When to sell a bond fund?

[redduck]

I'm basically and buy and hold type with regard to mutual funds. Last week my wife and I bought a bunch of VCAIX (Vanguard's tax-exempt Calif. municipal bond fund). Yes, we live in Calif. Anyhow, regarding bond funds, municipal or otherwise, is there a time when they should be sold as per what the economy or stock market it doing?

 

[mathjak107]

im buying muni funds now.... great spread at this point compared to treasurys.... just loaded up on fidelity ny muni income

 

[redduck]

mathjak107...

Well, it seem like we have both coasts covered. Anybody buying munis in the middle of the country?

 

[mickeyd]

Anyhow, regarding bond funds, municipal or otherwise, is there a time when they should be sold as per what the economy or stock market it doing?

Just curious redduck, if you are buy and hold guy, why the concern of when to sell a mutual fund that you just bought?

 

[redduck]

Just curious redduck, if you are buy and hold guy, why the concern of when to sell a mutual fund that you just bought?

Oh, sure. Well, first off I'm not concerned, I'm just wondering. I've never bought a muni bond fund before, so I'm trying to learn more about them. I've read numerous articles indicating that this is a good time to buy munis, but I've never read anything about when it might be a good time to sell them. I guess the very best time to learn (or figure out) when to sell them might be before I buy them. What do you think? Would you even be more curious then?

 

[FIREd]

I guess a good time to sell munis would be when people realize that most munis are not that dangerous and they start buying them again en masse to increase their portfolio's income. Right now treasuries are seen as the best insurance policy against default but they pay nada in *taxable* interests. I believe that when people realize that their investment income is dwindling away fast, they'll look at other options and they might find munis attractive again which will make their prices go up. But quite frankly if you are a buy and hold investor, then it should not matter.

 

[redduck]

I guess a good time to sell munis would be when people realize that most munis are not that dangerous and they start buying them again en masse to increase their portfolio's income. Right now treasuries are seen as the best insurance policy against default but they pay nada in *taxable* interests. I believe that when people realize that their investment income is dwindling away fast, they'll look at other options and they might find munis attractive again which will make their prices go up. But quite frankly if you are a buy and hold investor, then it should not matter.

OK, when the prices go up on a muni bond fund because people are piling into it, will that mean that the interest rate paid to me will go down because more money is piling into the fund and the fund is then buying bonds at a lesser interest rate than I bought in for? (I think the above should have been at least three sentences). Are these potential late-comers going to get in the way of my being able to enjoy my eventual retirement?

 

[FIREd]

OK, when the prices go up on a muni bond fund because people are piling into it, will that mean that the interest rate paid to me will go down because more money is piling into the fund and the fund is then buying bonds at a lesser interest rate than I bought in for? (I think the above should have been at least three sentences). Are these potential late-comers going to get in the way of my being able to enjoy my eventual retirement?

I am not quite sure I understand all your points (especially the one with the late comers and your eventual retirement), but yes as the prices of the bonds go up, the interest they pay comes down, but if you want to sell at a profit (which I believe was your original question), then who cares how much interest they pay then. Pocket your capital gains and let other people get paid less to hold munis.

 

[redduck]

Thanks for the info FIREdreamer.

Sometimes I think I could be the poster boy for the Financial Planner's association.

That being said, I was just hoping to hold on to this bond fund and keep getting a decent of rate income (what ever that might be). I do like making money via interest now that my equity mutual funds and ETFs seem to be in place (although I continue to add on slowly in this area).

 

[FIREd]

Thanks for the info FIREdreamer.

Sometimes I think I could be the poster boy for the Financial Planner's association.

That being said, I was just hoping to hold on to this bond fund and keep getting a decent of rate income (what ever that might be). I do like making money via interest now that my equity mutual funds and ETFs seem to be in place (although I continue to add on slowly in this area).

Well shop around, not all bond funds are created equal. An intermediate term bond fund for example might be able to ride a short period of low interest rates without a significant cut in the dividend because they might have so many other bonds still paying high dividends in their portfolio that they might not need to purchase a lot of the newer bonds paying lower dividends. So if munis are part of a well planned asset allocation and if you choose your fund carefully, they might be exactly what you are looking for.

 

[packrat44]

OK, when the prices go up on a muni bond fund because people are piling into it, will that mean that the interest rate paid to me will go down because more money is piling into the fund and the fund is then buying bonds at a lesser interest rate than I bought in for? (I think the above should have been at least three sentences). Are these potential late-comers going to get in the way of my being able to enjoy my eventual retirement?

If you bought a bond today that pays 5% it will continue to pay 5% until it has matured. When the demand for bonds increase, the issuer of new bonds can offer lower interest and still get buyers (supply and demand). Therefore, the interest will be lower but only on the new issue bonds, not the old bonds,

If you paid $100/bond with 5% interest, you would not being willing to sell it for $100/bond when interest on new bonds drop to 4%. You may be willing to sell for $105/bond (not math correct and depends on maturity date, etc). Now if you sell your higher valued (higher interest bonds) and purchase lower priced bonds (with lower interest) you should expect to see the same total gain on your investment since you will now have more bonds even though the interest they pay is lower.

Bottom line, you do not lose money on your bonds simply by having new bonds issued with a lower interest rat.

 

[mathjak107]

I am not quite sure I understand all your points (especially the one with the late comers and your eventual retirement), but yes as the prices of the bonds go up, the interest they pay comes down, but if you want to sell at a profit (which I believe was your original question), then who cares how much interest they pay then. Pocket your capital gains and let other people get paid less to hold munis.

number of people buying bonds is irrelevant, what counts is whats being offered as far as bids. lots of people were buying bonds at 15% in the 70's. lots of people were buying bonds recently at 3.25% ...

bond funds work a little different than actual bonds. a bond has a fixed price and fixed interest rate. a bond fund has a variable price and a variable interest rate. interest rates on bond funds change daily as bonds are being bought and sold all the time. yes if rates drop you will get less interest in the bond fund but your price per share will rise to offset the drop in interest .

you buy an intermediate treasury bond fund for 10.00 bucks. the average maturity is say 5 years. your getting 5% say the day you buy in. rates fall to 4% but the fund rises 5% in net value as the older bonds are worth more,, at the end of 5 years you got your interest plus capital gains giving your 5% average again.

 

[brewer12345]

Bottom line, you do not lose money on your bonds simply by having new bonds issued with a lower interest rat.

Unless what you own is callable. Hard to tell in a bond fund sometimes.

 

[FIREd]

number of people buying bonds is irrelevant, what counts is whats being offered as far as bids. lots of people were buying bonds at 15% in the 70's. lots of people were buying bonds recently at 3.25% ...

I meant to say that when more people want to buy the same thing, prices go up as a result. I mean it's like an auction, right? The more people want the same stuff, the more they are willing to pay for it and the higher the price go, no? As a result, the borrower doesn't have to pay as much in interests for its bond to find a taker. Lately the problem was that at auction, fewer people were bidding on munis so rates had to be increased a lot to make them attractive again. So my thinking is that when people become less scared of munis, they'll bid up on them again and borrowers will be able to pay lower interest rates on their bonds (and therefore the bonds you bought with a higher interest rate will be worth more on the second hand market). Are we talking about the same thing, or are you saying this is wrong?

 

[mathjak107]

not the same. you can never have more buyers than sellers . they have to be equal in order for a transaction to happen. because a transaction isnt logged or counted in effecting the price unless a deal happens . as an example you have 200 buyers and 2 sellers. the sellers want 5 bucks a share. the buyers,even though there may be 100 of them dont want to pay more than 4 bucks a share... no deal no price change that day. if one buyer agrees to 5 he gets the deal. if one seller agrees to 4 he gets the deal but the bids arent necessarily controlled by numbers. suppose one buyer offered 2x the price to get a share of xyz company. there may be 100 sellers but only one gets double the price and in effect the posted price of that stock is now double what it was with only having 1 buyer and 100 sellers.. unless other bidders offer the same price that price wont hold after the next transaction.

 

[FIREd]

you can never have more buyers than sellers ... as an example you have 200 buyers and 2 sellers. if one buyer agrees to 5 he gets the deal. if one seller agrees to 4 he gets the deal but the bids arent necessarily controlled by numbers.

I am not following. Isn't the price of bonds controlled by demand vs. offer ultimately?

 

[mathjak107]

simple answere.... yes, no and sometimes. it all comes down to the bids that actually execute.. the bids are based on sooooo many different things, flight to quality, definatly bids are based on demand and numbers.... but economic conditions usually dictate more about the offers than the sheer numbers of people.

 

[FIREd]

Ok, thanks. It's nice to know that some people understand the intricacies of the market. Could you recommend any book (or source) discussing the mechanism of bond auctions? I'd like to learn more.

 

[DblDoc]

I'm basically and buy and hold type with regard to mutual funds. Last week my wife and I bought a bunch of VCAIX (Vanguard's tax-exempt Calif. municipal bond fund). Yes, we live in Calif. Anyhow, regarding bond funds, municipal or otherwise, is there a time when they should be sold as per what the economy or stock market it doing?

1) To tax loss harvest
2) To rebalance
3) For withdrawals to fund your retirement
4) If you decide you no longer need that asset class
5) Or were you talking about market timing

DD