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Sell Bond Funds Now?
Old 08-08-2009, 11:38 AM   #1
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Sell Bond Funds Now?

I'm basically a buy/hold/reallocate guy, but just can't resist tweeking things when it seems like there are some indicators in the wind. Interest rates just probably are not going down anymore and by selling there isn't going to be any huge sacrifice in lost interest. If the economy continues to pick up pace I would think there would be some very good reasons for interest rates to nudge up and NAV to drop...right? I'm not too sure where else I would put the money right now, but am wondering if this would be getting ahead of the curve just a little.
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Old 08-08-2009, 12:02 PM   #2
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If bonds drop in value enough to upset your asset allocation ratios, then buy more! That's how rebalancing works. That is what I plan to do. Is that what you mean by "reallocate"?

Would you sell your whole bond allocation and leave it in cash instead? It might be a long wait and cash is paying very little interest right now. The FED may not start raising interest rates until 2011, so the low rates on cash situation may last a while longer.

It's almost impossible to "game" how quickly bond funds change NAV versus cash and interest rate changes. In many cases you are better off letting the bonds continue to pay interest. But not always!!! The changes can be gradual, they can be swift.

Psssst - if you are convinced of rising interest rates and improving economy/corporate credit outlook you could switch part of your bond position to a "bank loan" fund like FFRHX Fidelity Floating Rate High Income. This fund tends to pay out at higher interest rates while interest rates rise. Or you could shift your bond position more over to holding more high yield corporates - a similar type of move. But if we go through another scenario of concerns about how weak the economy is going forward or another credit scare, these types of funds will suffer disproportionately. Study how these funds behave under various market conditions, and you'll see the risks!

Caveat emptor!

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Old 08-08-2009, 12:19 PM   #3
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If you are certain that the Fed will raise rates in the very near future, you could try buying TBT, which is a double short Treasury ETF. You would really want to stay on top of it though.
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Old 08-08-2009, 12:20 PM   #4
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So far I have seen little evidence of the yield curve flattening, at least not for the kind of bonds I own. So, right now, most of my bond money is still in intermediate term bonds. I think that short term rates will probably stay low for quite some time especially if the recovery is slow and arduous as most predict it will be. Nobody wants to send the economy in another tailspin by raising rates too fast.
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Old 08-08-2009, 12:58 PM   #5
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I'm very conservatively allocated and am probably thinking to reduce my percentage in bond funds (probably intermediate term) by a couple or few percentages and either but it into short term CD's or maybe more equities, or both. Seems like by the time these things become overtly obivous, prices have already built in the anticipated change. I realize this is market timing, just wondering if it makes sense to anyone else.
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Old 08-08-2009, 01:03 PM   #6
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I hold a zero-coupon Treasury bond fund which will liquidate in 2015, they expect it come in at 113 a share which is certainly better than the planned 100/sh. I sometimes think of cashing it out when itís at say, 95-98, (92ish today) but I think Iíll just let it run itís course. I sold a junk bond fund in August í07.

Iím terribly over-weighted in GNMA but the typical fluctuations there are tolerable and would be mitigated by a rise in the equity part of my portfolio. Current plan is just to sell chunks of GNMA and buy equities until PF reaches a new AA.

OP, my optimism fluctuates about rising interest rates. I'm thinking the market might be like the '70s but I wouldn't bet on it.
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Old 08-08-2009, 01:36 PM   #7
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I think you should have bond funds with a range of duration between 90 days and 5 years. That covers just about all bond funds except the long-term bond funds which you should avoid. You can shift your bond funds from intermediate term to short term, if you like, but the shorter you go, the lower the yield that is paid (generally). So you are paid through the higher yield to take the risk in bond funds.

Other options are cash and some "deals" with deposits/CDs. You can also buy individual TIPS bonds and hold them to maturity. Actually, that's probably what you should do if you are really conservatively allocated.

Bottom line: Don't sell bond funds now.
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Old 08-08-2009, 01:43 PM   #8
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Originally Posted by roger r View Post
I'm very conservatively allocated and am probably thinking to reduce my percentage in bond funds (probably intermediate term) by a couple or few percentages and either but it into short term CD's or maybe more equities, or both. Seems like by the time these things become overtly obivous, prices have already built in the anticipated change. I realize this is market timing, just wondering if it makes sense to anyone else.
No, it doesn't "make sense" at all to me. If you have an allocation set up, then YTD the equity % of your allocation should have increased quite a bit, meaning that you should then be selling some equities to buy bonds to get back to your original allocation, not the other way around.

You want to make your asset allocation less conservative now that equities have recovered quite a bit? Well that would argue towards keeping your allocation where it currently is, not increasing the equity allocation/reducing bond allocation even further.

I think you really need to sit down and decide what the goal of your asset allocation is. It's good to write this stuff down. The investment plan/stated goals should drive your decisions. Not what you think the market will do over the next year.

lecture off.....

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Old 08-08-2009, 02:19 PM   #9
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I think you should do whatever you want. Asset allocation is a religion, not an established science.

I have never done it; and believe me if I had to say that my net assets had gone nowhere since 2000, or 2003, I would not be a happy camper.

It seems to me that long term fixed rate treasuries have an extremely poor risk:reward ratio over any considerable amount of time.

Regarding someone's recommendation of leveraged short ETFs, or any kind of synthetically leveraged ETFs for that matter, please google "flaws in leveraged ETFs, drawbacks of short ETFs", etc.

I think that what you find will convince you to stay far away from any of these things.

Ha
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Old 08-08-2009, 03:41 PM   #10
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We have conforable pensions and have most of our money in Treasurys and GNMA's. The GNMAs generate monthly income and pay one or two percent above Treasurys. We use the cash to reinvest in "hopefully" higher yielding securities. With higher bond prices and lower yields coming, we will probably put our money in a Total Market Bond Fund. The Stock Market is not for us. It seems to be controlled by Hedge Funds and day traders. We like to sleep at night.
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Old 08-09-2009, 06:54 AM   #11
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I think you should do whatever you want. Asset allocation is a religion, not an established science.

I have never done it; and believe me if I had to say that my net assets had gone nowhere since 2000, or 2003, I would not be a happy camper.
Asset allocation (with rebalancing) is not a religion, it's an investment strategy, and it does have "science" behind it - Modern Portfolio Theory.

One can choose to use it as an investment strategy or not. But one shouldn't fool oneself that one is using AA if one keeps changing their AA ratios due to market conditions and "certain" predictions of the future.

I don't understand the comment that "net assets have gone nowhere since 2000 or 2003". A buy-and-hold strategy would give you that result, not AA. I have used AA since 2000, and my net assets have grown over that time period.

I have seen folks lump buy-and-hold and asset allocation strategies together as it seems the OP probably does by using the term that he is "basically a buy/hold/reallocate guy". They are not the same strategy at all. In fact they directly conflict - asset allocation requires that you routinely sell part of a position once it exceeds a certain percentage.

Buy-and-hold means you leave stuff alone after you buy it - in other words it's a "don't sell" strategy — something that can be implemented during the accumulation phase (and usually recommended for investors with a very long time horizon), but that has to be modified after retirement, because obviously you have to sell something to live off your investments.

I'm not saying that anyone should use any given strategy. Just don't say you are using strategy X when you are really doing something completely different (or essentially the exact opposite).

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Old 08-09-2009, 08:13 AM   #12
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Originally Posted by roger r View Post
I'm basically a buy/hold/reallocate guy, but just can't resist tweeking things when it seems like there are some indicators in the wind. Interest rates just probably are not going down anymore and by selling there isn't going to be any huge sacrifice in lost interest. If the economy continues to pick up pace I would think there would be some very good reasons for interest rates to nudge up and NAV to drop...right? I'm not too sure where else I would put the money right now, but am wondering if this would be getting ahead of the curve just a little.
As usual, it depends. If we are in the rosy scenario of an improving economy, treasury and agency bonds will likely lose some value. But how much they lose depends on how quickly/much the economy improves, how quickly/much inflation returns, and how investors' perceptions of these things changes. In addition, different treasury/agency bonds are more or less vulnerable to value losses depending on their maturity. The longer out on the curve, the more they lose for a given interest rate increase. By the time you are talking about 5 year or less maturities, the potential value losses are generally modest.

If we are talking about corporate bonds, improving economic conditions would actually probably increase the value of the bonds as investors become more convinced that the companies issuing the bonds will actually survive and be able to make good on the debt.

If we are talking about mortgage bonds (GNMAs, Fannies, Freddies, etc.), it gets more complicated because values are sensitive both to interest rate and consumer behavior. The bog risk here is that the government stops buying agency MBS and values drop, but its hard to tell when that will happen and how much (if at all) value will drop.
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Old 08-14-2009, 05:33 PM   #13
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right before the big drop in 2008 all the talking heads were saying sell bonds, rates will be rising, the rates are so low they arent worth it... well the permanent portfolio part of my portfolio hold TLT long term treasuries... while not one expert mentioned long term treasuries as even a thought, well they soared, gaining 28% for the year.


that plus the rise in the gold portion actual had me closing up 3% in one of the biggest downturns in history.....


point is forget what anyone thinks, you know nothing ever plays out the way we think most of the time...there is always something not even on the radar that alters courses
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Old 08-15-2009, 08:25 AM   #14
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We have conforable pensions and have most of our money in Treasurys and GNMA's. The GNMAs generate monthly income and pay one or two percent above Treasurys.
It seems counter-intuitive. If pensions provide sufficient funding, one can take on more risk to grow the portfolio? Obviously, the bottom line is one's tolerance for risk.
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