Bond Alternatives to "Sitting on Cash"

I am curious to other TIPers what is a safe place to have capital with near liquid constraints. A 6month T bill of 1% is nothing to get excited over.

I found today some debt that looks interesting. For some safer corporate debt, Disney bonds $7.3 coupon, trading above par at $125 giving 6% YTM. A rated credit.
Ford had some available too, $9.9 coupon trading at $159 giving YTM around 6%, they are BBB rated.

There is some ToysRus debt thats due 2018, 3 coupons remaining/15months, below par at $92 giving a YTM of 14%. They are CCC rated, but after looking at their balance sheet (easy search it appears they will have ample liquidity to survive the end of 2018.

I like corporate bonds at this point in time to put capital to work. Ideally you can find bonds coming due that are low risk that provide some return. If a market correction comes along short maturity bonds are great. You can also trade out of the bond you are holding, bonds usually don't trade nearly as volatile as stocks. Also if a bankruptcy were to occur you are much much better off as the bondholder than the shareholder.

You will not knock it out of the park with bonds with bookoo returns.....although lately with market at 30x you wont be knocking many stocks out of the park either.

TIPers I am open minded to any other cash alternatives, welcome any thoughts.


  • Determing the default chance of a bond is not so easy - there are senior bonds, junior bonds...
    Basically senior bond holdholders are paid before junior ones - so in case of financial distresss, junior bonds are riskier.
    It is therefore not sufficient to just look at the balance sheet - but I am also not an expert on this issue.
    Then there are convertible bonds (the can be automatically changed to stock in some events), covenant lite-bonds (quite risky, since they do not include traditional protection in case of a default) and so on.

    For me, buying bonds is just not worth the risk at the moment I would have to do a lot of homework - and I am not sure, if the reward is sufficient. So I just stick to zero-yielding cash. No, not exciting at all.

    If you go into bonds, then make sure to fully understand what you are buying. Only buy very short-term bonds (the longer the maturitiy, the more you will get crushed if interest rates go up).

    All in all, I would be very careful. Much downside, very limited upside.


  • edited July 2017
    Interesting, thanks christoph. Agree with understanding capital structure, there is certainly a hierarchy to any equity in a bankruptcy event. I was thinking of identifying companies with ample liquidity or equity to cover the bond. Then capital structures of only the single bond coming due on the next years current liabilities.

    I think I see where you are coming from that it is risky trading in and out of a long term bond....just trying to quantify that risk more accurately.

    I am curious your reason for cash. Is it macro driven? Unable to find quality value companies? Liquidity for a flash crash?

    I have been fairly bearish and have been sitting on some cash since end of 2013. I remember thinking once the Dow rolls over 16'000 that’s it, certainly time for a correction. That capital if deployed in short term bonds would be at least 20% more. I have since decided not to time the market at all, but develop a playbook for capital efficiency. I decided to call a spade a spade and place more put options but also putting more cash to work on short term basis. My fear is time spent researching bonds is time that could have been spent identifying a compounder, a quality value company.
  • My reasons for holding cash? I consider the market to be extremely highly valued and do not find any good quality investments. Regarding the chances of a flash crash I do not know - but I am absolutely convinced that the market will crash at least in the order of 50-60% over the completion of the market cycle.
    The only problem with my "holding cash" approach is: I have no idea when the market turns. I would think rather sooner than later - but I also was convinced in 2014 that the market would collapse (because of Greece crashing out of the Euro zone) - and I was wrong in the end. So I stopped making any short-term guesses. The market will turn dramatically at one point - and in the not-to-distant future. If this happens tomorrow or in 2020 - no idea. But it will not be 2025 or later - here I am sure.

    When this crash arrives, cash will be worth gold. We will be making so much money then - so it is just not worth to risk even the slightest amount right now. Risk-reward is simply not good. I am sure, that it will be better in the future. So I wait.


  • edited July 2017
    Some more infos on this question.
    Firstly, you might want to check this really good article:

    I fully agree with the author. Except maybe the final suggestion to buy gold - but this is only my personal bad feeling about gold.

    And then there is a second thing, why a correction might come rather sooner than later (I say "might" because I do not speculate about the near-term. Just not my game. ).
    It is very likely that earnings of the S&P 500 will come down soon. Why?
    Well, we have basically
    earnings = sales * margins

    When we look at the S&P 500, then sales have grown just very little over the last 4 years:
    (and this growth is BEFORE inflation!)

    Since sales are basically flat, earnings can only grow due to larger margins.
    But margins already are exremely elevated:

    Worse, margins are cyclical - so if they are high now, they will be lower in the future.
    And they seem to be connected to the US unemplyment rate: The lower unemployment, the tighter the labour market.
    A tight labour market leads to wage inflation - and compressing margins.

    If sales stay mostly flat and margins decline, earnings will decline.
    If earnings decline, the markets will crash.




  • My apologies, what I meant to ask was, What are reasons for holding cash vs alternatives.....Gold, Puts, short term Bonds (or other ideas). I think I share the same views on why I am bearish the market.....for me that's not in question. I was seeking the best use of capital in the meanwhile.

    I was thinking that if a full blown correction happens as I believe it will, Is it the worst thing to have money tied up in 6 month bonds? I'm skeptical that a recession will come and go in a 6 month time frame and I will not have the opportunity to buy cheap quality companies. If Fed Raises rates, it really only hurts you if you trade out of that bond. I know it sounds foolish tying up capital for a few percentage points. Although 2-3% return can be placed into long term put options.

    I concur its a bubble on margins primarily. Long term low interest rates have allowed valuations to drift into orbit. I would say there are companies that have unrealistic growth as well, I feel those will fall the hardest. I saw this on youtube the other day. If I didn't know better it sounds like a newscast from today.

    Best Regards,
  • The reason for holding cash is two-fold, firstly it has the greatest liquidity. If stock prices fluctuate wildly under extreme market conditions one can secure a very cheap entry point with a limit order in place, if your money is tied up in bonds you may miss this opportunity and the stock may rise in the intervening months. Further we, as Value investors, do not wish to try and pick a bottom in the market as this is speculation but instead buy on a down scale and reduce our average cost price, thus we take an entry point when the stock is below our calculation of intrinsic value and desired MOS and if the price drifts lower we buy more to reduce our average cost price and increase our return on investment. Again this is hard to do if one's capital is tied up in bonds.

    The second reason why cash is preferable is that it carries no counter-party risk. Bonds are after all a debt instrument and as such carry the associated risks, this must be considered.

    Thirdly, as Christoph has quite rightly pointed out, one should avoid long-term non callable bonds as these will perform poorly over the coming years. The Bull market in bonds began back around 1980 when interest rates where at a historic high of approx. 15%, over the last 30 or so years these have performed well as interest rates have drifted lower. One should avoid long-term non callable bonds when rates are at historic lows (i.e. now!). If you are desperate for yield then short-term treasuries are the best of a bad bunch and you could park a portion of your capital in them if you wish, be sure to keep some dry powder on hand though!. Given the low rates on offer and the reasons I have stated above I, like Christoph, would rather sacrifice the yield in favour of increased liquidity.


  • To put it in a nutshell:
    If you also believe that a full-blown correction will arrive soon - then why do you even think about holding anything other than cash? For me this is a no-brainer, really.

  • Cash invested in 6 month bonds for a small yield. That yield placed into put options. Those put options would provide liquidity in the immediate term if a correction were to occur. The remaining capital would be locked in for whatever duration remaining on the 6 month bond (unless you could trade out of the bond without too much of a haircut). There has yet to have a market recession that has come and gone in less than 6 months.....the capital would still have opportunity for a cheapened market.....perhaps not the precise bottom, but that is what the put options are for. There are funds that follow variations of this.

    At this point in the market I am perfectly content sitting on some cash. Like I mentioned before, its more to form a playbook of capital efficiency for the future. Sitting on cash since 2013 was foolish, although buying short term bonds is far from brilliant as well. I am open minded to alternatives.

    From time to time there are exceptions. I think of the saying that "A young investor understands the rules, but an old investor understands the rules and exceptions". When the price of oil collapsed everyone was fixated on an opportunity to invest in oil companies. The correct answer as identified by Buffett was not to time the oil market, but identify who benefits from cheap oil. I had done analysis on every airline company in US and Canada because they were fundamentally cheap, then oil fell adding to their margins. Should have been a no brainer. I sat on the sidelines because Buffett said airlines are a terrible investment, well that and I wanted dry powder for this the young investor and Buffett obviously knew the exception.

    Sitting on cash feels inefficient.
  • edited July 2017
    Hi colby,

    You could take a look at this if you are looking for a yield of some sort;


  • Like others here, I am not putting money into bonds, but where to put it instead?

    My favourite bond-like investment is Doric Nimrod, which leases Airbus A380s to Emirates airlines. It is paying 8.25%. The two primary risks seem to be the value of the planes nose-diving, and Emirates getting into financial problems and being unable to pay to lease the planes.

    Here in the UK, holding cash (GBP) over the last year hasn't been at all good, so gold has its attractions. Actually, silver looks rather more attractive than gold to me.

    Proudcolby likes bonds, but what about hedging bond holdings with a corporate bond short instrument, such as Proshares Trust Short High Yield? For every ten Dollars in bonds, a Dollar or two in Proshares might give some insurance from a fall in value in bonds. I would be interested to hear others' views on that.
  • Careful with short investments - including short ETFs!!!!
    Reason: They are path-dependend.
    Example: Consider an underlying security - eg. a stock index, a bond index or anything else.
    Today this security stands at 100 points. In 1 year it is 110 points.

    So if you buy a (long) ETF on this index today, you will have gained 10% in one year (for simplicity, we ignore fees, tracking error or tax).
    So far so easy.

    But what is your return in 1 year, if you bought a short ETF on this index today?
    Answer: It could be ANYTHING - even zero. And that is because the return does not only depend on the value of the underlying security of today and of the value in 1 year - but also of the values in all times in-between.
    You have to make a good guess about the short-term behaviour of the underlying security!!!

    Be aware of that - or you might get burned.

    I currently own some put warrants on the S&P500. Interestingly, these are not path-dependent.
    The price at a certain time in the future only depends on the value today and at the day when I execute it.


  • Rusty,

    Interesting, is that preferred stock?
    For the record I actually dislike bonds.....Buffett describes them as an asset at 20x that will never trade up in value.
    I just dislike more non-yielding assets over 4+ years, aka cash. Short term no biggie.

    I actually have some short ETF with SJB. Junk debt with a 5% yield is certain to fail in my opinion.

    Christoph is certainly correct with inverse ETFs, it does not trade lock step with the underlying security. There is fundamental decay ( because they are, a blend of longterm options. Then you bid on these options with a market for the demand for this insurance that can trade at a premium or discount. Be sure you understand what you are buying with these. I honestly recommend individual options vs a short least you know the value of the underlying asset with some certainty compared to a credit default swap.

    Guys I think I have come to terms with my mistake.
    I do not think it is a mistake of asset allocation, but a mistake of me too early trying to time the market. Short term bonds are not a great solution. The next time the market is at 17x even 20x that doesn’t mean (to me) to hoard cash....I think it means be careful. If an opportunity like the airlines example is available and the market is 20x, I think I would buy because they were less than 5x earnings and 10x FCF. So what if there are some AMZNs and TSLAs inflating the S& don’t have to own them.

    Best Regards,
  • "There is some ToysRus debt thats due 2018, 3 coupons remaining/15months, below par at $92 giving a YTM of 14%. They are CCC rated, but after looking at their balance sheet (easy search it appears they will have ample liquidity to survive the end of 2018."

    I couldn't have been any more misled!

    "I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn." Charlie Munger

    thanks @christoph @David for your views
Sign In or Register to comment.