Are online savings accounts a better choice than bonds?

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I just clicked on one that "Skooby" posted and the rate appears to be 4.20% - but I'll take your word there are banks with 5.36%.

I have a feeling that isn't so much a teaser rate as much as it will be lowered once the bank figures out they can't make money loaning it out at 8% and buying money at 5.36% - I would think the spread has to be wider.

[sweeps]

I just clicked on one that "Skooby" posted and the rate appears to be 4.20% - but I'll take your word there are banks with 5.36%.

I have a feeling that isn't so much a teaser rate as much as it will be lowered once the bank figures out they can't make money loaning it out at 8% and buying money at 5.36% - I would think the spread has to be wider.

The 1st post in the thread has the list. Those are the regular rates, not promotions. FNBO has a 6% promotion right now, but the regular rate is still an impressive 5.25%.

[disneysteve]

I'll take your word there are banks with 5.36%.

No need to take my word for it.
Bank CD Rates (Certificate of Deposit) & Money Market & Savings Accounts - AmTrustDirect.com

You could also ladder your emergency funds in 6-month CDs that are at 5.46% now.

[humandraydel]

Both money market accounts (or CDs or even short term treasuries) and bonds have essentially the same degree of risk, especially in an environment where the direction of interest rates is unknown. It's called interest rate risk and it's the risk that interest rates will become unfavorable for your chosen investment.

For long term bonds, for example, there is a risk that interest rates will rise over the next 5-10 years and your money is locked away for 10 years at 5%. For short term investments (CDs, money market, t-bills) the risk is that interest rates will fall and you'll have to invest your money at low rates of 3%.

Unfortunately, it's not always clear which way interest rates are headed and when they'll change direction. This is why a bond "ladder" or a bond "barbell" is so strongly suggested. Steve did a great job of explaining the ladder. A barbell has big chunks of money on each "end" of the time scale. So half your money is invested short term and half is invested long term, allowing you to hedge interest rate risk.

So, to answer your ORIGINAL question - which is better? I'd say both. Ideally you should hedge interest rate risk by owning both short term and long term cash/bond investments.

[stilllearning]

...The net asset value of the fund could rise or fall depending on market conditions and the underlying value of the bonds held in the fund...

How is that bonds have a market like stocks? I don't see how bonds or bond funds could go down in price, as they are basically loans with a set interest rate. You don't have part ownership of a company like with stocks. How is it that they go down in price? Thanks again.

[disneysteve]

How is that bonds have a market like stocks?

Let's say that you purchase a $1,000 bond that is paying 5% interest for 5 years. Six months from now, the fed lowers rates so that new bonds coming out are only paying 4.5%. Investors would much rather own your bond and will be willing to pay a premium to get it, so you could sell your bond for something more than $1,000.

On the flipside, let's say the fed raises rates to 5.5%. For some reason, however, you need to get to your money and have to sell the 5% bond. Well, who wants your 5% bond when they could go out and buy a 5.5% bond? An investor will buy your bond, but at a reduced price to compensate him for the lower interest rate it pays, so you sell your bond for something less than $1,000.

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How is that bonds have a market like stocks? I don't see how bonds or bond funds could go down in price, as they are basically loans with a set interest rate. You don't have part ownership of a company like with stocks. How is it that they go down in price? Thanks again.

Like DisneySteve said, there is a bond market that moves on the Fed's interest rate (which he decides what to do with what the economy is doing).

Your mortgage (which is essentially like a bond) is basically traded the same way. Chances are most of our mortgages we all own here at this forum have been bought and sold several times (mine 2x in 3 years).

Mortgage co.'s buy and sell debt as a way of raising capital to re-loan money. Theorectically bond holders could do the same thing.

Also, generally speaking, and I mean generally. . .your bonds become more valuable if the stock market crashes. People get psychologically stunned when the market tumbles or goes bear and want to escape into bonds, so your bond price may go up.

One of the things you'll discover about investing is everything is for sale.

Ironically, last century bonds outperformed stocks 1 out of 3 years. . .this century, it appears to be a new economy and bonds don't seem to hold the same weight as in years past.

A real quick tutorial:

DEBT SECTOR INVESTMENTS:

Bonds
Saving accounts
CD's
Bond mutual funds
Promissory notes

EQUITY SECTOR INVESTMENTS

Stocks
Commodities
Stock mutual funds
Real estate

[savingandinvesting]

Responses to date confirm that this is potentially a very big question, and one that needs to be analysed based on liquidity needs, time horizon etc., not to mention that the bond market is huge with a lot of different bonds with very different characteristics.

Firstly, online savings accounts tend to offer better rates than regular savings accounts because of the cost savings to the provider. If they are from a reputable and stable provider, they are definitely a better idea than a regular (lower interest) savings account. That is a head to head comparison and a question that can be easily answered.

The bond market also typically involves lending money for interest (or a coupon) but there are many issuers (corporations, governments) and different maturities, and comparing something as specific as an online savings account to the bond market needs a lot of qualification.

What I would say is that short term interest rates and longer term interest rates are not that different at the moment, so the incentive to go for longer term lending via for example government bonds, is significantly reduced because the rates at the short end (i.e. bank account included) are almost as high as longer end.