Can someone explain Bond FUNDS to me?

[LRAO]

Why would someone want a ST Index vs. IT vs. LT vs. Total Bond?

Thanks.

[soupcxan]

For the same reasons that someone would prefer a 1-year, 5-year, or 30-year regular bond. Longer time to maturity means higher yields but more interest rate risk, so NAVs will be more volatile. Some may know the timing of their future obligations so they will match the duration of the bonds to coincide.

I believe the total bond market fund holds a variety of durations (not sure about the mix of credit ratings but you could check on Yahoo finance) as well as different types of bonds, like government, corporate, and mortgage-backed.

[LRAO]

So if I'm looking for something in my tax-deferred accounts/Roth (which I am not going to touch until I am forced to), then I should just compliment my VIPSX (TIPS) with VBLTX (Long Term) instead of Total Bond?

I guess in my case, I don't see the point of ST or even IT bond funds.

[brewer12345]

Historically, intermediate bonds have delivered almost all of the return of LT bonds, but with much less volatility. They would be my choice, especially with long rates so low. The longer term the bond, the more you get killed when rates rise (and the more you gain when rates drop). The latest rally of the 10 year treasury looks like a sucker rally to me. If we get close to 4%, I will be shorting TLT.

[soupcxan]

Brewer,
Have you seen this article from DFA?

http://www.dfaus.com/strategies/fixed/

They seem to think that bonds with less than 2 years to maturity offer the best risk/return. They cite the last twenty years of falling rates as an abberation unlikely to repeat itself. Is there anything to this...is the 4.35 duration of VBMFX too long?

[brewer12345]

I don't agree with much of what the article suggests in terms of when to buy which bonds (eg when the yield curve is inverted, it is often a good time to buy longer bonds), but they make the basic point very well. The modestly higher yield of long bonds don't make up for the much higher volatility.

Personally, I am half considering shorting TLT, but any profit might well get gobbled up by the costs of doing so. Myy long FI exposure is limited to unhedged foreign bonds (GIM) and Pen Fed CDs. I especially like the CDs because you always have the option of early surrender at a small, fixed penalty if rates spike. Pen Fed is now offering 5% on CDs as short as 3 years.

[renferme]

Pen Fed offering 5% apy for 3 and 4 years,
but, that is the APY. If you need to 'exist' off the interest, then the yield is 4.88%.

[fire5soon]

I have a fairly large amount (to me anyway) to plunk down in bonds & do not want it to waste away in a MM. I was planning to add to my Intermediate Muni fund (VWITX) & get pretty close to Admiral shares. My plan is to hold this for many decades to come.

My temptation though is to sell the Intm fund and just put everything in the Ltd Duration fund which is roughly 2yrs in duration. Am I over thinking this/over reacting? The duration of my current fund is only about 4-4.5 yrs. Should I just put the money in the Intm fund and reinvest the increasing dividends as rates rise?

Thanks,
Jay

[brewer12345]

Depends on your risk tolerance. Personally, I wouldn't be all that worried about something with a duration of 4 or so. You start getting to 8 or 10 and I would not be interested.

[Gonzo]

Pro Funds have two funds that are like shorting bonds:

Maturity: Rising Rates Opportunity 10 ProFund is benchmarked to the most recently issued 10-year U.S. Treasury note, while Rising Rates Opportunity ProFund is benchmarked to the most recently issued 30-year U.S. Treasury bond. The value of securities with longer maturities tends to fluctuate more in response to interest rate changes than securities with shorter maturities.

Magnified Returns: Rising Rates Opportunity 10 ProFund does not seek magnified returns. The fund seeks to return the direct inverse (opposite) of the most recently issued 10-year U.S. Treasury bond. So on a day the bond falls by 1%, the fund should rise approximately by 1%, less fees and expenses, and on a day the bond rises by 1%, the fund should fall by approximately 1%.

Rising Rates Opportunity ProFund, by contrast, seeks to provide magnified exposure to its benchmark security. It seeks daily returns of 125% of the inverse of the most recently issued 30-year U.S. Treasury bond, before fees and expenses. So on a day the bond falls by 1%, the fund should rise approximately by 1.25%, and on a day the bond rises by 1%, the fund should fall approximately by 1.25%.

http://www.profunds.com/overview/updatesBody.asp?id=762

Richard