Corporate vs Government bonds in current environment

[disneysteve]

I was browsing the bond ETFs at Vanguard and noticed that their Total Corporate Bond ETF (VTC) has a 2.94% yield while the Total Bond Market ETF (BND) is yielding 1.31%. There are obviously some differences as BND is primarily government issues and VTC has a slightly longer average duration (8.5 vs 6.6 years).

What are the main differences from a risk perspective? I realize that corporations are more likely to default than government agencies. Is that really the main thing? VTC holds over 6,600 bonds so I'd think any defaults would have very little impact on the overall portfolio.

If you're looking for income, why wouldn't you choose the higher return?

[bjl584]

Are there different tax implications to govt versus corporate?
That would align the yields a little more closely

[disneysteve]

Are there different tax implications to govt versus corporate?
That would align the yields a little more closely

Good question. Does anyone know the answer to that?

[kork13]

Good question. Does anyone know the answer to that?

In short, federal bonds are typically exempt from state and local taxes. State & local bonds are often (not always) exempt from federal, state, and local taxes.

Corporate bonds are almost always taxed as same other investment -- LTCG, STCG, and interest each treated as we're used to.

[TexasHusker]

Typically, the only tax free bonds are of the municipal sort. The interest paid by U.S. Treasury bonds is exempt from income taxation at the state and local level, but is fully taxable on your federal income tax return.

Bond yields directly correlate to the projected risk of default. The higher the bond rating, the higher the safety, and the lower the yield. There are many higher-risk bonds out there that are yielding 7-8 percent pretty easily. US treasuries are considered the safest debt on the planet, which translates into very low yields.

[LivingAlmostLarge]

Typically, the only tax free bonds are of the municipal sort. The interest paid by U.S. Treasury bonds is exempt from income taxation at the state and local level, but is fully taxable on your federal income tax return.

Bond yields directly correlate to the projected risk of default. The higher the bond rating, the higher the safety, and the lower the yield. There are many higher-risk bonds out there that are yielding 7-8 percent pretty easily. US treasuries are considered the safest debt on the planet, which translates into very low yields.

Something not talked about is private lending. That is also pretty good returns.

[TexasHusker]

Something not talked about is private lending. That is also pretty good returns.

Yes, that is in the realm of junk bonds, which are the highest risk. Good returns, although you need to count on some defaults.

[disneysteve]

Something not talked about is private lending. That is also pretty good returns.

Another vehicle mentioned frequently on the ER board is a multiyear guaranteed annuity. I haven't taken the time to learn much about them but they seem pretty popular among that crew.

[TexasHusker]

Another vehicle mentioned frequently on the ER board is a multiyear guaranteed annuity. I haven't taken the time to learn much about them but they seem pretty popular among that crew.

Annuities are popular because many work 30 years to save a nest egg and then have no idea how to translate that amount into retirement income.

Yoi essentially gift your nest egg to a third party and, in return, they pay you a specific amount of money for a defined period of time. But you don’t own the nest egg any more - it’s theirs. If you die a month after you start receiving income, your heirs don’t get the nest egg back.

The annuitant is also relying on the integrity and worthiness of the party taking your nest egg. These companies can and do go bankrupt, and your annuity is not protected by FDIC or similar.

I don’t always agree with Dave Ramsey, but he once said this about annuities: “Annuities are wrong for 95 percent of investors, but 95 percent of financial advisors recommend annuities.” Reason? Huge commissions.

[disneysteve]

Yoi essentially gift your nest egg to a third party and, in return, they pay you a specific amount of money for a defined period of time. But you don’t own the nest egg any more - it’s theirs. If you die a month after you start receiving income, your heirs don’t get the nest egg back..

Apparently this isn't how these MYGAs work. You purchase the annuity that has a set term. At the end of that term, you can take your money back in a lump sum or reinvest in another annuity. There is a surrender fee for cashing out before the end of the term which typically decreases each year. Retirees use these as replacements for CDs since they pay better rates. They build a MYGA ladder to deal with changing interest rates, just as they would with CDs. And most offer a death benefit for your heirs with no surrender fee, so the money isn't lost when you die.

[QuarterMillionMan]

This is the closest thread I could locate to match my next possible investment in corporate (A) bonds. Any of these except Alibaba would work for me under 1-year YTM.

[james.hendrickson]

Um...why corporates QMM? You'll lose money with current inflation rates.

[QuarterMillionMan]

It seems like inflation has peaked and might be cooling. Hard to say though.

[disneysteve]

Um...why corporates QMM? You'll lose money with current inflation rates.

James, nobody owns bonds with the intent of beating inflation. That's not what they're for. Stocks are for growth and outpacing inflation. Bonds are for income and balancing the risk from stocks. Considering that just a few months ago, our best cash accounts were paying 0.5% and we can now get over more than 3 times that and short term bonds (up to 2 years) are paying over 3%, that's not a bad deal at all. And some of those options are even tax-advantaged, like T bills which are state tax-free or munis which are Federal tax-free and could also be state tax-free if issued by your home state.

[disneysteve]

This is the closest thread I could locate to match my next possible investment in corporate (A) bonds.

I dipped my toes into corporates a while back but I really don't feel that I understand them well enough to assess risk. Same with munis for that matter though at least I feel a little safer with those. That's why I landed on Treasuries as my investment of choice lately. I know the government isn't going to default (or if they do we've got bigger problems). I feel like with corporates and munis, you really need to build a diverse portfolio to spread the risk around.