Short term IG bonds to complement intermediate term?

[Lsbcal]

I have asked myself what mix of intermediate term bonds (IT) versus short term bonds (ST) to hold? Many here hold intermediate term investment grade (like Total Bond market) and since the early 1980's that has been a good position. But in the 1950's through the 1970's, ST bonds actually did somewhat better then IT.

For some perspective, I used the Simba data to calculate 5 year rolling returns for the different bond classes available. Treasury returns were the only data type available before 1976. I plotted the difference between IT and ST returns using these 5 year rolling return values.

You can see for Treasuries, the ST bonds beat IT more often then not when there was an uptrend in rates (1950-1980). No mystery there. I believe this would also hold true for investment grade bonds i.e. short term investment grade bonds beat or could be a good complement to intermediate term investment grade bonds in a rising rate period.

The chart also compares returns for intermediate term investment grade (IT IG) versus short term investment grade (ST IG) bonds after 1976. In general the trend on investment grade (IT - ST) is similar to Treasuries but more volatile.

Here is the rate picture for 5 year constant maturity bonds. Viewed here as a proxy for the intermediate Treasury bonds. As we know, the rates are very low now and lower then the 1953 start of this chart. Most of us have invested during the declining rate part of this picture.

I have recently increased the ratio of ST IG to IT IG bonds in our portfolio. That goes along with lightening up on equities. Swedroe was fond of saying that ST IG was one asset class where the risk has been rewarded. I know that predicting rates into the future is not productive, but it is a fact that rates are very low right now. Over the past 5 years intermediates have definitely beaten short term but then rates have actually declined over that period.

Your thoughts?

 

[mickeyd]

My FI investment of choice is not the ever-popular TBM bond fund. My choice is the I-T bond fund. In addition, I use the S-T bond fund as a back up for my cash position. I would only dip into it if I ran out of cash, a situation that has never occurred.


I will report back in 25 years to let you know if my strategy has worked.

 

[Lsbcal]

My FI investment of choice is not the ever-popular TBM bond fund. My choice is the I-T bond fund. In addition, I use the S-T bond fund as a back up for my cash position. I would only dip into it if I ran out of cash, a situation that has never occurred.


I will report back in 25 years to let you know if my strategy has worked.

I personally use the Intermediate term investment grade fund VFIDX. For ST IG it is VFSUX.

 

[VanWinkle]

I have used a combination of Intermediate corporate bonds, total bond, and short term investment grade bonds. Of my 50% bond allocation, i have 25% in intermediate corporate, 15% in total bonds, and 10% in short term investment grade. I also use the ST IG bond fund as a cash substitute to use as needed to replenish my true cash position in a rewards checking account earning 2% (up to 30K).

I do not know if there is any "right" way to allocate the fixed income, but this works for me.

VW

 

[mickeyd]

I do not know if there is any "right" way to allocate the fixed income, but this works for me.

VW

I think we could all agree with that.

 

[mathjak107]

in my income portfolio i use a mix of a total bond fund , a go anywhere bond fund and very very short term bond funds .

17% total bond

30% go anywhere bond fund , with international , corporate , emerging market high yield bonds .

16% in a very very short term bond fund less than 1 year .

12% in a limited term maturity bond fund , about 2.50 years .

about 25% in a dividend equity fund .

ytd is 6.50% on the income model which runs about 65% less volatile than the s&p 500

longer term money is in a 60/40 mix .. but overall equities are at 40% as of last week

 

[DEC-1982]

Your logic sounds very sensible but ...

A lot of financial "experts" have said for the last 4-5 years that rates would rise, and they have been mostly wrong.

Another thought in my mind is a simple TBM portfolio may not generate the best results, but it probably satisfies our needs.

If I reduced TBM funds and increased ST funds today, I wouldn't know when to reduce ST funds and increase TBM funds. My dabbling (timing) based on my thinking usually produces sub-par results. Obviously this does not apply to smarter people.

Finally, this is what I learnt over the course of my career, "KISS - keep it simple".

 

[mathjak107]

well rates on bonds have been rising and my opinion is more increases are coming . the fear of faster growth and inflation is weighing on the bond markets

while i would not avoid bonds , i believe in being dynamic as the big picture shifts . making things less rate sensitive at this stage and a a bit more economic sensitive makes sense .

i was 30% total bond up to now. now it is 17% . the lions share is now in the go anywhere bond fund that has a nice balance of interest rate sensitive stuff with more economically sensitive fixed income types .

that should hold up better if rates continue to rise , while taking advantage of things if the economy stays relatively well .

 

[BGold]

I have been keeping 3 years of funds in VG Short term corp index to support our finances if/when a regression (or meltdown) occurs. Since “most” recoveries have taken from 2-3 years, that bucket will keep me from selling equities when they are lower.

My DW and I have taken a 10% position in Pimco’s income fund - PIMIX, which also has a 2-yr duration.

 

[audreyh1]

I just notice that spreads between IG and US treasuries are at historic lows again. So I would be nervous about credit risk - spreads widening.

But it’s true that such conditions can persist for a couple of years.

Part of my fixed income allocation is always in a short term bond index fund. Cash, short-term and intermediate-term.

 

[walkinwood]

To the OP : Did you use a specific mutual fund to calculate the results or index values?

 

[Lsbcal]

To the OP : Did you use a specific mutual fund to calculate the results or index values?

This is from the Bogleheads Simba spreadsheet which uses a variety of documented sources. The spreadsheet file discusses the sources. In general they use index funds or near index funds.

Here is a link to the spreadsheet info: https://www.bogleheads.org/wiki/Simba's_backtesting_spreadsheet

 

[Lsbcal]

I have been keeping 3 years of funds in VG Short term corp index to support our finances if/when a regression (or meltdown) occurs. Since “most” recoveries have taken from 2-3 years, that bucket will keep me from selling equities when they are lower.

My DW and I have taken a 10% position in Pimco’s income fund - PIMIX, which also has a 2-yr duration.

PIMIX (actively managed) looks like an interesting choice as a modest part of a bond portfolio. It maybe take a leap of faith to invest in such a bond fund and would not pass muster with the hard line Boglehead crowd.

It performed in line with other intermediate bond funds in 2008 i.e. did not blow up. It looks like one can easily buy this institutional grade fund in a Vanguard account.

Some informatinal links I looked at:

fact sheet: https://www.pimco.com/handlers/disp...stf4gYMNdM6ya293387fZCtcArqx3WLVfNAs2mhWTnEk=

November 2017 report: https://www.pimco.com/handlers/disp...TovrtT4D3iHgdldaGwuReEtpHysYY8aXRuw3poZVA4fVy

 

[Lsbcal]

Looking at PIMIX more closely, it appears to have a large helping of leverage. If so, it's not for me.

 

[foxfirev5]

Check out the current 5 year CD ladders combined with a Corporate bond fund. Similar yield with a lower duration than TBM. Eliminates GNMA as well. With CD rates at these levels vs Treasuries I see it as a free lunch. Just don't exceed the 250k FDIC limit per bank.
FWIW I also hold PIMIX and DBLTX to cover the bases.

 

[Lsbcal]

I really don't understand the -48% cash PIMIX holds. Is it leverage or some fancy way of using derivatives?

 

[audreyh1]

I really don't understand the -48% cash PIMIX holds. Is it leverage or some fancy way of using derivatives?

Definitely uses leverage from what I read. But the details are beyond me.

 

[BGold]

Lsbcal,
I have to admit that the euphoria around PIMIX has influenced me. Your questioning of Pimco’s strategy along with the links has had a sobering effect. I do not understand how the “soup” is made and that has me thinking...

Many thanks!
Brian

 

[Lsbcal]

Lsbcal,
I have to admit that the euphoria around PIMIX has influenced me. Your questioning of Pimco’s strategy along with the links has had a sobering effect. I do not understand how the “soup” is made and that has me thinking...

Many thanks!
Brian

I found some interesting information on the Bond Squad site at M* on PIMIX (under the PONDX recent thread). But most of that was from PIMIX owners who were all in. I found another discussion on the Boglehead site but many smart Boglehead's had stupid responses which indicated they hadn't read much about the product.

I don't know enough to say this is a good selection or not for others. If I held it I'd probably have 10% of the portfolio in it. If it outperformed my current VFIDX (intermediate investment grade) by 3% per year, that would boost portfolio performance by 0.3%. Nice but I might be a bit nervous about this supposedly safe part of my portfolio. But if it started to tank because of weird derivative stuff (or whatever) that I did not understand, I'd really kick myself for investing in it.

I have some experience with this sort of investment. I owned PTTRX (actually the etf: BOND) but never felt comfortable for the same reasons (not understanding the fund's methods). When Bill Gross left, I left too.

 

[BGold]

Lsbcal,
I noticed those posts as well. Even the biggest advocates for the fund couldn’t clarify the strategies.
I do have a 10% portfolio position, which I had considered adding to, but will now keep a closer eye on through January. I did sell a small position in PONDX and moved it to Wellesley, in which I already had a position.

I saw PONDX/PIMIX as somewhat aligned with equities; this together with a conservative equity percentage of 33%, could juice my equity returns with lower volatility (or so I thought).

A recent M* post noted that their 2008 decline of only ~5.5% may have been due to its having just been opened and not fully invested at the time.

Still, I can’t complain as PIMIX has been a solid performer this year.

 

[BGold]

I do have a 5% position in VG Short term-corp Index, which I maintain as a “cash bucket” to my intermediate bonds such as VG total bond, TIAA Traditional acct. and the long bond percentage in Wellesley.
Brian

 

[VanWinkle]

I do have a 5% position in VG Short term-corp Index, which I maintain as a “cash bucket” to my intermediate bonds such as VG total bond, TIAA Traditional acct. and the long bond percentage in Wellesley.
Brian

We could be brothers from another Mother

Your technique sounds a lot like mine!!

 

[BGold]

We could be brothers from another Mother



Your technique sounds a lot like mine!!

VW,

Just re-visited your earlier post....You’re the smarter brother then, having a rewards checking account earning 2%. Need to check that out....Thanks!

Brian