Fixed Income questions

[Lomonossov]

Hello, fellow mustachians!

I am opening this topic because I'm slowly building my investment portfolio for retirement purposes and I'm having a hard time deciding what to do with the fixed income part of it. So far, I've kept most of it in cash directly, or bought a few shares of Vanguard's Global Aggregate Bond ETF (VAGF).

The inflation here in Poland starts to be a worrying issue for my savings, so I decided to reduce the cash reserves to just a few months of expenses and add most of it to the fixed income part of the portfolio.

I was thinking about buying some Polish bonds, since contributing to global bond funds has quite a few issues: the rates are extremely low right now, there is all these interest rate risk for the value of the funds and they are denominated in EUR, and right now the PLN EUR exchange rate is the worst in two decades because of the war.

The offer the Polish government has is as follows, all yearly rates:

Fixed coupon:
3 months: 1%
2 years: 1.5%
3 years: 1.6%

Linked to inflation:
4 years: 1.8% in the first year, later inflation + 1%
6 years: 2.0% in the first year, later inflation + 1.5%
10 years: 2.2% in the first year, later inflation + 1.25%
12 years: 2.5% in the first year, later inflation + 1.75%

In my view, the 2 and 3 years don't make any sense. I plan to keep some cash-like reserves in the 3 months and then invest in the longer ones. The 6 and 12 years' bonds can only be bought by people with kids, and for that I'll be elegible in november, if everything goes well, the 4 and 10 years I can buy right now. Government will buy bonds from you at any time, with 2% discount.

I don't really know how to approach the problem (although I work in finance, lol). I have the feeling that the T10 is the best option right now, and when we have the kid we should start buying the T6 instead, but is mostly based on my gut and some extreme basic simulation of cash-flows done in Excel based mostly on my expert jugdement on how inflation may look like.

Would you have any idea on where to start? I never thought I'd save enough to consider having my own bond portfolio and this community made it possible, so I thought I could ask a little more from it.

Many thanks for your help!

[maizefolk]

What is your motivation to focus on bonds to the exclusion of equities? The bonds you have access to with fixed interest rates above inflation and guaranteed repurchase by the government at close to face value are about the best one could hope for in terms of bond investments for rising inflation environments.

One issue in the USA which may not apply in Poland is that here is that while there are some bonds which pay out a fixed amount of interest + pay out an inflation adjustment, the whole amount, including the inflation adjustment, is taxed as regular income (which can be very high rates). So even though in principle one should be protected from inflation, net of taxes these investments tend to fall behind in high inflation environments.

And hey, congratulations:

The 6 and 12 years' bonds can only be bought by people with kids, and for that I'll be elegible in november, if everything goes well

[Lomonossov]

What is your motivation to focus on bonds to the exclusion of equities? The bonds you have access to with fixed interest rates above inflation and guaranteed repurchase by the government at close to face value are about the best one could hope for in terms of bond investments for rising inflation environments.

One issue in the USA which may not apply in Poland is that here is that while there are some bonds which pay out a fixed amount of interest + pay out an inflation adjustment, the whole amount, including the inflation adjustment, is taxed as regular income (which can be very high rates). So even though in principle one should be protected from inflation, net of taxes these investments tend to fall behind in high inflation environments.

And hey, congratulations:

The 6 and 12 years' bonds can only be bought by people with kids, and for that I'll be elegible in november, if everything goes well

Thanks a lot for your response and for the good whishes!

Bonds represent right now around 5% of my investment portfolio, and I would like to increase that to approximately 20%. The other 80% will be equities in form of equities (broad market index funds).Since I am at the beginning of my investment journey, I should be able to do it in the course of a few months.

In terms of taxes, we have a fixed tax rate for investments here (19%, when the max marginal tax rate is 32%). There is really no way around it, since the tax-advantaged accounts are limited and I have them full of equities anyway. Still way better option than cash, specially in the current circumstances.