidelity, Schwab), then you can sell it early on the secondary market, for whatever a buyer will accept. So there's less difference between bonds and CDs than people suppose. (There is also the issue of default risk when the issuer of the bond is a private company or untrustworthy government. But I would say that US Treasuries and FDIC-backed CDs have similar low default risk, and you can make an argument that the T-bill is actually safer.)
- ryandrake 2y ago
  One difference between CDs and US Treasury bonds is that interest on US Treasury bonds/notes/bills is exempt from state income tax. So if you live in a high income tax state, you need to account for taxes when comparing yields.
acjohnson55 2y ago
The author is suggesting using money market accounts as a substitute for savings accounts, and treasuries a substitute for CDs. It is true that money market accounts have liquidity crunches (i.e. "break the buck"): https://www.investopedia.com/terms/b/breaking-the-buck.asp https://www.investopedia.com/terms/b/breaking-the-buck.asp Governments have a lot of vested interest in preventing that from happening, but it's not a guarantee on the level of FDIC. EDIT: Just realized I misread the article, and they are talking about money market funds, not money market accounts, which are different things. I did not realize brokerages allow money market fund assets to be treated essentially as cash balances, which is basically what a money market account does.
tim333 2y ago
In the UK wise.com has a money market fund you can link to your account. You can withdraw any time, the capital doesn't fluctuate, pays about 4.5% on stg, 5% on usd. (reddit on that https://www.reddit.com/r/UKPersonalFinance/comments/1b5q73o/wise_interest_account_to_good_to_be_true/ https://www.reddit.com/r/UKPersonalFinance/comments/1b5q73o/...)

esaym 2y ago

lol, my bank's rate is 0.3% on savings account.

_uhtu 2y ago

Money market funds and short term t-bills are basically always liquid at face value, unlike longer term bonds. They fall below investment value maybe once per 50 years and that usually lasts a couple days.

tompccs 2y ago
See my edit. What protects you from the fund being mismanaged?
- zbobet2012 2y ago
  Depends on the money market fund. There are US treasury only funds like FDLXX, basically the only situation it would become unable to meet it's cash flow obligations is if there where no buyers for US treasuries at face value. And frankly if that's the case I wouldn't be betting on FDIC or equivalent insurance actually working anyways. But even "less" secure ones are heavily regulated to be kept at 1$ of NAV and SPIC backed.
  - ryandrake 2y ago
    Just buy the short term T-bills directly and hold them. They're as liquid and you don't have to worry about any risk besides US government default. Why pay a fund even 5 basis points simply to build a ladder that you can build yourself?
    - loeg 2y ago
      > Why pay a fund even 5 basis points simply to build a ladder that you can build yourself? Convenience is easily worth it.
- toomuchtodo 2y ago
  US money market funds fall under strict regulations (including around liquidity and redemption) post global financial crisis to preserve their net asset value at $1 (to prevent “breaking the buck” or losing value). Can you be more specific as to what mismanagement looks like? https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/what-sipc-protects https://investor.vanguard.com/investor-resources-education/mutual-funds/money-market-reform https://investor.vanguard.com/investor-resources-education/m...

firsthummus 2y ago

It should be clarified that the advice is to purchase short-dated Treasuries, which have negligible exposure to short term volatility (and are typically the place people park money in times of distress). Also, an important note is that none of the major banks in the US pay 4% or anywhere near that amount on deposits. Think 0.01%. Long term bonds, as you correctly point out are extremely sensitive to changes in interest rates. In the current (rather unusual) situation, where deposits pay nothing and short term Treasuries pay reasonably well, this advice is sound.

tompccs 2y ago
if savings rates in the UK were as bad as they seem to be in the US then I admit I would be tempted. However, a shock at the wrong time can cause those "safe" T-bills to suddenly be much less than what was paid for them. Something similar happened to Silicon Valley bank - it wouldn't have been a problem if their depositors hadn't all demanded their money at once, but these are the scenarios that banks are regulated to avoid.
- zbobet2012 2y ago
  You've a mis-understanding of how funds like FDLXX are managed. In a T-BILL only fund even a decrease in past asset value doesn't matter because they are by law managed to 1$ of net asset value. That is they most hold 1$ of _current_ asset value for every 1$ deposited _at all times_. The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either.
  - tivert 2y ago
    > The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either. I don't think so: suppose the company offering the fund was mismanaged and failed to comply with the regulations. Maybe not likely, but definitely more likely than the "collapse of US currency."

cls59 2y ago

That depends on whether you need to sell the bond before its maturity date. Supposing it is a 1 year bond, if you hold it for the full year you get your £100 back. If you need to sell early, then you might get less back if rates have risen. A money market fund operates differently from holding individual bonds and aims to provide you with the ability to sell at any time without a loss --- but the monthly interest paid out will fluctuate according to market rates.

vladd 2y ago

Since bonds are always reaching their promised payout terms upon their maturity, you can manage that risk through proper alignment in maturity dates. You can purchase multiple bonds that are spread around their term duration. E.g. buy now 1-year bonds, and repeat every 3 months. After 4 such cycles, you will now always have bonds reaching maturity every 3 months. Or just buy shorter term ones to begin with (if the interest is still appealing), and move to longer term ones once you have enough maturity diversity for the advice in the previous paragraph.

koliber 2y ago
This works if you never need to liquidate early. For most people such a need to get their cash out occasionally happens. Regardless of how you stagger your bonds, if you need to sell before maturity, there is a chance they will be worth less.
- thanksgiving 2y ago
  The only money if buy a bond with is money I'd put in a certificate of deposit (CD) anyway.
- nly 2y ago
  You can sell gilts early. There's just a chance of a small loss. Unlikely ATM while rates are expected to fall.
FooBarBizBazz 2y ago
Bond ladders are almost exactly the same as CD ladders. Bonds and CDs are almost exactly the same thing, mathematically. The tax treatment is a tiny bit different. T-bill interest is exempt from state/local tax. CD interest is not. Default risk is the tiniest bit different, but not by much. With the CD, there is some probability that the bank will fail, at which point you then need to wait for the gears of the FDIC to slowly turn to pay you your CD insurance. The FDIC actually doesn't have that much money, so in a sufficiently large bank run the Federal Reserve will have to backstop it. On the other hand, you can just buy a T-bill directly from the Treasury, which is also backstopped by the Fed. So there are some additional middlemen in the case of the CD. Maybe that's good -- more failures in a row are necessary before you get to the Fed. Maybe that's bad -- there are more parties and more bureaucracy involved in the unlikely event of a bank failure. I think you might as well go straight to the Treasury for the high rate and better tax treatment. (Or I'd plow it into the S&P 500 because T-bills ain't never gonna outpace inflation, no matter what they say the numbers are.)

cma 2y ago

If inflation is rising along with interest rates, treasury inflation protected securities will drop a lot less on rising rates than just plain treasuries.

HenryBemis 2y ago

> £100 If you have £100 then go eat a sammich :) If you have £100k then it is worth 'spreading' it in various assets, including what the article talks about. There is also a 'recognised practice' that slowly/over time you move some of your stocks/indexes/etc. positions into bonds as you grow older/getting close to pension. Unless you got enough ££££ in the bank and you plan to leave your portfolio as inheritance, in which case leave it where it is.

skybrian 2y ago

If you prefer to buy something FDIC insured, you can buy CD’s through your brokerage. You can pick them from whichever banks pay the most interest and you can also sell them early on the secondary market rather than paying an early withdrawal penalty.

hiatus 2y ago
How do you access the secondary market for selling CDs early? It doesn't appear to be an option offered by the bank.
- skybrian 2y ago
  I haven’t done it, but here is what Schwab has in their FAQ [1]: > While we can't guarantee there will be a market for it, we'll help you sell the CD at the current market rate by requesting bids on your CD and contacting you with the highest one. If you decide to sell, you'll receive the bid price plus any accrued interest. There are no guarantees that you'll get what you originally paid for the CD. [1] https://www.schwab.com/fixed-income/certificates-deposit https://www.schwab.com/fixed-income/certificates-deposit

globular-toast 2y ago

But when you withdraw that £100 it will be worth less due to inflation. You can't eat money.

pjc50 2y ago

Also a UK consideration which may apply in the US: in the UK, you really want to have all your savings in an ISA wrapper, because then you don't have to pay income tax on the interest.

justincormack 2y ago
You really want to put shares not cash in an ISA so you also dont pay capital gains tax, and hold for the long term.
gpderetta 2y ago
if you are UK tax resident, there is no CGT on gilts, which make some low-interest-paying bonds interesting to hold outside a tax wrapper.

vegabook 2y ago

The whole idea of the yield curve is that you (generally) get compensated for that risk with higher rates. That is why (outside of crises) the yield curve is upward sloping. It follows that if you buy shorter dated T-bills or bonds, the liquidation loss risk you mention is low, and you’ll still usually make out better than with the bank because you’re not paying any middleman.

nly 2y ago

You just need to match your gilt holdings in terms of maturity with your desired access date. They are a valid alternative for fixed term deposits (and vastly more tax efficient for higher earners)

FooBarBizBazz 2y ago

The distinction to make isn't between CDs and bonds. They're actually just-about identical instruments. The key issue is the duration of the bond or CD. Longer duration bonds (and CDs!) expose you to more interest rate risk. If you buy and then rates go up, then nobody will want to accept your bond/CD on the secondary market at the old face value; you'll need to sell it for less, so the rate they get from it is on par with the new prevailing one. With CDs some of these dynamics are more hidden, because most people cannot access a secondary market for their CDs and do not see what they are worth on a given day. They just hold to maturity. But -- -- you can also just hold a bond to maturity, and -- if you buy your bank CD through a brokerage account (e.g. Fidelity, Schwab), then you can sell it early on the secondary market, for whatever a buyer will accept. So there's less difference between bonds and CDs than people suppose. (There is also the issue of default risk when the issuer of the bond is a private company or untrustworthy government. But I would say that US Treasuries and FDIC-backed CDs have similar low default risk, and you can make an argument that the T-bill is actually safer.)

ryandrake 2y ago
One difference between CDs and US Treasury bonds is that interest on US Treasury bonds/notes/bills is exempt from state income tax. So if you live in a high income tax state, you need to account for taxes when comparing yields.

acjohnson55 2y ago

The author is suggesting using money market accounts as a substitute for savings accounts, and treasuries a substitute for CDs. It is true that money market accounts have liquidity crunches (i.e. "break the buck"): https://www.investopedia.com/terms/b/breaking-the-buck.asp https://www.investopedia.com/terms/b/breaking-the-buck.asp Governments have a lot of vested interest in preventing that from happening, but it's not a guarantee on the level of FDIC. EDIT: Just realized I misread the article, and they are talking about money market funds, not money market accounts, which are different things. I did not realize brokerages allow money market fund assets to be treated essentially as cash balances, which is basically what a money market account does.

tim333 2y ago

In the UK wise.com has a money market fund you can link to your account. You can withdraw any time, the capital doesn't fluctuate, pays about 4.5% on stg, 5% on usd. (reddit on that https://www.reddit.com/r/UKPersonalFinance/comments/1b5q73o/wise_interest_account_to_good_to_be_true/ https://www.reddit.com/r/UKPersonalFinance/comments/1b5q73o/...)