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Old 03-31-2014, 11:02 AM   #21
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Fermion, whether muni bonds make sense depends to a large extent on your tax rate. If your federal tax rate is 39.6% and your state tax rate is 5.0% then your taxable equivalent yield on a 4.0% muni bond (now having approximately a 14-15 year maturity) is over 6.5%. If you live in a State with a higher state income tax, the taxable equivalent yield would be higher. To me, this makes sense for a substantial portion of my fixed income portfolio.
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Old 03-31-2014, 11:42 AM   #22
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Assuming no default, any decrease in bond value will be fully recovered at maturity (regardless if it is a bond fund or individual bond). So if you have a long term plan or only use interest payments should be fine.

But I do not own too many bonds as stocks perform better long term.
It's more complicated than that. You can choose to hold indiv long bond to maturity, but in rising rate environment the real principle value (actual purchasing power) will be prob be lessened by accompanying inflation. Although there are some bond funds with 'hold to maturity' style, most LT bond funds have significant turnover. They will have at least some capital losses under rising rate conditions as funds managers sell off some older issues to buy newer higher yielding bonds. The extra interest from those newer bonds would help offset at least some of the capital losses. In past rising rate periods, folks have usu done OK (not great) in good quality LT bond funds IF they held for # yrs approximating the fund's effective duration.
FWIW, I favor short duration bonds/funds right now as I expect rates to rise & have no idea how tapering by the Fed (& Europe, Japan, etc.) will affect the bond markets. Coming months/yrs could go smoothly....or get rather ugly
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Old 03-31-2014, 12:58 PM   #23
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I am noticing in the threads about bonds a bit of fear given the low rate environment and likelihood of rising rates in the near future.

I am curious how folks are approaching bonds. They are obviously an important part of AA and FI. If you are in bonds, are you in bond funds or ind bonds, tax-free or not and what duration(s)?

And, how are you feeling about Wellesley and Wellington (VG Funds) which are so popular here, yet have significant bond exposure?

Thanks!
I am sticking to my AA of 55% bonds. This includes

VWIAX (Wellesley)
VBTLX (Vanguard Total Bond Market Index).
TSP "G Fund" (government bond fund)

I do not own any individual bonds.

In answer to your question, I feel fairly optimistic about Wellesley and Wellington, especially in the long term. Wellington Management (that runs both) has a good track record.
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Old 03-31-2014, 01:33 PM   #24
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I am sticking to my AA of 55% bonds. This includes

VWIAX (Wellesley)
VBTLX (Vanguard Total Bond Market Index).
TSP "G Fund" (government bond fund)

I do not own any individual bonds.

In answer to your question, I feel fairly optimistic about Wellesley and Wellington, especially in the long term. Wellington Management (that runs both) has a good track record.
Where is the upside in VBTLX? It is negative for the past 2 years and the best it could possibly do over the next few years is maybe a 3% return each year. I just don't see the advantage, especially over something like the 3% Penfed cds that were available.
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Old 03-31-2014, 01:51 PM   #25
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Where is the upside in VBTLX? It is negative for the past 2 years and the best it could possibly do over the next few years is maybe a 3% return each year. I just don't see the advantage, especially over something like the 3% Penfed cds that were available.
Average annual return for the past 3 years is 3.76%, although that is not reflected in the share price. It provides dividends, which I use for a small part of my living expenses.
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Old 03-31-2014, 03:11 PM   #26
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Bond yields have been manipulated down by the government (which means bonds are at all time high prices). Why would you want to buy something at an all time high price?
Stocks are also at an all-time high price, give or take a couple percent. Gotta buy something!
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Old 03-31-2014, 03:16 PM   #27
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We had a flurry of similar threads last summer. Current treasury interest rates are about the same (actually slightly lower), than they were then. I stayed the course back then and am staying the course now.
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Old 03-31-2014, 03:18 PM   #28
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I haven't changed my bond allocation, still at a little over 50%. No particular bond funds, whatever Wellesley, Wellington and Target 2010 invest in.
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Old 03-31-2014, 03:21 PM   #29
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It's more complicated than that. You can choose to hold indiv long bond to maturity, but in rising rate environment the real principle value (actual purchasing power) will be prob be lessened by accompanying inflation. Although there are some bond funds with 'hold to maturity' style, most LT bond funds have significant turnover. They will have at least some capital losses under rising rate conditions as funds managers sell off some older issues to buy newer higher yielding bonds. The extra interest from those newer bonds would help offset at least some of the capital losses. In past rising rate periods, folks have usu done OK (not great) in good quality LT bond funds IF they held for # yrs approximating the fund's effective duration.
FWIW, I favor short duration bonds/funds right now as I expect rates to rise & have no idea how tapering by the Fed (& Europe, Japan, etc.) will affect the bond markets. Coming months/yrs could go smoothly....or get rather ugly
That's my thinking too.

ER has prompted me to move into stable value and cash to support my immediate spending. My bonds are intermediate term mostly in Wellesley. I plan to reinvest dividends for 10 or 20 years so I'm not overly concerned about what might happen over the next 5 years.
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Old 03-31-2014, 03:22 PM   #30
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I just heard a pundit on a business channel saying to hurry to buy bonds because rates are headed further down. If ever I've heard a reason to sell that was it!!
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Old 03-31-2014, 03:45 PM   #31
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Vanguard Short Term Investment Grade and Intermediate Term Investment Grade only and that is in my rollover IRA. I have a good chunk in the Stable Value fund I left in my 401k.

I wouldn't own munis because I am not in a high tax bracket but more importantly I think many cities and states are really in very bad condition and face serious financial issues.

Bonds are for stability. People that worry about the nav on bond funds dropping 4-7% should consider the potential for losses in equities that will dwarf that if they move money out of bond funds into equities. Dividend paying stocks are not a substitute for fixed income just because they have a comparable or better yields. Sure the yield stinks in bond funds but if equities drop 15, 20 or 25% you use those bond holdings to buy more equities. To me the nav loss in a holding that doesn't yield much to start with is nothing compared to what you can lose in equities and then maybe not have adequate fixed income holdings for rebalancing.

My AA has been fluctuating from 60/40 to 42/58 currently. I'd like to see the S&P 500 to drop to maybe 1800-1820. I'd exchange some of the SV into the S&P 500 fund and sit tight until it hits 1850-1860, it's just a short term trade. I did this a couple of months ago and made a boatload of money (about 2.5 years worth of SV returns in 3 months) vs having that money in the SV fund. yes it's dirty stinking market timing but it's a fun thing I can afford to do and I don't use more than 15% of the total portfolio.
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Old 03-31-2014, 03:59 PM   #32
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Bonds are for stability. People that worry about the nav on bond funds dropping 4-7% should consider the potential for losses in equities that will dwarf that if they move money out of bond funds into equities. Dividend paying stocks are not a substitute for fixed income just because they have a comparable or better yields. Sure the yield stinks in bond funds but if equities drop 15, 20 or 25% you use those bond holdings to buy more equities. To me the nav loss in a holding that doesn't yield much to start with is nothing compared to what you can lose in equities and then maybe not have adequate fixed income holdings for rebalancing.
Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.
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Old 03-31-2014, 04:38 PM   #33
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Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.
Any historical evidence of how bad a bond bubble burst might be? The Vanguard portfolio analyzer shows that the worst year since 1926 for an AA of 20/80 is -10%, and that was in 1931. Worst year for 100% bonds was -8% in 1969.
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Old 03-31-2014, 04:55 PM   #34
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A sharp increase in interest rates would mean the economy is growing a lot faster than it is now, and that wouldn't be bad news at all.

My asset allocation, for stocks and bonds, is "steady as she goes". No reason to change.
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Old 03-31-2014, 05:01 PM   #35
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Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.
Well I just don't like having all my eggs in one basket and I can't predict the future. So I'll stick with diversity and keep stocks, bonds, cash, real estate, SS, annuities and pensions in my retirement portfolio.
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Old 03-31-2014, 05:02 PM   #36
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Any historical evidence of how bad a bond bubble burst might be? The Vanguard portfolio analyzer shows that the worst year since 1926 for an AA of 20/80 is -10%, and that was in 1931. Worst year for 100% bonds was -8% in 1969.

I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.
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Old 03-31-2014, 05:06 PM   #37
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I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.
1931 was not the worst year for 100% bonds. that was in 1969 and was still only an 8% drop.
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Old 03-31-2014, 05:12 PM   #38
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Quote from Vanguard's Gregory Davis, head of Vanguard's Fixed Income Group, a team that oversees $750 billion in fixed income assets:

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Many people get hung up on the possibility that interest rates are going to rise, which would cause bond prices to fall, but the market has already priced in that possibility. The question becomes: Will rates rise more than what's been priced in? And that's a much more difficult question to answer.

But it's worth remembering that rising rates are not necessarily a bad thing if you have a long time horizon and the average maturity of your bond fund is shorter than your time horizon [the time until you'll need the money].
https://personal.vanguard.com/us/ins...tion=Position1
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Old 03-31-2014, 06:10 PM   #39
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Quote from Vanguard's Gregory Davis, head of Vanguard's Fixed Income Group, a team that oversees $750 billion in fixed income assets:

https://personal.vanguard.com/us/ins...tion=Position1
Great quote...great source.

Thanks to all for the great thoughts. Indeed we are in interesting times.
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Old 03-31-2014, 07:45 PM   #40
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I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. ...
Agreed. With most all developed nations pursuing simultaneous artificial 'easy money' fiscal policies (e.g. US's QE infinity, Japan's Abe'nomics, ECB supports, etc.), it's not hard to imagine some miscalculation causing an overshoot in interest rates beyond typical range for current GDP growth. Even a 2% rise in rates could mean -17% annual return on 10yr Treasury holding (2.7% interest - 20% principle loss).

BTW-Anyone know what bond surrogate the Vanguard Portfolio Analyzer uses? Other Vanguard tools use Total Bond Index, which is intermediate term (ave duration 5.5yrs).
https://personal.vanguard.com/us/fun...FundIntExt=INT
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