Treasury/Bond Funds

I'm considering putting some of my savings into a bond or treasury fund. Up until this point, all I've invested in are equities. So I have a split of my money that has lost a substantial percentage in recent years, as well as a portion sitting in my Etrade account getting next-to-nothing in interest.

I know nothing about bond/treasuries. Can anyone suggest some good reading on the subject or some decent funds to look at? I'd like to get as close to guaranteed return as possible. I'm guessing that would be with treasuries? But of course I'd assume the yields would be pretty low? Even 3 or 4 percent is substantially higher than I'm getting at Etrade.

Basically I don't want to lose sleep over possible losses (this is my cash/emergency funds, not my retirement which I'm comfortable putting into high risk equities), but want to get a few percentage points of returns.

Thanks for any help.

The best way to go is a short-term or intermediate term bond index that spreads money over various forms of bonds. Interest rates will be rising soon and short-term bonds will be impacted the least. I own an intermediate bond and a short-term bond that have faired very well over the past 15 years.

Suggestions include Vanguard Short-Term Bond Index; Vanguard Total Bond Index; Vanguard Intermediate Bond Index; Dodge & Cox Income; T. Rowe Price New Income Fund; Fidelity Intermediate Bond Fund; Fidelity U.S. Bond Index Fund; and/or Pimco Total Return or Pimco Short-Term Duration if either is available in your 401[k]. The Vanguard funds charge an industry leading low management fee and perform well.

Generally speaking bond funds lack a fixed maturity. With a fixed maturity, if you hold to term you get all your principal back (plus interest) -- unless the issuer defaults.

ShowMeTheDeal said: Interesting stuff. I was under the assumption that treasuries and corporate bonds just paid out the agreed upon interest rates and the reason you got a little higher return than a high-yield savings account was the slight risk of default.

Thanks for the info.

There are differences between bonds and bond funds. Straight corporate, municipal, or treasury bonds are as you describe. They have very straightforward terms and are guaranteed as long as the corporation, municipality, or federal government is solvent.

ThePessimist said: Although, that guarantee only applies to scheduled interest payments and the repayment of principal at maturity. As I mentioned earlier, if you need to sell a bond to get the money back before maturity (quite possible with an emergency fund), you could get much less than the stated principal. E.g., no one is going to pay par for your old Treasury bond paying 2% if they can buy a new one paying 5%, so in a 5% environment you'd get less than the stated principal if you had to sell a 2% bond.

Yes, this basic premise is true with all non-liquid investments. And you are right, the fact that bonds are not liquid investments would make them a poor choice for an emergency fund. Hopefully, the OP at least understands that.

The thing about bonds is that there can be all sorts of interest rate structures and prices that can produce a vast array of expected yields which you can structure in a way that's as safe or risky as you see fit. For example, Fannie Mae offers "step up" funds that increase interest rates yearly, until maturity, for example. You are also right that it's difficult to buy a bond on the secondary market that will result in a substantially more lucrative return than just starting with a new issue since there are so many configurations available.

Here is a link to Fidelity's bond offerings which does a pretty decent job of explaining what each type of bond is as you drill into it. I'm sure many brokerages have similar listings.

Matr0skin said: IRS pays 2% interest on the overpayments. It is higher than what you get from Treasuries and 100% safe. Just pay too much and file your return asking for refund when you what your "investment" back.
Lest anyone take you seriously, despite the "joke" disclaimer, this is absolutely not true. Overpayments are, in effect, an interest-free loan from you to the Treasury. The IRS pays no interest on them.

There are cases, which very rarely apply, where the IRS demands money through its own calculations that then proves to be in excess of the taxes owed. In these cases, they pay interest. However, there's almost no way to deliberately engineer one of these situations.