Bonds, MoneyMarket & CD

Details

Last Updated: Saturday, 30 December 2023 16:36

Published: Friday, 28 January 2022 16:27

Hits: 952

Cash to keep:

Usually you do not want to leave much cash in your brokerage account, as they pay you close to 0% in interest rate. However, it's prudent to keep some cash just so that you don't have to ever sell any stock under any circumstances. Cash doesn't need to earn 0%. You can either invest your cash in Bonds (which may lose value) or keep it in some CD or money fund (which won't lose value). These Bond, CD and money market investment are only supposed to be short term, to reduce the bleeding of money (they still lose money compared to inflation, but may be little better than cash). You can buy them just like stocks in a brokerage account.

Below we'll talk about both Bonds and Money market funds. We'll also mention Brokered CD, though more details about CD are in CD section of "Banks".

Here's link explaining various options: https://www.doctorofcredit.com/brokerage-money-market-bond-funds-as-savings-account-alternatives/

TAXES:

You always have to pay Federal income tax as per your tax slab for any interest income. That interest may come from money in banks, money market, bonds, CD, etc. There is one exception to this - Municipal bonds carry no Federal income taxes. However, the interest on these municipal bonds is much lower than what you get on other kind of Bonds. So, for most of the people the saving on federal tax isn't worthwhile. 

However, you may be able to save state income taxes on some of these interest income securities (assuming you live in a state that charges state income tax). This is true for US Treasury bonds, I-Bonds, Federal money market funds, Municipal bonds, etc. In short, anywhere you lend money to Federal, State or local Government, you may be able to save on State income taxes. More details on DoC link below.

Link on DoC: https://www.doctorofcredit.com/savings-taxes-on-earnings-from-high-yield-savings-accounts/

A. Bonds:

We talked about stocks, and how we should always be "invested" in stock ponzi scheme. We also talked about banks, and how we can park our money there in Savings/Checking accounts to get few cents in interest every month. Or if we are looking to get more than few cents, we could get a CD, which locks our money for multiple months to multiple years.

One more thing that we can invest in is loaning our money to public companies and government. Lending to public or private companies is risky, as they may go bankrupt, and we may never see our principle back. Lending to government is less risky, as the government has power to print money, and hence can always pay the money back. Loaning money this way is done via "bonds". Bonds are just like stocks, except that you are in the front line of creditors, if the company goes bankrupt. In stocks, you get back nothing if the company goes bankrupt. But with bonds, you may get something back depending on whatever is left over after liquidating the assets and paying other higher priority creditors. Bonds trade on the stock market just like stocks, their prices change every second. But you do get monthly or quarterly or half yearly interest payment.

Bonds are a good way to get higher interest than your bank will give. As of end of 2021, bonds for public companies were yielding 2% for 10 year investment grade bonds.  Government bonds were were yielding even less than that. The rate is abysmal to start with. There's also a risk of losing money in the bond. You may think of Bonds as a CD, where you lock your money for couple of years. If you take out money before then, you may be charged a pre withdrawal penalty (since for holding of < 2 years, bonds may lose value depending on current interest rate). I said 2 years, because now FED raises interest rate very slowly, so there's no way that interest rates may rise > 1% in any given year. Also long term direction for interest rates is downhill, so you will most likely be always in black, except when you are in it short term for < 2 years. (This has been proved wrong, as FED raised rates about 4% in 2022).

Bond prices fluctuate, so even though you may be collecting monthly dividend, you may still lose money. If the bond price falls by more than your dividend amount, then you are in red (if you have to sell it at that time). The longer you hold bond, less the likely hood that you will lose money. Usually, bonds move in opposite direction to stock market, so if stock market falls hard, bond prices may rise (irrespective of interest rate direction), so you may be able to break even with cash, but not always guaranteed. Bond prices vary mostly based on FED funds rate. If you hold any bond to maturity, then you will never lose money on principle. Be aware of the risk of losing money on bond, no matter how much you collect in interest.

We'll talk about the 2 kinds of bonds: Government Bonds and Corporate Bonds

1. Government Bonds:

We may buy bonds issued by the government directly from their treasury website or thru a brokerage account. These bonds are guaranteed by the government, and they can't default (as the govt can print unlimited amount of money). The bonds have been giving very low interest (i.e 10 yr were yielding 1.5% and 30 year were yielding 2%, with shorter maturity ones yielding close to zero as of Dec 2021). However as of May 2022, tables have turned, and some government bonds are paying more in interest in a year that what corporate bonds are going to pay in multiple years.

When we say Govt bonds, we mean Treasury securities. These treasury securities can be bought via your treasury Direct account. They can also be bought via your brokerage accounts in secondary market or in primary market (i.e new issues) via participating in auction held by Treasury department. Treasury securities consist of Treasury Bills, Treasury notes, Treasury bonds, TIPS (Treasury Inflation protected securities) and Savings Bonds. Below is the link with more details:

Treasury Direct (TD): https://www.treasurydirect.gov/indiv/research/indepth/indepth.htm

Treasury Securities are classified in these 3 categories depending on how long they take to mature. We use these 3 terms interchangeably on this website, so be mindful of that.

• T-Bills: Known as Treasury bills, they refer to Treasury securities having shortest maturity term. They mature in anywhere from 1 month to 1 year. Terms are 4, 8, 13, 26 and 52 weeks. They don't pay interest, but instead sell at a discount to par value. So, their coupon yield is 0% (0.0% rate is what is listed on the Bill), but you buy a $100 bill for may be $99. Then on maturity you get full $100, implying $1 income, which you can think of as interest.
• T-notes: Known as Treasury notes, they refer to Treasury securities having medium maturity term. They mature in anywhere from 2 years to 10 years. Terms are 2, 3, 5, 7 and 10 years.We buy them at par value, and redeem them at par value (unlike T-Bills). They have a interest rate or coupon rate written on the issue. Based on that rate, interest payments are made every 6 months. 
• T-Bonds: Known as Treasury Bonds, they refer to Treasury securities having longest maturity term. They mature in 20 years or 30 years. They are just like T-notes, where interest payments are made every 6 months. T-Bonds usually have higher interest rates than T-notes since you tie up your money for a longer term.

All of these 3 kinds of Treasury securities as well as TIPS have been useless for the past 15 years (i.e 2008-2022) as they have given close to 0% returns. As of Sept 2022, these Treasury securities have suddenly become very popular because of 4%+ interest rates on maturity < 1 yr. Here's few such offerings:

• 05/12/2023 (1 yr treasury > 5%) => https://slickdeals.net/f/16642112-u-s-treasury-short-term-treasury-bills-4-week-52-week-maturity-up-to-5-50-interest
• 09/25/2022 (1 yr treasury > 4%) => https://slickdeals.net/f/16060201-one-year-treasury-constant-maturity-t-bill-4-14

Savings Bonds:

Apart from T-bonds mentioned above, there are another kind of Bonds known as Savings bond. Savings bonds have suddenly become even more popular in this low interest rate environment, as inflation has picked up (Savings bonds rates are tied to inflation). Here are the 3 saving bonds that are sold by the treasury: EE Savings bonds, I Savings bond and H Savings bond (H savings bond have been discontinued). These are the tidbits about savings bond to keep in mind:

• All savings bonds are issued for a maximum of 30 years and earn interest for 30 years unless you cash them out before maturity. You can cash them out after 1 year (Before 1 year, you can't cash them out, no matter what). But if you cash them before 5 years, you lose the last 3 months' interest. (For example, if you cash an EE bond after 18 months, you get the first 15 months of interest.). If you cash them out after 5 years, you pay no penalty.
• One other caveat with savings bonds is that only $10,000 each calendar year for each Social Security Number (including kids, no age limit) is allowed for each type of savings bond. There are some exceptions, which we'll look at later (i.e Buying $10K more per account holder as gift for someone else). So, it's scattered money that you will have to keep tab of, else your family may never see this money once you are gone from this world. For a family of 4 with 2 adults and 2 kids, you could buy a maximum of $40K of savings bonds every year. You could also buy extra $40K as gifts that you can gift to each other (money doesn't need to be gifted to outsider).
• Other problem is that the the bank account that you use to transact on TD website is not easy to change (once you register that bank account). So, you can't close that bank account ever. If for some reason, the bank is gone, then it's a hassle to setup a new bank, as there's no way to verify your identity (as everything is handled online). I've read comments that TD is making it easier to change yourbank accounts, so hopefully this issue will be resolved.
• You save state income taxes on these, but NOT federal income taxes. Since state taxes are usually low to start with, there's not too much in tax savings here.

These are the 2 kinds of savings bonds:

1. EE Savings bonds: EE bonds earns the same rate of interest (a fixed rate) for up to 30 years. When you buy the bond, you know what rate it will earn for at least the first 20 years. Treasury announces the rate for  new bonds each May 1 and November 1. For the last 15 years (from 2008-2022), rates have been close to 0%. Regardless of the rate, at 20 years the bond will be worth twice what you pay for it. If you keep the bond that long, Treasury will make a one-time adjustment then to fulfill this guarantee. What this implies is that you will get at least 3.6% APR for the 1st 20 years. If you hold EE bonds for < 20 years, you get nothing, as interest rates are 0.1%. EE Bonds may be an alternative to 20 year CD. EE bonds are not recommended as the holding period is for ever, and you can get > 3.6% return in stock market in 20 years. Here are the interest rates on EE bonds (click on link on this webpage that shows rates since 2005):

https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms.htm

2. I Savings Bonds: I bonds earns interest based on combining a fixed rate and an inflation rate. Fixed rate stays the same for the life of the bond but the inflation rate is set twice a year, and applied to all the I Bonds. For the last 15 years (from 2008-2022), fixed rate of these bonds have been close to 0%. However, the inflation rate has shot up starting 2021, and averaged about 5%-8% from 2021-2022. This has made I bonds very attractive, as you can close the I bonds after a year, lose 3 months of interest and still get more money in interest than what any bank will ever pay you. Historical rates are provided for I savings bond on TD link above. As you can see that since 2008, fixed rate has been 0 (or very close to 0), and variable rate (i.e inflation rate) has been  1%-2% per year. Even though fixed rate can't go below 0, variable rate can go -ve, implying your return may even go -ve. Historical rates on I bonds are provided on link below (scroll to the rates section below): 

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

As can be seen, since 2003, fixed rates on I-bonds have been < 1% for 6 months (mostly 0%). Variable rates has mostly been under 2% for 6 months (4% yearly rate when considered for a year). So, annualized rates on these I bonds have mostly been < 5% annualized. The last time it was 5% was in 2008, and then from 2009-2020, it has mostly been < 2%. What we are seeing from 2021 onwards is an anamoly, so make your long term investment plans based on this. I Savings bonds are short term investment to be kept for a couple of years at most.

UPDATE Nov 2022: Fixed rates on I bonds issued starting from Nov 1, 2022 has gone to 0.4%. That means all bonds issued since Nov 1, 2022 will now have a fixed rate of 0.4% instead of 0%. This applies to only bonds issued after Nov 1, 2022 and will remain tied to the I-Bond for the life of the I-Bond. TD may decide to lower this rate any time, but that will affect only new issues from that point on, and NOT existing I-Bonds that had already been issued. This is a nice bump.

There's an article explaining this here: https://www.doctorofcredit.com/treasury-direct-adds-40-fixed-rate-to-i-bonds-on-top-of-6-48/

Here's few links to the deal for I bonds:

• Originally Posted in Apr 2021: https://www.doctorofcredit.com/us-treasury-bonds-rate-set-to-increase-to-7-12-rate-i-bonds/
• Here's another on slickdeals: https://slickdeals.net/f/15758386-us-treasury-series-i-savings-bonds-inflation-rate-earnings-may-october-22-9-62-interest-annualized-for-6-months-limit-10k-year-per-person?src=frontpage

Conclusion: None of these savings bonds are for long term investment. EE bonds are useless, and I bonds can be kept for anywhere between 1-5 years depending on the inflation rate. Only if you get > 5% annualized rates on these is when you should get into the I bonds. As soon as the rates go below < 2% annualized, get out of these. You should think of it as a short term CD (1 yr to 5 yr term deposit CD) and nothing more. Pay the small penalty when you cash out in < 5 years, and you may still come ahead. When people say savings bonds, they usually mean I Savings bond (and NOT EE savings bonds)

2. Corporate Bonds:

Just like government bonds, we can buy corporate bonds. These are bonds issued by private companies. Since the risk of default is higher in these, they pay you a higher interest rate than similar maturity Government bonds. So to reduce the risk of default, instead of buying bond from one company, we can spread our money and buy bonds from several different companies. This diversification works well, similar to how we diversify in stocks. Just like we have stocks ETF and mutual fund, we have equivalent Bond ETF and Bond Mutual Funds (MF). So, we don't have to go and buy bonds from 100 different companies, ETF and MF do that for us.

Bond ETF or bond mutual fund pools in bonds from multiple companies to reduce risk of default. These bond fund may invest in any kind of debt security. Even though we say corporate bond, these bonds may invest in corporate debt, municipal debt, government debt or foreign debt. There are mixed bonds which invest in both corporate bonds and Treasury bonds, while there are Treasury bonds which invest exclusively in treasuries and Corporate bonds which invest exclusively in Treasuries. There are bond ETF/MF which invest in long term debt (i.e bonds maturing in 10 years or more), while there are bond ETF/MF which invest only in short term debt (i.e bonds maturing in a couple of months). All these Bond funds offer different yield depending on mix of bonds and their maturity duration. Safest to buy bonds which invest in very short term debt, as fluctuation in price of Bond is very low (though yield is also low to start with). Anyway, we are just trying to get something better than cash here.

We'll not discuss Bond Mutual Fund (MF), as Bond MF have same drawbacks as Stock mutual fund (i.e MF almost always have higher expense ratio compared to ETF and can only be bought/sold at the end of the day). ETF are always desirable over MF. Below we'll discuss 3 kind of Bond ETF: Long Term ETF, Short term ETF and Ultra short term ETF.

Long term Bond ETF:

These are bonds which hold their securities any where from 5 years to 30 years. Below are few most popular long term bond ETF. All these ETF are mixed bond ETF meaning they invest in Corporate as well as Government debt.

1. iShares Core US Aggregate Bond ETF (AGG):

This ETF offers broad-based exposure to investment grade U.S. bonds. It's number 1 bond ETF and very liquid and has AUM of around $80B as of Dec, 2021. It's expense ratio is only 0.04%. It offers a dividend yield of 2% as of Dec 2021.

2. Vanguard Total Bond Market ETF (BND):

This popular ETF offers exposure to entire investment grade bond market in a single ticker, with holdings in T-Bills, corporates, MBS, and agency bonds. While it holds securities of all maturity lengths, it is heavily weighted towards the short end of the curve. It's number 2 bond ETF and very liquid and has same AUM as those of AGG. It's expense ratio is same as AGG at 0.04%. It offers a slightly higher dividend yield of > 2% as of Dec 2021.

3. BNY Mellon Core Bond ETF (BKAG):

This ETF was introduced recently in 2020, and tries to mimick AGG. Best part is that it has 0 expense ratio, which in unheard of in Bond ETF world. However, it's spread is higher at 3 cents, since it has AUM of only $200M. It's dividend is also lower (at 1.3% as of Dec 2021) than those of AGG and BND, not sure why?

Personally, I would just go with either Vanguard ETF (BND) or BKAG for long term. However, as stated earlier, long term Bond ETF are just not worth investing.

UPDATE Apr 30, 2022: As of today, corporate bonds (i.e Bond ETF AGG) have lost about 15% of the value from their peak. They were yielding about 1.5% at their peak, meaning people who bought bonds a year back, are getting 0% interest on their bonds (This is due to the fact that $15 that they are going to collect in interest over next 10 years, is negated by $15 that the value of bond itself has come down by). So, when you cash out these bonds in less than 10 years, you get much less than what you paid ($85 in principal + $1-$10 in interest), implying -ve return. Of course, if you hold it for 10 years or more, bond prices would recover and you will be made whole. Anyone who bought these long term Bond ETF in the last 10 years has lost money compared to cash. So, only time to buy these long term bond ETF is when they yield > 3%. Anything below that is too risky.

Short term Bond ETF:

These are bond ETF which hold their securities from a year to < 5 years. Although, the risk of losing money due to loss in bond price is still high here, though not as high as Long term Bond ETF. I wouldn't consider these ETF at all, as they don't give any advantage over stocks, and are more nuisance. I've listed 1 example each of Corporate Bond ETF as well as Govt Bond ETF, just for completeness.

1. Vanguard Short-Term Treasury ETF (VGSH):  This invests in 1-3 yr Treasury bonds. Expense ratio=0.04%. Yield was pretty low as of start of 2022, but have started moving up as FED rates have gone up.

2. Vanguard Short-Term Corporate Bond ETF (VCSH): This invests in short term corporate bonds. Expense ratio=0.04%. Yield is higher than similar Treasury bonds.

Ultra Short term Bond ETF:

Below are few largest and popular ultra short term bond ETF. These are bonds which hold their securities for less than a year. So, the risk of losing money due to loss in bond price is very low, especially if you hold it closer to the maturity term of their holdings (which is less than a year). Only downside here is that short term interest rates have been close to 0 for last 10 years (from 2010 to 2020), so these ETF have given close to 0% return. However, when short term interest rates are > 1%, it's advisable to park your brokerage cash into these ultra short term ETF. They give you better yield than what bank accounts give you.

There are 31 such ETF listed below. Some of them are exclusively invested in US treasuries (most safe), while few are invested in corporate bonds too.

https://www.etf.com/channels/ultra-short-term-etfs

I've listed 1 example each of Govt Bond ETF as well as Corporate Bond ETF.with very low expense ratio:

1. iShares 0-3 Month Treasury Bond ETF (SGOV):

This primarily invests in 0-3 month Treasury bills. So, it's return is lower as Treasury bills have lowest interest rate at any given time. It's NAV is around $100. It's expense ratio is lowest at 0.05%. It pays out dividend every month around 1st of the month.

Here's SGOV details directly from ishares website: https://www.ishares.com/us/products/314116/ishares-0-3-month-treasury-bond-etf

If you click on detailed holdings, it brings up an excel sheet. That shows only 12 holdings, 25% of which is in money market, remaining in 1-3 month treasury (as of Aug 2022, Treasuries are maturing in Aug, Sept and Oct 2022). T-Bills show 0.0% coupon rate as expected (see discussion above).

Dividend schedule for this is shown on far left of the page under "distributions" (click on "view full table"). You'll notice that dividend has been 0.5 cents every month that the Fed had interest rates tied to 0%. So this fund was able to get you 0.05% yield every year on avg, which is as close to absolute 0 as it can get.

Below is the table of what T-bills were yielding each month of 2022, and what was the yield that SGOV gave for that month. SGOV yield for a given month was close to the avg of 1 month T-bill for current month, 2 month T-bill yield for previous month, and 3 month T-Bill yield for 2 months back. This is as expected, since most 2 and 3 month T-Bills are from prior months and have older rates. Also, since 25% of the fund money is in lower yielding money market, yield goes even lower for SGOV. However NAV of SGOV has held pretty well, since the fund continuously rolls into newer T-Bills, as old ones keep on maturing. We should expect to see SGOV yielding close to 3% by end of 2022.

SGOV Yield for 2022:

For year 2022, Total dividend paid was ~$1.45 which amounted to 1.5% dividend yield. The last dividend was paid on 15th Dec, 2022, so 15 days of interest will be paid in 2023. Avg Treasury yield was about 1.7% for 2 month T-bills, so SGOV came close to what we would have gotten by buying T-Bills directly.

For 2023, Total dividend paid for 6 months (until June 2023) is $2.27 for first 6 months (avg Treasury yield was 4.8% for 2 month T-Bill for 1st 6 months), and $2.61 for last 6 months (avg Treasury yield was 5.5% for 2 month T-Bill for last 6 months). We get extra 15 days of interest from 2022 in Feb, 2023, but also lost 15 days of interest for Dec 2023. Assuming they cancel out, total interest payment was $4.88. Based on 2 month T-Bill, we should have gotten $2.4 for 1st 6 months, and $2.75 for last 6 months, but SGOV underpaid during both of these periods. So, SGOV holds up well with T-Bill interest rates, though coming in lower at 4.9% instead of 5.1% interest rate. We may lose a little in principal (avg 0.2% or 20 cents depending on interest rate direction. SGOV has varied from $100 to $100.20 just after paying the dividend, so assuming it goes back to $100, you will lose 20 cents). So, better to go with SGOV as you end up getting close to T-Bill rates, instead of going with Money Market Mutual Fund (explained below).

2. BlackRock Ultra Short-Term Bond ETF (ICSH):

This primarily invests in broad market investment grade corporate bonds. It's NAV is around $50. Expense ratio is low at 0.08%. It's 5 year return has been 1.5%. It pays out dividend every month. Short term treasury are yielding around 2% as of June 2022, but ICSH paid only 5 cents in dividend for June 2022, implying a yield of 1.2%. Since, ICSH invests in Corporate bonds, we expect to see higher yields than treasury bonds. So, ICSH yield is lot lower than similar term treasury yield. We'll need to watch dividend payout for July, Aug and Sept 2022. Dividend should be at least 10 cents for each of these months with NAV at $50, that will imply we are getting around 2.5% dividend as expected.

Here's ICSH details directly from ishares website: https://www.ishares.com/us/products/258806/ishares-liquidity-income-etf

If you click on detailed holdings, it brings up an excel sheet. That shows about 450 holdings (the webpage lists only 234 holdings though). 60% of the holdings have maturity < 3 months (30% of the holdings with maturity < 7 days), but 15% of the holdings have maturity > 1 yr. Weighted avg maturity is still high at 8 months. That puts the principal at risk, and this is why we see the price of this fund went from $50.50 in Oct 2021 to about $50 in Apr 2022, implying a loss of 1% loss in bond price. That wouldn't have happened if all the holdings had maturity of < 6 months (as with SGOV). Maturity wise, ICSH holdings are kind of messed up, as they load on real short maturity and also load up on real long maturity. That means you get the disadvantage of lowest interest rate (for real short maturity holdings), along with the principal risk of these very long maturity holdings. So, it's guaranteed to lose money either in interest loss or in principal loss.

Dividend schedule for this is shown on far left of the page under "distributions" (click on "view full table"). You'll notice that dividend has been 1-2 cents every month that the Fed had interest rates tied to 0%. So this fund was still able to get you 0.5% yield every year on avg, which is good considering the fact that SGOV was yielding absolute 0.

Conclusion: Comparing all these ETF, only ultra short term ETF (with avg maturity < 12 months) make sense. Among the 2 of such ETF listed above, SGOV has lower expense ratio and lower maturity than ICSH. SGOV guarantees almost no principal loss due to bond price fluctuation. We do get a lower yield with SGOV than with ICSH, but it's lot better than what banks and CD pay you when short term interest rates are > 1%.  Also, we are able to get out of SGOV at any time, while ICSH may involve some loss if we try to get out in < 1 year. Also, ICSH is corporate bond, so it should be at least 1% more in interest rate than SGOV, but we don't see that. Considering all of this, SGOV is a preferred investment over ICSH when Fed fund rates > 1%. Below that rate, putting most of the money in high yielding kasasa bank accounts makes sense. I would just stay away from ICSH (not worth investing).

B. Money Market fund (MMF):

Apart from bonds, we also have money funds, which is like a short term loan to a company. These money funds never lose money (principle is safe) in practice, though theoretically they could lose money. These money market funds have a NAV or price of $1. You are essentially guaranteed that price will always remain a dollar (i.e you will never lose money). However, the dividend that you get in these will be close to 0 (when Fed funds rate are 0%), as their interest rates are tied to short term (1 month - 6 month) treasury rates. Also expense ratio is high, which almost eats into all the dividend. So, you will never make any money when Fed fund rates are < 1%. You are better off putting that money as cash in some other bank account (Tmobile account that earns you 1% with no limits, see in "bank account" section), and then transfer the money to brokerage account, only when you need it. However, when short term interest rates are high (i.e > 2%), then it makes sense to put money in these money market funds. They can be bought at any brokerage forms.

I'm listing below couple of money market funds for completeness. These are the funds issued by various brokerage firms. Different brokerage firms have their own money market funds, and you can only buy them at their own brokerage firm commission free. To buy at other brokerage firms, you have to pay an extra fee. For ex, if you try to buy a schwab MMF at Vanguard, then Schwab may charge you $50-$100 for buying it. So, first try to find out which MMF are offered by your brokerage, which of them give the highest interest rate and if the interest rate is close to what you get in Bond or CD, then you may consider these.

1. Prime money funds: schwab value advantage - investor shares (SWVXX) = Offered at Schwab only. expense ratio=0.34%, 10 year yearly return=0.5% (for 2021, yearly return is 0.03%)
2. Prime money funds: schwab advantage - ultra shares (SNAXX) = Offered at Schwab only. expense ratio=0.19% 10 yr yearly return=0.6% (for 2021, yearly return is 0.03%). However, minimum investment of $1M required.
3. Vanguard Federal Money Market Fund (VMFXX) = expense ratio=0.11%, 10 yr return is low. Avg maturity period of holdings is 2 months, so you get yield similar to 3 month Treasury bills.

Conclusion:

You can see that 10 year return for these money market funds can't even get to 1% from 2011 to 2021, when short term interest rates were close to 0. So, MMF are useless most of the times (as federal fund rates would remain close to 0 most of the times). I would recommend buying Ultra short term ETF over these Money Market funds, as those ETF have lower expense and higher yield. There's no additional advantage that these money funds offer over similar bond ETF. The only guarantee that MMF offer is their NAV value which remains tied to $1 and never fluctuates. But for this guarantee, they take a lot of money from you by giving you much lower interest rate. MMF are advertised heavily by Brokerage firms, as it's cash cow for them (with such high expense ratio). I would just buy Bond ETF (Such as SGOV), and stay away from MMF.

C. Brokered Certificate of Deposit (CD):

We now come to the most interesting part of fixed income investing. Apart from bonds and MMF, you can also buy CD at your brokerage firms. These generally give you rates competitive to Bonds and MMF. These CDs are not issued by the brokerage firm, but instead other banks, credit unions, companies, etc put their CDs on sale at these brokerage firms. These CDs are protected by same FDIC or similar insurance that is offered on CDs sold by banks/CU. These are called Brokered CDs as the brokerage firm is just acting as a middle man to connect you to a a seller selling these CDs. These CD generally have higher interest rates than what Banks give you for similar term CD on their own website.

It's also very easy to buy or sell CDs on a click of button (similar to buying/selling of stocks). Also, no worries of CD going beyond your maturity date, as money will automatically be moved in your brokerage account, once CD matures (unless you have it set on auto renewal). There is no paperwork to fill either. Other advantage is that all your money is one place and no headache to keep records of your CDs at other banks. Brokered CDs are offered in terms ranging from 1 month to 30 years, and there are thousands of CDs competing for your money. All of these CDs are the ones issued by banks/CU, but they are sold here, since brokerage firms give these CDs a much bigger market than they can otherwise access. Brokerage firms themselves don't make much, if any at all, money on these CDs (they do make tons of money on their MMF though).

Broker CDs not only give you higher interest rate, but they also allow you to cash it out prematurely (provided CD has the option of being sellable in secondary market). You can buy/sell CD on the broker's website anytime you want, provided the trading market is open. You may lose some money in the process as the CD price in the secondary market may be higher or lower than you paid for it. Depends on the interest rate at that time. But the amount of money you may lose is very small compared to what you may lose in a bank.

One of the downsides of Brokered CDs is that CD don't get opened immediately. You lose at least 1-2 weeks of interest, before the trade settles and interest starts accruing on CD. So, on a 1 year CD, you lose about 5% of interest amount. Due to this, it's wise to open brokered CDs for > 6 months only.

I've used Schwab and Ameritrade brokerage accounts for buying CD and Bonds, and I'm just impressed with the ease and the much higher interest that you get on those CD. As of September 2022, a lot of Brokered CD are offering rates > 4% for 1 year CD. Even 1 month CD are offering over 3% rates (As of Jan 2023, 1 month CD have rates > 4%. As of Aug 2023, 1 month CD have rates > 5%). You can never get anywhere close to these rates with a regular Bank/CU CD. For best CD rates, head to section on "Best CD accounts".

Buying Bonds / CD / MMF at Brokerage Firms:

As stated earlier,  all of these Bonds, MMF and CD can be bought via your brokerage account by click of  button. They can also be sold very easily too. There are no fees charged by the brokerage firms, and you don't need to call or talk to anyone over the phone or send any paperwork. It's similar to buying/selling of stocks. There's usually a link to "Bonds, CD or other similar securities" on your brokerage website. That will show various kinds of Bonds, MMF, CD available for purchase. Just call and ask your brokerage firm and they will gladly guide you thru the process.

We'll talk in short about how to buy these:

1. Bonds: Bonds are of 2 types. Govt bonds and corporate bond.
   1. Govt Bonds: These may be bought directly online at treasurydirect website, but it's always better to buy it via your Brokerage firm (not the savings bonds, just T-bills, T-notes and T-bonds. (Savings bonds can only be bought at TD website). By buying it via Brokerage firm, you retain the ability to sell them at any point whereas positions purchased in a treasurydirect account can only be held to maturity or transferred to a brokerage firm. You can purchase all treasuries thru brokerage firms such as Schwab, Fidelity, etrade etc. These treasuries may be bought in primary market as well as in secondary market.
      1. Primary market: Here we are buying bonds directly from the treasury by participating in the auction. Most brokerage firms allow you to participate in the auction, and buy treasuries this way. They may charge a commission though for providing this privilege.
         1. This is a link that shows how to buy Bill/notes/bonds offered by Treasury during the auction directly from various Brokerage. The author says that it saves you money on buy and sell as secondary markets will always have some spread. But then you are tied to the treasury until it matures. You may not sell it in secondary market (see next section)
            
            1. Link: https://thefinancebuff.com/treasury-bills-cd-money-market.html
      2. Secondary market: Here we are buying/selling treasuries from other people which were ultimately bought in the primary market. Here market participants decide the price of bonds, and they are very close to fair price based on interest rate in effect at that time. Most of the brokerage firms don't charge any fees or commission for buying/selling in secondary market. So, I would just buy/sell in secondary market as there's no difference in the return. The small disadvantage of buying/selling in secondary market is the spread that you have to pay. It's usually a cent or two for each way transaction.
   2. Corporate Bonds: You may purchase corporate bonds too similar to Govt bonds. They may be bought/sold in Primary market or secondary market. There are no fees whatsoever to purchase these thru your brokerage firm. And you can purchase treasuries in the secondary market (those that were previously sold in an auction) as well as brokered bank CD's which have finally caught up to treasury rates @ intermediate maturities. And  Added advantage is that all your money is at one place.
   3. ETF bonds (Government bonds / Corporate bonds): ETF bonds allow us to diversify amongst different kinds of bonds, so ETF bonds are preferred. They can be bought/sold just like stocks. ETF are of all kinds of bonds (govt bond, corporate bonds, municipal bonds, etc)
2. MMF: MMF can be bought/sold just like stocks. However, MMF are speciifc to a brokerage firm, and if you try to buy/sell MMF of a different brokerage, you have to pay commission. So, not worth buying MMF.
3. Brokered CD: CD can also be bought/sold just like bonds. CD can be primary CD or Secondary CD.
   1. Primary market: Just like bonds being sold in primary market, CD also get bought by directly buying it from the issuer of the CD. Usually CD issuers are banks, Credit Union and private companies.
   2. Secondary market: Similar to bonds, CDs may be bought/sold in secondary market. Look at the details of the CD which shows the original price, current price, current yield to maturity, etc. To keep it simple, I just buy it from Primary market.

Conclusion:

Now knowing all about Bonds, MMF and CD, it's time to decide which one is best. We already know the answer to this. When Fed fund rates are close to 0, all these will give you 0% interest, so at such times, keep your money in Kasasa Bank accounts or a Tmobile bank account (see in Bank section). When Fed fund rates are > 1%, keep your money in SGOV ETF. You may also keep your money in short term brokered CDs, as these will most likely give you interest rates little higher than what SGOV might be offering you. Remember, that investing in Bonds, MMF and CDs is just short term. For long term, you put your money in the stock market Ponzi scheme !!