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Old 12-17-2013, 11:04 AM   #41
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Here's a recent piece that makes the case that current rates are too high and recommends buying bonds now. Crowding In
That's kind of how I see things - and which is why I jumped at the chance to buy some 3% CDs which are currently yielding better than some of my high quality intermediate bond funds.
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Old 12-17-2013, 11:16 AM   #42
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Here's a recent piece that makes the case that current rates are too high and recommends buying bonds now. Crowding In
Good article, thanks. So where do I get "a high-grade, long-term tax-free yield of 5% is obtainable in a very low-inflation environment, we think that bond investors who run from bonds and liquidate them will look back, regret the opportunities they missed, and wonder why they did it" without taking the risk/volatility to match?
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Old 12-17-2013, 11:22 AM   #43
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Good article, thanks. So where do I get "a high-grade, long-term tax-free yield of 5% is obtainable in a very low-inflation environment, we think that bond investors who run from bonds and liquidate them will look back, regret the opportunities they missed, and wonder why they did it" without taking the risk to match?
Muni CEFs? But I couldn't live with the volatility. Still, they are on sale right now.
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Old 12-17-2013, 04:41 PM   #44
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I'd also in hindsight you would been much better off with 0% bonds, the returns of BND (total bond market) have been 4.39% over the last 5 years vs 17.97% for VTI, which over 5 years correspond to difference between total 23% return and 228%. You may have slept better with some bonds (I know I did) but that is ton of money to give up for good night sleep.
Ahh yes, hindsight. After the casino's little silver Roulette ball drops I should be kicking myself for not putting my entire nest egg on 29 Black
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Old 12-17-2013, 05:30 PM   #45
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I have been investing in bond funds for more than 20 years. And since I ERed 5 years ago, the monthly dividends from them provide me with more than enough money to cover my expenses. Remember that the price (NAV) of bond funds tends to work in inverse proportion to the monthly dividend yield. So I like it when the NAV drops because I can buy new shares cheaply and those shares will generate more money every month. The ultimate bargain basement price on bond funds was back in late 2008 when the price of everything dropped (even though interest rates were not necessarily rising) and I had the chance to buy into one of them at greatly depressed prices.

About a year ago the bond fund prices were on the high side but since then they have fallen and for the first time in a while, the monthly dividend yield has begun to rise a little bit, a good development for me. I don't buy buy bond funds to make money by selling them (I rarely sell them, only in emergencies, so if I make a few bucks on the sales, great, if I lose a few bucks, no big deal), I buy them for the income they generate.
To me that declining distributions of my bonds funds has been one of the most troubling aspects of the financial crisis. Fortunately bond were never more than 35% of my portfolio. Still lets look at the distributions of one of Vanguard most popular bond fund Vanguard GNMA (Admiral)

Monthly distributions per share
1/2008 .0454
1/2009 .0414
1/2010 .0254
1/2011 .0302
1/2012 .0288
1/2013 .0203
11/2013 .0233

Multiply by 12 and divide ~$10.50 you can see the yield has dropped tremendously.


So seeing that monthly income has been cut almost in 1/2 since the beginning. I would have to conclude that either the bond funds are pretty small portion of your income, or you had a pretty big cushion.
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Old 12-17-2013, 05:57 PM   #46
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Ahh yes, hindsight. After the casino's little silver Roulette ball drops I should be kicking myself for not putting my entire nest egg on 29 Black

I guess the point I am making is that while bond were good to have during the crisis primarily because they didn't drop much during 2008 and started appreciating earlier than stocks. For retirees like myself who's withdrawal are based on how much income our portfolio generate, bond fund weren't particularly useful to have during the crisis. Having my income cut in 1/2 (previous post) is more than I can handle for extended period of time.

I am all for significant amount of fixed income in a retirement, pension, SS, even annuities. Now no fixed income investment would have eliminated the huge impact on retirees income, that war on savers has caused. My question is there any reason to own a bond fund when an alternative fixed income instrument, CD, Stable Value fund, G fund etc. provide an equal or superior yield with a similar duration.

Or more specifically anybody think I should keep the money in the Vanguard GNMA as opposed to get Pen Fed CDs?
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Old 12-17-2013, 06:31 PM   #47
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Or more specifically anybody think I should keep the money in the Vanguard GNMA as opposed to get Pen Fed CDs?
I guess the low risk path would be to lose the GNMA fund. But I have never studied GNMAs to see how they work. Is there something about the cash flow characteristics of a GNMA bond that causes it to lose value in a credit crunch. Or is it just from having leveraged funds, and hence funding problems?

I have a fund in which about 1/2 the assets are agency or non-agency MBS. Since May 2013 it has lost some quoted price per share, but the per share distributions have been increasing, not decreasing, and of course with monthly distributions increasing or at least holding steady, my reinvested cash buys more shares. My total return is much better than what I use as a risk free comparator (not a benchmark in the classic sense, just by before the fact estimated hurdle).


Maybe you could explain the behavioral differences from unleveraged investment quality assets of similar duration, and in particular since that was your focus, why these distributions dropped?

Ha
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Old 12-17-2013, 09:38 PM   #48
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Or more specifically anybody think I should keep the money in the Vanguard GNMA as opposed to get Pen Fed CDs?
The nasty thing about GNMAs in a volatile rate environment is their significant negative convexity (optionality sold to the borrowers for more coupon). When rates drop, the borrowers refinance and lower the coupon. When rates rise, instead of an estimate of, say, an average 4 year life for your bond you suddenly find that nobody wants to prepay or refi so your expected average life goes to 9 years (with duration making similar moves). Its a heads I win, tails you lose proposition offset by getting more yield than a straight bullet of similar credit quality would offer. In an environment where there is a lot of uncertainty about the size and direction of rate moves, I really do not like the negative convexity of these bonds.
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Old 12-17-2013, 10:15 PM   #49
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The nasty thing about GNMAs in a volatile rate environment is their significant negative convexity (optionality sold to the borrowers for more coupon). When rates drop, the borrowers refinance and lower the coupon. When rates rise, instead of an estimate of, say, an average 4 year life for your bond you suddenly find that nobody wants to prepay or refi so your expected average life goes to 9 years (with duration making similar moves). Its a heads I win, tails you lose proposition offset by getting more yield than a straight bullet of similar credit quality would offer. In an environment where there is a lot of uncertainty about the size and direction of rate moves, I really do not like the negative convexity of these bonds.
Brewer, is this what happened to Clifp in the credit crunch? I can't really remember the course of bond yields as we got into that and then came out. I guess all the low payouts he shows recently must be from refinancing of mortgages when rates were low, then holding the low rate mortgages more recently as rates improved. I still am surprised at how awful the result was.

Ha
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Old 12-17-2013, 10:19 PM   #50
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Brewer, is this what happened to Clifp in the credit crunch? I can't really remember the course of bond yields as we got into that and then came out. I guess all the low payouts he shows recently must be from refinancing of mortgages when rates were low, then holding the low rate mortgages more recently as rates improved. I still am surprised at how awful the result was.

Ha
Yep, refis and defaults (which result in bad loans getting replaced by cash or good loans) caused the drop in yields as market rates dropped. Now these bonds are under pressure as rates rise and durations extend.
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Old 12-17-2013, 11:18 PM   #51
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To me that declining distributions of my bonds funds has been one of the most troubling aspects of the financial crisis. Fortunately bond were never more than 35% of my portfolio. Still lets look at the distributions of one of Vanguard most popular bond fund Vanguard GNMA (Admiral)

Monthly distributions per share
1/2008 .0454
1/2009 .0414
1/2010 .0254
1/2011 .0302
1/2012 .0288
1/2013 .0203
11/2013 .0233

Multiply by 12 and divide ~$10.50 you can see the yield has dropped tremendously.


So seeing that monthly income has been cut almost in 1/2 since the beginning. I would have to conclude that either the bond funds are pretty small portion of your income, or you had a pretty big cushion.
Wow, that is a pretty steep drop in your monthly dividends per share (DPS). In the big (corporate) bond fund I often refer to (it represents 35% of my overall portfolio and just over half of the taxable subset of it), the monthly DPS was just under 5 cents per share in late 2008 when I first began investing in it. In the 5 years I have been in it, the monthly DPS has dropped to just under 4 cents per share.

However, while the monthly DPS has dropped by about 21%, the number of shares I own has risen by about 28%, so my actual monthly dividend has remained pretty stable (0.79 x 1.28 = 1.01). The added shares came from the excess of monthly dividends over expenses as well as cap gain reinvestments and dividend sweeps from some other funds.

I agree that there has been an erosion of the monthly DPS and I have found it troubling. I own nearly 50,000 shares of my bond fund so even 1/10 of a cent per month translates to about $50 per month.
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Old 12-18-2013, 03:12 AM   #52
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Wow, that is a pretty steep drop in your monthly dividends per share (DPS). In the big (corporate) bond fund I often refer to (it represents 35% of my overall portfolio and just over half of the taxable subset of it), the monthly DPS was just under 5 cents per share in late 2008 when I first began investing in it. In the 5 years I have been in it, the monthly DPS has dropped to just under 4 cents per share.

However, while the monthly DPS has dropped by about 21%, the number of shares I own has risen by about 28%, so my actual monthly dividend has remained pretty stable (0.79 x 1.28 = 1.01). The added shares came from the excess of monthly dividends over expenses as well as cap gain reinvestments and dividend sweeps from some other funds.

I agree that there has been an erosion of the monthly DPS and I have found it troubling. I own nearly 50,000 shares of my bond fund so even 1/10 of a cent per month translates to about $50 per month.
The drop in distribution in the Vanguard GNMA isn't all that unusual in government bond funds.

BND (total bond market index etf)
2009 Distributions $3.1627
2013 $1.8508 (est)

Vanguard Investment Grade intermediate
2009 $.505
2013 $.354

Vanguard Hi Yield
2009 $.430
2013 $.372

It appears that all this QE stuff resulted in a dramatic drops in distributions for the safe government bonds (BND I believe is like 75% government 25% corporate) and smaller drops in corporate and very modest in high yield.

I was measuring the GNMA fund from a longer period Jan 2008 vs the total 2009 income distribution for the other fund.
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Old 12-18-2013, 03:35 AM   #53
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Brewer explained the issue with GNMA better than I can. It was an earlier comment of his that caused me to significantly decrease my holdings (and my mom's much bigger position at one point 1/2 her assets were in Vanguard GNMA.)

The thing is the GNMA is one of Vanguard oldest fund 1980 and we've owned it almost that long. Over the years it provide 50-100 basis higher return than Treasuries and even today the 10 year return of the GNMA exceeds the Total Bond Market.

But I can't think of any advantage of the GNMA over a Pen Fed CD, other than liquidity so I sold today.
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Old 12-18-2013, 07:19 AM   #54
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The drop in distribution in the Vanguard GNMA isn't all that unusual in government bond funds.

BND (total bond market index etf)
2009 Distributions $3.1627
2013 $1.8508 (est)

Vanguard Investment Grade intermediate
2009 $.505
2013 $.354

Vanguard Hi Yield
2009 $.430
2013 $.372

It appears that all this QE stuff resulted in a dramatic drops in distributions for the safe government bonds (BND I believe is like 75% government 25% corporate) and smaller drops in corporate and very modest in high yield.

I was measuring the GNMA fund from a longer period Jan 2008 vs the total 2009 income distribution for the other fund.
One measure I use to figure out the monthly dividend's rate of return is to divide the number of shares I receive or would receive (if I do not reinvest them) by the total number of shares I own. This calculation is clean if I did not make any sales or purchases in the month, otherwise I have to modify it a little bit. I can take that monthly return and annualize it. But what I also do is to multiply 12 consecutive of these monthly rates of return to get an annual rate of return. I maintain a moving 12-month rate of return so I can track it and smooth out any "bumps" from month to month.

Using this meaurement, I have seen the annual dividend rate of return in my home-state muni bond fund also erode in the last few years after being pretty stable from 2004-2011. In the corporate bond fund I described in my previous post, the annual dividend rate of return has dropped from around 7% to 5% in the last few years but most of that is due to the decline and elimination of an annual "spike" in the December monthly dividend in recent years.
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Old 12-28-2013, 05:47 PM   #55
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Vanguard says to keep your asset allocation by buying when markets are going up, and buy them when going down. Also keep the allocation balanced by selling what is high and then invest into what is low per the contrarian rule. That is a gutsy oxymoron , but it works out with time,...
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Old 12-30-2013, 04:22 PM   #56
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Most of the developed countries in the world are in population decline. The US has been the one exception, at least up until the great recession. I think the US is barely hanging onto roughly zero growth right now. Most of the developed countries have very high birth rate declines. Even developing countries now have birthrates below the replacement level and will be in population decline.

Anyway, bonds may be a descent investment. Based on the countries that have been going through population decline the longest, the economic affects seems to be deflation or stagnation (which just reinforces the birthrate declines even more).

Japan is a good country to watch to see if they can pull themselves out of this. Their population decline appears to have started after their economic meltdown, and I think they have been caught in a reinforcing loop where more economic deflation/stagnation causes lower birthrates, which then causes more deflation/stagnation...

What I am doing with my own money is trying to invest in companies that will benefit from the wave of artificial intelligence and robotics that is coming down the pipe. IBM and Google would be good examples. We are going to need machines to replace human labor as we have less and less people.





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