bond yields lower than savings account interest - why buy bonds?

[aGracefulStomp]

My current asset allocation is 70 : 30 = stocks : cash. I am trying to figure out if I should put the 30% in bonds.

In Australia, Vanguard's general bond index fund yield-to-maturity is 2.61%. An online savings account interest rate is 3%.

Thus I would take an interest cut of 0.39% if I was to buy bonds.

If interest rates were to go up, I would win with cash. If interest rates were to go down, I would win with bonds. However I don't have a crystal ball and have no idea which way interest rates will go.

I guess buying bonds feels a bit like gambling - I'm making a bet that interest rates will go down & go down enough to cover the loss of the 0.39% return.

So I guess my question is: when savings bank account rates are higher than bond yields, why do you buy bonds?

I've tried to find the answer to this online but I can't find anything that doesn't just state "even though bond yields are low, they are always an important part of a portfolio". Trying to find a more mathematical response.

Further articles often state that cash isn't a good protection against inflation - but wouldn't cash be a better protection if savings rates interest is higher than the bond yield?
 
Thanks for the help! Genuinely trying to figure out why everyone is so convinced bonds are a great idea and wanting to make the right decision for my portfolio.

[mjr]

I'm of the same opinion.  Not touching bonds with a barge pole with interest rates at the bottom of the cycle.  Yields less than term deposits and the prices with nowhere to go but down.

[Notch]

I can't fault your logic.  It does seem to be a strange gamble at these yields.

Mind if I ask where you're getting 3 % interest for a savings account?

[Llewellyn2006]

Mind if I ask where you're getting 3 % interest for a savings account?

I'm interested in this too.

[aGracefulStomp]

Mind if I ask where you're getting 3 % interest for a savings account?

I'm interested in this too.

RAMS is the 3%. There's also ME Bank (2.95%) and ING Bank (2.8%).

[Llewellyn2006]

Mind if I ask where you're getting 3 % interest for a savings account?

I'm interested in this too.

RAMS is the 3%. There's also ME Bank (2.95%) and ING Bank (2.8%).

Thanks for that. The RAMS one looks promising

[alexpkeaton]

Think you've got it right. Assuming banks are insured like they are in the US there's basically zero risk and, in this case, a slightly better return.

My pension plan has a floor on the rate of return of 4%. The company probably invests in stocks and bonds to fund it, but with a fixed return I count it as a bond on my asset allocation. And 4% is way better than I'll get in a bond fund right now, so I'll be cutting my bond holdings as my pension grows.

[Indexer]

Well normally bonds don't yield less than savings accounts. In most cases they earn more so they make sense.


This is an exception to the rule. Thanks for the notes about RAMS. I know where I'll be putting cash for awhile.

Edit: NVM

[MrSpendy]

they're comparing aussie bonds to aussie savings accounts.

In Australia, Vanguard's general bond index fund yield-to-maturity is 2.61%. An online savings account interest rate is 3%.

[Indexer]

they're comparing aussie bonds to aussie savings accounts.

In Australia, Vanguard's general bond index fund yield-to-maturity is 2.61%. An online savings account interest rate is 3%.

Oh... my bad. Sorry about that. I thought an Australian bond index would would have a name implying Australian bonds. When I saw Vanguard general bond index I figured they meant the US bond index. I didn't know they had an Aussie bond fund that didn't have the word Australian in the name.

[never give up]

I know little about bonds but was reading an article today about a fixed income bubble. Bubbles to me signify potential 10% to 30%+ downside risk. Does anyone know what the down side risk of bond funds are? I assumed a bad year was -2% or something but as I say I am only just learning about them for the first time.

If there is down side risk then the only reason I could think of choosing them over cash at the moment would be that it was the only way of lowering the volatility of a tax free account if there were no cash funds on offer I.e. a means of not being 100% stocks.

[Heckler]

Canadian Couch Potato has an excellent seeies of Bond Basics, 1, 2 & 3

http://canadiancouchpotato.com/2017/04/13/bond-basics-1-why-bond-prices-fall-when-rates-rise/

[RedmondStash]

Canadian Couch Potato has an excellent seeies of Bond Basics, 1, 2 & 3

http://canadiancouchpotato.com/2017/04/13/bond-basics-1-why-bond-prices-fall-when-rates-rise/

This is interesting -- but since interest rates are currently at rock-bottom, and bond performance has been anemic over the last couple of years, does this mean bond performance is likely to get worse as interest rates inevitably rise to more normalized levels? I'm already considering ditching my bond funds.

And yeah, I saw the part about how a gradual rise in interest rates can result in gradual increases in bond fund values because newer, more expensive bonds replace older ones over time. But given the argument of the article, I'd expect bonds to be performing like champions right now, with interest rates so low. So I'm kinda confused.

Are bonds just archaic and on their way to obsolescence? Are folks now choosing savings accounts or CDs for money they want stable, predictable returns on?

[Paul der Krake]

Bond prices can go up. Saving accounts can't.

Not saying you should buy bonds, but they're not the same thing.

[aGracefulStomp]

Bond prices can go up. Saving accounts can't.

Not saying you should buy bonds, but they're not the same thing.

Wasn't arguing or suggesting that they are - hence my question for analysis about whether to buy bonds or keep my money in cash.

[Heckler]

I adjusted my planning to buy and hold bond funds forever, or at least longer than thier duration.  They are made for interest income in my plan, as well as a 30% buffer (I'm 44) to equity crashes.

[Heckler]

And interest rates arent at rock bottom.

https://www.marketwatch.com/story/what-you-need-to-know-about-the-bank-of-japan-and-negative-interest-rates-2016-01-29