Is this the worst possible time to buy a bond fund?

[charlie]

I like GNMA and have owned some on and off over several years. However, I like Vanguard's Intermediate Term Investment Grade
better right now. It is paying over 6% and may have some capital
gain potential. This fund is in my IRA currently.

Cheers,

charlie

 

[audreyh1]

I believe the current spread is quite wide. This author says 1% is more typical.

That's what I was thinking. Thanks for the details.

Part of my interest is that I have cash in these money market funds that have a "temporary" Fed guarantee, and the absolutely Fed guaranteed treasury-back MM funds that are yielding almost 0%, the Government bond funds that are yielding super-low. And then I see these GNMA funds which are government guaranteed and yet they have such attractive yields! Definitely motivates me to cut back on my cash position.

I already own a lot of short to intermediate corporate bonds through my other bond funds.

I've ridden the rising interest rate cycle before with GNMA funds and they definitely can get hit hard! Usually I'm nimble enough to switch over to bank loan funds before this happens.

Audrey

 

[Free To Canoe]

I too was wondering why the GNMA-Treasury rate difference.
Negative convexity. Has a nice ring to it.
Thanks Ha. Thanks all! It's all good.

Free to Canoe

 

[audreyh1]

I have been buying corporates, mostly investment grade, both individual bonds and funds. You can buy pretty attractively priced high quality bonds right now in the single A rating range. Yesterday I bought a smidge of a nice BBB+ rated bond maturing in 5 years that yields just shy of 10% to maturity. I know the issuer and own some of the equity and am comfy the credit profile, so picking some up at this kind of yield was a no-brainer.

Brewer! We haven't heard from you in a long time! I've been wondering what's been happening in your neck of the woods.

Audrey

 

[brewer12345]

Brewer! We haven't heard from you in a long time! I've been wondering what's been happening in your neck of the woods.

Audrey

Busy. Working the soles off my shoes for the last month and change. It will subside in the next few weeks, but leaves me pressed for time.

 

[dshibb]

My two cents. I wouldn't get caught dead buying bonds right now(with the exception of TIPS which you just missed one of the best opportunities to buy a week ago). I don't time markets all I can say is that sometime in the next 1 1/2 years you will see a very steep increasing interest rate environment. Bonds are attractive right now, but they will become devalued as interest rates rise. Buy something that keep up with inflation.

 

[Learn2Earn]

Hi -

Googled and found this forum. Why Vangard bond and not Fidelity Government fund? May I know where you buy Vangard VBMFX and if there is a transaction fee. Thanks.

 

[Stevewc]

Hi -

Googled and found this forum. May I know where you buy Vangard VBMFX and if there is a transaction fee. Thanks.

Just go to the vanguard web site. Open an account and buy all you want.
Hope that helps,
Steve

 

[Stevewc]

Good Morning Group,
I too am trying to get my mind right concerning bonds. I need to add bonds to my portfolio but have procrastinated. Now it seems the NAV's are up and I should have bought earlier in the game. The tax exempt funds are back close to 52 week highs and GNMA has risen a good bit too. I guess I want the best of both worlds but my timing skills are bad to say the least. Is my mind set wrong? Do I just need to accept the fact that I may see (hard earned) principle fluctuate even with bonds? What say the guru's of retirement?
I guess the one good thing about my procrastination is I've now watched over the last several months what these bond fund NAV's can do during bad market conditions. I would have been shocked had I thrown my money in bonds to watch it shrink like the funds did this past year. It was bad enough watching my stock funds disintegrate.
Its been one heck of a year for new investors trying to get our money set up to live off the income. I think I've done OK in my pursuit of buying stock funds as the markets crashed. But haven't seen daylight on those yet, getting very close though. I'm happy I have gone slow with my money moves and have managed to keep most of the funds safe in MM funds. But also need stable investments for my income in retirement.
The plan was to get everything set up & invested to retire at the end of this (2009) year. I've learned a ton but still working toward our goal. Oh, and will be leaning on all my forum friends for the rest of my life for moral support/advise.
What a year to get an investment education?
Steve
PS. Nothing like an early monday morning to spill out your heart and soul !!!

 

[Stevewc]

My two cents. I wouldn't get caught dead buying bonds right now(with the exception of TIPS which you just missed one of the best opportunities to buy a week ago).

Are you buying at auction or secondary market? Or maybe just Tips funds?
Thanks,
Steve

 

[MasterBlaster]

Has anybody answered the OP's question ? <Is now a horrible time to buy a bond fund ?>

I didn't see any discussion about bonds priced for the (coming) corporate and municipal defaults. Or for the very possible inflationary scenario that may come due to all of the stimulus/fed bailouts/dollar weakness.

In my opinion, bonds longer than a few years in maturity are not priced right. But what do I know ?

 

[Stevewc]

I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve

 

[haha]

I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve

The original question could not possibly be answered. Who could possibly know if any time were "the worst possible time" for anything?

 

[Free To Canoe]

Plenty of Follow Up is Good

I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve

First I buy EM funds to diversify my portfolio (2007) then REITs and Oil funds (2008). Although I still think they were good moves, if I had it to do over again I would have waited. So now I want to buy bonds? Therefore this [-]is[/-] may be the WORST time to buy.

They seem to be valued poorly relative to other investments but one never knows. Time to take a small position and utilize the wisdom of the ER Forum. My finance professor said that one should start a career in finance by learning about fixed income vehicles.

Free to Canoe

 

[Gearhead Jim]

Most people seem to use bonds or bond funds to reduce the volatility of their total portfolio. To me, bond funds seem similar to stock funds in that the NAV fluctuates and can actually decline.

A bond fund can get badly hurt by rising interest rates or ratings decline. But if you hold an actual bond ladder, you don't sell before maturity and don't care about ratings decline unless the bond actually defaults. And rising interest rates only mean that you earn a little less money, you don't actually lose it.

Because of transaction costs and the difficulty of diversification, I'm looking to use a CD ladder rather than a bond ladder.

Perhaps someone here can convince me otherwise, because bond funds are certainly convenient.

 

[dshibb]

Auction!!!, prices are better especially ones with an *, which means that they are selling a surplus amount. This needs to be weighted with the tax benefits of buying in a tax sheltered account.

If anybody has any information on how to purchase from an auction using a tax sheltered vehicle I'm all ears. Even if it means selling you're higher coupon TIPS through an intermediary and buying them back through the tax sheltered account.

The time horizon on bonds is very short. I think its like playing with fire. You can attempt to market time(i.e. buy now and sell within a few months after the default risk subsides, but before the inflation gets priced in), but its a very short window that you have, and if you miss it you will regret it. I'm not that balsy, so I wouldn't do it myself.

In terms of bond funds. The outlook is even scarrier. I'm not perfect on my pricing lingo, but I think the future would be constituted the same as contango. The bond fund will continue to buy up bonds at higher and higher interest rates(each more expensive than the last) to see that the previous ones have been devalued and the ones they are purchasing become devalued to. Its like dollar cost averaging into a storm; it will suck dearly until you get on the other side of the inflation mix(thats years down the road).

 

[clifp]

I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve

I stated my opinion that I think it is a bad time to buy government bonds or bond funds. As Ha Ha said, is it the worst time ever? that can't be known.

So lets inject a bit of data into the discussion. Right now the Vanguard Total Bond index SEC yield is 4.17%. Is that high or low? The 5 year total returns on the fund are 4.08% and the 10 year and lifetime (22+ year) returns are 5.45 and 6.81% respectively. The price of 10.11 is slightly above the average which has varied between 9.46 and 10.58 over the last 10 years.
So based on this historical information it doesn't look like a horrible time to buy the fund.

Of more interest to me is to break down the bond market into various parts. These are all Vanguard bond SEC yield figures (Admiral shares where available add another ~.1%). Of course yield is not equal to the total return due to price changes in the fund, but most Vanguard bond funds trade in a fairly narrow range of $10 +/- $.50 over long periods.

Type	Short	Intermediate	Long
Bond Index	2.39%	4.55%	5.43%
Treasury	1.88%	2.29%	3.52%
Corporate (A)	4.60%	6.01%	6.68%
Municipal	.62%	3.42%	4.02%
GNMA	N/A	4.29%	N/A
Hi Yield	N/A	10.04%	N/A
Hi Yield Muni	N/A	N/A	4.8%

I find the difference in yields between the Treasury and Municipal/Investment grade corporates to be remarkable wide (and one can find lots of info on the web documenting this),especially at the intermediate duration.

Now is the prospect of 6% yield on corporate enough to compensate for the risk of prolonged recession increased corporate defaults AND the prospect of high inflation down the road? I don't know with great confidence, but if I am looking at 4% SWR that rate does allow for 2% inflation close to the historical average. If I was still working and had a household income near the 250K range, I'd find the 3.42% or 4% Muni bond funds at least marginally attractive. For those with a higher risk tolerance, if you think this government stimulation will work, as I do, the double digit yields of the High Yield look very attractive.

Finally, any question about bond funds has to be put in the context of compared to what. The stock market is up more than 20% in the last 6 weeks, while there are glimmers of hope in the economy, it is entirely possible this is all an illusion. CD offer safety the certainly don't offer much in the way of returns Vanguard show CD rates as follows 1 year 1.35% 2 year 2.75% 3 year 3.35% and 5 years 3.5%, significantly lower than any non-treasury bond fund.

 

[mathjak107]

we got 2.25 on 1 year cd,s 2 weeks ago.... at the time both fidelity and vanguard cd's were far lower..... we opened up cd's at 3 local banks , all were within .25% of each other

 

[clifp]

we got 2.25 on 1 year cd,s 2 weeks ago.... at the time both fidelity and vanguard cd's were far lower..... we opened up cd's at 3 local banks , all were within .25% of each other

Yes Bankrate shows similar rate for 1 year CD and slightly higher rates for longer term.

But that does beg the question how does one fund or sustain a retirement with 1 year CD of 2.25% or even longer term ones at 3.5%?

This would require a portfolio of 2-3 million to fund the typical spending levels on the board and would provide no protection from future inflation.

Perhaps a more interest question if CD returns 3.5% and inflation averages 3% and taxes are roughly 1/3 either now or once you retire, how does one possible save enough money to retire?

 

[mathjak107]

thats the question right now we all have

 

[haha]

Perhaps a more interest question if CD returns 3.5% and inflation averages 3% and taxes are roughly 1/3 either now or once you retire, how does one possible save enough money to retire?

Speculate, speculate, oh lolly lolly gonna speculate...

 

[brewer12345]

No doubt I am going out on a limb here, but with respect to corporates (both investment grade and junk) I feel like a kid in a candy store. Why? My fondest wish is to have a portfolio return rate of 8%. So much the better if I can do more, of course. I used to have to buy equities to have a hope of getting that kind of return, but now I can buy bonds with maturities of as low as 5 years and lock in 8% to 10% to 20% returns and have less risk than equities.

So what am I buying? How about a few examples, one investment grade, one crossover, one junk:

- Axis: This is a Bermuda-based insurer/reinsurer, equity symbol is AXS. This company is run by one of the most adept underwriters in the world (who also went through a messy public divorce with the largest award to a spouse in UK history). They have continued to make money hand over fist throughout these times of woe and want, and they were actually upgraded (not a typo) by S&P in the last 6 months. I have happily been buying their senior unsecured debt maturing in 2014 at about a 10% YTM. This is an investment grade company. Their exchange traded preferred stock yields even more.

- Methanex: This is a Canadian domiciled company that is the world's largest producer of methanol (symbol is MEOH). They have more cash than debt and remain solidly cash flow positive. Over the long term, they stand to benefit from the growth of China, India, etc. as methanol is a precursor chemical for, well, almost anything. If you bought the entire company at its trading price, you would be getting their plants at less than replacement cost. If they went bust and the bondholders took the plants in return for their bonds, they would be buying the plants at less than 50% of replacement cost. In the very likely event that the company doesn't default, the 2015 bonds yield in the 14% range. Ths company is rated investment grade by one agency and is a BB name by the other (crossover).

- Navios Maritime: This dry bulk shipping company has high long term charter coverage on its vessels and is cash flow positive. They will be taking delivery of 7 large ships which are all chartered for 5 to 10 years at very attractive rates. Importantly, all of their charters are guaranteed by an agency of a AA+ rated EU government (Belgium, if I am any judge). Cash flow positive and able to pay down their debt over their time from internally generated cash flow. I have been buying the senior unsecured bonds due 2014 at north of a 20% yield. This is a junk name.

Obviously, some of these investments require a certain amount of risk tolerance. But with credit risk, diversification is a great aid and materially reduces risk. A bunch of individual bonds or the simple expediency of a fund can allow one to lock in equity-like returns at materially lower risk than equities offer. And much of the return is in the form of cash coupons.

 

[Ed_The_Gypsy]

to OP: yes.

 

[dshibb]

Mathjak, I've got a question for you. How does it make sense to get cds at 2.25 when you can track down liquid accounts that are paying out at least twice as much?

Brewer, you do know the difference between return and REAL return, right? Real return takes into account inflation rate. The only place that debt aquistion banks are buying right now is very high default rate debt. As the risk is probably substantially overpriced and that can be significantly higher than any future inflation rate. An example of that is buying up a bankrupt companies debt at 3 cents on the dollar because if the market has downgraded the debt so much and the company gets liquidated you can make 4 cents on the dollar and get 33 percent return. That can't be eroded by inflation. In the case the default risk completely eclipses the inflation risk, so that doesn't need to be a factor in the equation. This is also the same reason that the big banks actually want to hold onto their "toxic" assets.

 

[mathjak107]

my wife wanted to put the money we owe for next years taxes into a cd..... we sold some investment property and already have a whopper of a tax bill for 2009....

i myself like ginnie mae funds and have been using ffrhx fidelity floating rate high yield....