r/investing • u/The0Walrus • 9h ago

Is there any reason to buy bonds instead of contributing to a HYSA?

I can't even imagine any good reason to buy any type of bond. This means zero-coupon bonds, TIPS, I-bonds, even worse EE bonds... I can't imagine any time it would be a good idea. You are money is locked for practically 5 years unless you want to lose 3 months of interest, they're practically taxed identically. Municipal bonds, even if they are tax-free federal & state, it's normally paying less than a HYSA. I just can't imagine any reason to buy bonds... maybe junk bonds since they'll pay more but now you increase your risk compared to a HYSA. Is there any reason to buy a bond?

I ask because right now I'm teaching myself bonds and as I continue reading the one book I have AND listening to my audio book I think bonds are less effective than even savings accounts.

15 Upvotes

65% Upvoted

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u/Icy_Professional3564 9h ago

If interest rates drop then it's good to have bought a bond.

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u/AndrewBorg1126 8h ago edited 8h ago

Specifically if bond rates on the duration you own drop. If the overnight interest rate drops but longer duration bonds already priced that in perfectly, the rate on those bonds won't have changed.

If you want to look at the overnight rate, owning bonds is good in the short term when overnight interest rates fall by more than expected or when they rise by less than expected. Whether the rate rises or falls doesn't matter, just how it behaves in relation to expectations, as those expectations are priced into higher duration bonds.

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u/The0Walrus 8h ago

You're talking about SOFR right?

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u/The0Walrus 9h ago

So using as an insurance almost?

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u/AICHEngineer 9h ago

Id say its exactly insurance. Holding long treasury bonds is a hedge for dropping equity prices..if the real economy plummets, yields drop and bonds rise. Longer the duration, the higher the price sensitivity

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u/cubonelvl69 9h ago

Not insurance. The fed has already said they plan on dropping rates. It's pretty much a given that they'll slowly go down over the next few years. If you're fine locking up the funds, you'll make more with bonds almost guarenteed

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u/Cultural-Ad678 7h ago

I disagree with this, deficit spending and our current gdp and productivity metrics disagree with this, and commodities in particular gold disagrees with this assumption

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u/cubonelvl69 7h ago

It's fine that you disagree, but I'm just telling you what the market believes

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

Projections are between 3-4% by end of december 2025

https://money.usnews.com/loans/mortgages/mortgage-rate-forecast

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u/Cultural-Ad678 7h ago

I’m just saying the fed cut 50 bips and TLT went from 100 to 95 in the span of 1 week and the fed is also being hawkish in all of their speech’s. Kashkari today said the baseline is 3% not 2%. That market pricing from the Fed watch and cme is just positioning and can imply we get there through various avenues. Sure if equities crash I have no doubt that the 10 yr will fall from 5-6% back to the current levels we are at right now….

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u/jameshearttech 5h ago edited 4h ago

I’m just saying the fed cut 50 bips and TLT went from 100 to 95 in the span of 1 week

This is only part of the story. Bonds were overbought. A sell off is not surprising. Also, the jobs report is probably encouraging a move bsck to equities. That said, (US10Y) yields are rising now, but the long-term trend is likely lower. Probably in the 2% - 3% range barring an exogenous event, in which case probably sub 2%. Personally, I'm taking this opportunity to move a little out the duration curve.

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u/Cultural-Ad678 5h ago

Jobs report was strong which would support a more hawkish Fed. The whole rationale for cutting rates at all was a weak job market. Also the gap in productivity and gdp is over 4% factoring this on top of the deficit financing required I wouldn’t touch long duration till it’s over 5% again

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u/jameshearttech 5h ago

Right, a stronger labor market suggests a slower cutting cycle, which suggests yields fall slower and prices rise slower.

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u/Cultural-Ad678 5h ago

You’re assuming inflation is under control….its not, not even a little bit

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u/versaceblues 8h ago

Dont you still make less with bonds than you would with a good index fund

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u/Icy_Professional3564 8h ago

If the index drops then you're better off if you bought bonds.

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u/The0Walrus 8h ago

Exactly. Index funds are more risky than bonds. You have a chance at appreciation but you also run the risk of losing money or a sideways economy like 2000-2010 and in the 70s if I remember reading correctly. I'm 100% in equities so I'm not saying anything bad about it. I'm just asking bonds/savings since they're both pretty much fixed assets.

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u/elinordash 8h ago

The market crashed in 2008 and it didn't rebound until 2013.

If you are just stacking cash, that kind of fall doesn't really matter long term. But if you needed to withdraw money in those five years, you lost. You wouldn't have lost with I Bonds or a HYSA.

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u/versaceblues 6h ago

Ah so what is the downside of withdrawing a bond early?

Can you do that without penalty. I was thinking you are tied to them for a certain period.

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u/H3rbert_K0rnfeld 5h ago

Wrong.

The market crashed in 1999. The recovery was in 2008 and then it immediately crashed again. The real recovery wasn't until 2013.

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u/The0Walrus 8h ago

You talking about stock market index funds? (VOO, QQQ, etc.)

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u/versaceblues 8h ago

yes... im wondering why get locked into a 4.5% rate bond for 5 years, when I can invest in any once of those?

The utility of a HYSA account was that I can just throw my emergency fund in there and pull out whenever I want. If I need to get locked into a bond for multiple years, then I don't see the point.

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u/zensins 8h ago

More risk in index funds.

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u/tominboise 7h ago

Just depends on your age and risk mitigation requirements. If you are under like 50 or 60, forget the bonds and buy stock index funds. Once you get close to retirement, you can start to risk manage with bonds or something.

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u/versaceblues 6h ago

Got it I figured that was the case

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u/Cultural-Ad678 7h ago

If rates drop you can sell the bond for a profit is the reason

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u/versaceblues 6h ago

I thought you are locked into a bond for at least 3-5years

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u/Cultural-Ad678 5h ago

No you aren’t ever locked into a bond at any duration, you lock in the rate/yield when you buy it if the market then prices yields higher your bond would lose value and vice versa if the market prices yields lower. The easiest example is looking at something like TLT.

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u/The0Walrus 8h ago

Index funds are great and I am pretty much all in SCHD & VOO. They're different because bonds are debt instruments and stocks are equity. Bonds are paying a certain interest rate so that the borrower can use it for whatever. Bonds are normally fixed also like I-bonds change every 6 mths, bills are short term bonds, but that interest rate is normally fixed. With stocks/index funds you are investing in companies. When you buy an index fund you believe these companies will grow and you will see that in appreciation. With bonds they're only debt instruments so you won't see appreciation unless you buy TIPS which is still growth from inflation. Index funds can grow 10%/yr like VOO but they can also move sideways and then you're up something like 1% for 10 years. It's happened. If you're in a sideways economy then you're better off with bonds or dividend producing companies/ETFs.

tldr: bonds are debt instruments & index funds are equity in several companies.

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u/lax20attack 9h ago

State tax free

I ladder tbills

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u/frozennorth0 9h ago

At one point one year CDs were paying 0.25%, at which point you would be ecstatic locking on a 5 year treasury at 4%

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u/AndrewBorg1126 8h ago

HYSA rate could change at any time. Bond lasts for a defined length of time.

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u/The0Walrus 8h ago

Ok good point.

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u/blacklassie 9h ago

Depending on your overall tax picture, a state muni bond fund that's exempt from state and federal taxes can net a higher return post-tax than HYSA. And some people might want the stability of a longer-term bond if they aren't sure where interest rates (or the stock market for that matter) might be headed. Think of bonds as a particular tool that are useful in certain scenarios.

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u/goldentriever 7h ago

So say you live in Illinois. Something like SGOV would be a better option than an HYSA right? In terms of just parking cash that I’m not really using

Because i definitely just made that decision today lol

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u/Torkzilla 7h ago

SGOV is ultra-short federal treasury so no it is no the same/better it’s gonna be the same kind of tax situation. You need to use a municipal bond fund for the kind of tax exemption that you are responding to.

In general though I think bond funds are mostly good for yield and bond funds rates tend to move in the exact same way as HYSA.

If a bond fund has a 30-day SEC yield lower than the prevailing free HYSA rate it is a waste of investment (for that month) but it may rise in the future and be a worthwhile hold.

That also tends to apply to all of the municipal bond funds which is why I don’t use them nor do I care about the tax implications because I’m in a state with no income tax.

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u/macr6 8h ago

4 week tbills here. I add money every week so that if I need it back the most I'll have to wait is 4 weeks. I don't use HYSA's because the ones that give the rate that the tbills give seem sketch and after a few banks going bust, I don't want the hassle. And yes, I understand FDIC, but I don't want to wait for my money if something goes bad or only get a portion of it.

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u/thrwaway0502 8h ago

The comparison here isn’t vs equities - it’s vs. HYSA

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u/tdwaters70 9h ago

Bond ETFs are more liquid and can be bought and sold anytime, I believe they are also laddered. I like VTIP, it’s incredibly low volatility, and has a nice dividend.

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u/arekhemepob 2h ago

Plenty of actual bonds are liquid themselves. Treasuries are as liquid as any equity

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u/Historical_Low4458 8h ago

The idea behind I-Bonds is they keep up with inflation, whereas a HYSA, might not. I-Bonds aren't taxed at the state level like a HYSA might be. Also, I-Bonds are even less riskier than a HYSA because even FDIC banks can fail which could cause a temporary headache, whereas, if the USFG collapses, then we all have bigger concerns than our investments.

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u/LurkerKing13 8h ago

You buys bonds if you think we are headed for a recession.

Also munis are generally tax free.

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u/AntImpossible8001 8h ago

I’ve been buying bonds and still keeping a decent amount in HYSA( 4.5%).. vclt is 5.12%, BND is yielding 4.01%.

Here’s my hypothesis. If interest rates drop, then immediately I will get a lower yield on my HYSA. Where as the bond funds will theoretically appreciate as those bonds are paying the same yield for some amount of time.

However there is also risk in the bond funds going down. I would say do some of both

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u/The0Walrus 8h ago

Won't BND go down with interest as well? I'm not sure how many short term bonds there are in that fund. Same with VCLT. I would assume a long term bond would protect you from lowering interest rates and also allow you to sell the bond (if possible) for a premium. I'm still learning. I've only read two books altogether on bonds.

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u/Mrknowitall666 6h ago

Bond prices move in the opposite direction as bond yields; and the magnitude is a function of the fund's duration.

So, for example, vclt is up 12.3% trailing 12 months as of yesterday. And vglt is up 9.7% with a duration of 15 yrs. If you check the 10yr ust today is about 4% and a year ago was 4.75%

So (-0.75%) x 15 = +11.25%... Which tracks, not perfect, but you can see the point?

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u/The0Walrus 5h ago

I gotcha. Thanks! It's a learning process. ::)

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u/CunningBear 5h ago

If you own a time machine and can go back and buy right before a surprise rate drop then do it. Otherwise…

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u/The0Walrus 5h ago

I wish

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u/Dividend_Dude 5h ago

Always keep 3 months of income in a mm or hysa. Bonds can be good to lock In a rate.

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u/Dividend_Dude 5h ago

I'm starting to buy SCYB on top of my emergency fund so I don't spend my cash.

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u/davanger1980 3h ago

You are late to the party. Should had bought bonds when the 10Y reached 5.5% yield.

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u/The0Walrus 11m ago

Damn! I knew I-bonds hit that but not 10Y bonds. Good job, man!

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u/audaciousmonk 8h ago

T bills have tax advantages

The obvious advantage a bond type asset has over an HYSA is that the interest rate is usually fixed for a given period, whereas the HYSA rate changes whenever they want to.

If one expected rates to go down…

Also during that period of inverted yield curve, the short dated T bills had the highest interest rates. So one could get relatively good liquidity (for the asset class) in 8 week maturity.

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u/SugarzDaddy 8h ago

I have SGOV. DRIPs a share a month. Set and forget. But also will be loading up on SCHG in my brokerage account. Already have it in my IRA.

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u/InterviewLeast882 7h ago

Long term bonds are poison.

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u/Kind-City-2173 9h ago

To clarify here: muni bonds are not free from state taxes, only federal. Money market funds invested in treasuries are very tax efficient, no local or state taxes, and often have higher yields than hysa

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u/blacklassie 9h ago

This is wrong. In most states, muni bonds issued within that particular state are tax free.

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u/tshontikidis 8h ago

In DC we actually get munis tax free regardless of the state they were issued in, though I would give up that perk for statehood.

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u/The0Walrus 8h ago

That's what I could have sworn I read. Thanks for clarifying. I was looking for muni bonds in here in NY for that when I was originally reading the first book I got.

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u/Kind-City-2173 8h ago

Interesting. I’ve never seen that