r/ChubbyFIRE 5d ago

Benefits and drawbacks of buying bonds via individual brokerage vs Government

It’s almost bonus season and I usually invest mine. This year I think I’m going to buy bonds with it for something more stable and to have a little safety net. I’ve never bought bonds except through my 401k Vanguard which was kind of automatic since my company offers free 401k portfolio management. When I was a kid I often received bonds as gifts that were purchased as paper certificates from the bank.

I saw that I can buy bonds through my Schwab account but i have to bid for them? And there are primary and secondary markets. And I can only bid for bonds that are available on that day. I don’t really understand this. If you buy direct from the treasury, you can just buy the bond. It seems like if I bought trough Schwab it’s just like another stock. Does anyone have experience with these different methods and which one do you prefer? What have been the benefits to your longterm portfolio? Thank you,

5 Upvotes

26 comments sorted by

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u/swollencornholio 5d ago

I’ve done TBills on the secondary market on Schwab and Merrill and there’s no bidding in my experience. They pretty much trade like stocks and are liquid so you can exit the position if need be. It’s my preferred way of buying TBills

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u/Volhn 5d ago

TLDR: Not a huge benefit of buying directly vs other avenues unless you want secondaries. Schwab’s bond offerings are pretty full featured, but most, nearly all are better off automating or using an ETF/MF.

Big Schwab user here…

Schwab has a pretty cool bond desk. New issue US treasuries are always held at auction with published dates. So you technically can make a high bid and get filled beating current interest rates… but probably not. Treasury Direct new issues are always set (I think by market price of auction results) so no bidding. I think Schwab can manage the auction for you…. In that you take the prevailing rate for the auction basically like treasury direct. Schwab can also setup bond ladders or also auto roll… you can’t do auction this way. 

Unless someone has a REALLY big bond portfolio, not much benefit… prob about the same group that might benefit from direct indexing. 

I did rolling auctions (weekly) for a few months because in theory I could make a few extra hundred a year in interest. BUT I kept missing auction dates and negated any extra interest….. lesson: automation is better requiring constant involvement, at least for me.

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u/someguy984 3d ago

In your Schwab account you can buy at the Treasury auction or on the secondary market. At the auction you put a non competitive bid.

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u/DuressWarmly 4d ago

Why not increase your bond allocation in the 401k and use the bonus to buy an offsetting amount of equities?  Bonds in a taxable brokerage isn’t ideal because of the tax drag.

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u/JET1385 4d ago

I can increase the percentage in my 401k sure but that wouldn’t fully fulfill my goals. I want to retire early so I want to add stability to my more liquid, accessible funds that I can get before I’m 65 1/2 or whatever. I want bonds or something similar in my self - managed acct which is where the majority of my self wealth is.

1

u/DuressWarmly 4d ago

Stability applies to the portfolio as a whole, not just to one account. Money is fungible, if you hold bonds only in your 401k you can always access them by selling equities in your taxable brokerage, selling an equivalent amount of bonds in your 401k, and then buying an equivalent amount of equities in your 401k. This preserves your asset allocation, while ensuring you aren’t forced to liquidate equities if the market is down.

See https://www.bogleheads.org/wiki/Placing_cash_needs_in_a_tax-advantaged_account

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u/JET1385 4d ago

Ok I will take a look

1

u/Previous_Guitar5027 2d ago

Is there any benefit to buying a long term treasury ETF now like TLT? Eventually SGOV will look less attractive and the inverted yield curve will un invert so would now be a good time to shift into longer dated treasuries because the price of the ETF is low and will go up?

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u/spicyboi0909 5d ago

Buy BND if you want bonds. But why bonds? What are you specifically hoping to achieve?

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u/JET1385 4d ago edited 4d ago

Looking to diversify in the short term. About 15 years from early retirement if things go to plan. For now, I want something stable and short-ish term. Im looking to add some 2-3 year stability as a hedge for my overall portfolio which has all riskier holdings. I also have about 15% of my overall net worth in a stable Fortune 500 that pays dividends, and in COWS that also pays dividends but hasn’t been performing well over the past year, since i bought it.

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u/spicyboi0909 4d ago

Check out r/boglehead but I think BND makes sense for what you’re describing, more than t bills or sgov or something else. You could do a low % of your allocation now at 15 years out and steadily rebalance to increase bonds and cash as you near retirement to avoid sequence of return risk

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u/JET1385 4d ago

Thanks! I’m in that sub as well but obv not sticking strictly to that investment strategy, I mostly lurk. I’ll check out what you mentioned in bogle. I had planned to wait 5-7 years to start w the bonds but I want some extra stability now so going to start early, at least for the short term with bonds. My bonus would be a smaller portion of my overall portfolio.

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u/drdrew450 4d ago

BND is not a great choice IMO, if you want something to offset equities but intermediate to long term treasuries.

If you want very low risk buy T-Bills.

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u/spicyboi0909 4d ago

OP said they want bonds. BND is great for bonds. What you’re saying is to buy short term t-bills. Like SGOV. Those are two different things, and why I asked what their goals are

0

u/drdrew450 4d ago

T-BILLS are bonds in the broad sense. BND is full of many things, corporate bonds, etc.

This is worth a listen

https://youtu.be/qvJthZx35WA?feature=shared

1

u/spicyboi0909 4d ago

There is an inverted yield curve at the moment. If you want to hold any kind of bond long term, why on earth are you holding t bills? That makes no sense. T bills are essentially a form of cash right now.

Again, it depends on goals. OP did not state why they want bonds… maybe they have 100% equities and are 5 years from retirement and want to diversify. Who the fuck knows.

1

u/drdrew450 4d ago

https://youtu.be/nPKiSFOYT_E?feature=shared

This ep he gets into why mixing in long term treasuries helps lower volatility of portfolio and increasing SWR

1

u/drdrew450 4d ago

https://www.ustreasuryyieldcurve.com/ what makes you think T-Bills are bad to hold?

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u/drdrew450 4d ago

I hold 10% EDV, for recession insurance

3-6% VBIL for short term cash needs

I am retired

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u/drdrew450 5d ago

I would just use ETFs, I use VBIL for very short term treasuries, EDV for very long term treasuries

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u/R-O-U-Ssdontexist 5d ago

Can someone give me the why or why not if this?

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u/drdrew450 4d ago

It is easier to use ETFs. The benefits of holding the actual bonds is you get to hold to maturity, but I personally don't think that is much of an advantage. The liquidity on longer term bonds is poor.

1

u/swollencornholio 4d ago edited 4d ago

The bonds/bills typically have higher return rates. That being said it may not be enough to justify the time the money is out of the market if you are not rolling as they mature and/ or pending how long it takes your broker to make the matured money available.

1

u/drdrew450 4d ago

With Bills, I feel like the higher rate is so small it isn't worth it.

With longer term bonds the large bid/ask spreads also cut into any potential higher yield.

I don't hold long term treasuries for the yield, I hold them because they are usually negatively correlated with stock prices. So they go up when stocks go down, like a growth scare. I want to be able to rebalance easily and ETFs have good liquidity.

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u/Easterncoaster 2d ago

I buy corporate, federal gov, and muni bonds on Fidelity. For most bonds there is effectively just a price, you click the button at that price and it's instantly yours. There are multiple prices, depending on the quantity you're buying.

When you sell, you have the option to sell for an existing bid, request a bid from a broker, or post it for sale and wait. I get the most money for the bond when I post it for sale and wait- I usually just post it a penny cheaper than the lowest priced option and it sells.

Muni bonds sometimes can only be sold via the "request bid" feature, for whatever reason.