Short, Medium & Long Term Bond Funds 2013

[Midpack]

Hopefully there's no one left here who doesn't recognize the risk associated with long duration bond funds when interest rates eventually increase. These fund choices aren't exactly apples to apples, I chose them for selfish reasons because I own the first two but they are short (2.3 yrs), medium (5.5 yrs), and long (14.0 yrs) duration funds. Obviously not what you expect to see long term, and thank goodness I split my fixed income holdings where I used to be solely in TBM. And this is one year with essentially no rate increase, just imagine...

 

[Moemg]

I've reduced my bond exposure down to 24% . All but 1% are now in short term bond funds . Hopefully this works out !

 

[audreyh1]

Unless - long term interest rates don't move much, but the short term does. That has happened before.

You never know!!!

 

[galeno]

In 2014 our AA = 60/13/27. The plan is to increase bonds by 5% per year and decrease cash (MMF + 5yrCD ladder) by 5% per year until we have a 60/35/05 portfolio.

I'm currently investigating the possibility of switching from an Ireland (offshore) PIMCO bond fund denominated in USD. It has an ER = 0.85%. Sec Yield = 1.40%. Duration = 4.4 years. Lots of leverage and derivatives.

The change would be for a new Ireland (offshore) Vanguard bond ETF that is a Great Britain government bond fund denominated in GBP. ER = 0.12%. TTM yield = 1.85%. Duration = 9.3 years. No leverage or derivatives.

I'm going to have to think about this for a while.

I don't like the long duration nor the denomination in GBP. I LOVE the cost and the fact of no leverage or derivatives.

 

[easysurfer]

I go TBM and have about 40% with a long term perspective.

Just rebalanced and a few days ago from the upshot in equities last year.

 

[pb4uski]

What would normally be in domestic bonds for me is currently in MM funds. Only bonds are domestic high yield and international bond funds. I'm not sure what I will do.

Tempted to stand pat or to value average into iShares 2020 Corporate target maturity bond fund over 6-12 months.

 

[NW-Bound]

The 30-yr Treas. has been inching up since summer of 2013, and is up to 4% now. The 5-yr rate used to be below inflation (crazy bidders!), but is above it now.

 

[veremchuka]

I'm 50% in FI. Vanguard short term investment grade and intermediate term investment grade and stable value in my 401k. The ITIG fund makes me nervous, the STIG not so much. Since I reinvest dividends in both and have no distributions planned until 70 1/2, the ITIG fund's duration may not be a problem as that's a bit beyond the 5-6 years of the ITIG fund and RMD.

 

[aaronc879]

I have a fairly large portion of my portfolio in a rollover IRA invested in PGBOX. Is that an example of a "bad" bond fund when rates go up? I put the money there because I thought it was far more conservative than anything involving equities. Now i'm not so sure.

 

[RockyMtn]

My bond allocation is split up as follows: 30% Stable Value fund. 20% ST US Treasury, 30% Target maturity 2014, 2015, 2016 IShares Muni ETF's, 20% Vanguard Intermediate Muni ETF. Weighted maturity about 2.5 years.

 

[Marc]

My "non-equity" allocation is Fidelity Total Bond 80%, Fidelity Capital and Income 13% and Fidelity Floating Rate High Income 7%. A little too high on junk but has worked out well for me.

Marc

 

[Midpack]

Cross posting? Meant for this thread http://www.early-retirement.org/forums/f28/whats-your-non-equity-portfolio-look-like-69996.html?

 

[Marc]

Cross posting? Meant for this thread http://www.early-retirement.org/forums/f28/whats-your-non-equity-portfolio-look-like-69996.html?

Didn't see that thread; actually only reason i said "non-equity" instead of "bond" was that some don't consider Fid Cap & Inc or Floating Rate bond funds.

Marc

 

[NW-Bound]

I have a fairly large portion of my portfolio in a rollover IRA invested in PGBOX. Is that an example of a "bad" bond fund when rates go up? I put the money there because I thought it was far more conservative than anything involving equities. Now i'm not so sure.

I look up PGBOX, and see that it is has a relative short duration of around 5 years. So, that's not too bad.

Yes, there is really nothing absolutely safe. Some people think that if they hold individual long bonds to maturity, they do not lose money. Well, the cumulative inflation in the past 14 years from Jan 2000 to Jan 2014 is 40%, and we even had two recessions and a deflationary period in that time interval. Hate to think what it would be in a "normal" period.

Well, I just looked up the preceding 14 years. From Jan 1986 to Jan 2000, the cumulative inflation was 54%. It was not as bad as I thought.

Surely, you get back your original principal with individual bonds eventually, but it will be worth 65c on the dollar. You pay the piper now with bond MFs or you pay him later with individual bonds.

On the other hand, perhaps the long interest rate will turn around and dips into deflation like some people say, despite the chart I posted earlier about it trending up lately, and bonds will ride high again. One never knows, and maybe these people will be proven right, though I have my doubt.

 

[Lsbcal]

For my own purposes I analyzed a few bond fund's performance during the last rate rise starting in Jan 2003. The yield difference (spreads) between 5yr and 2yr Treasuries were almost the same as now. The absolute yields were about 1.4% higher though.

Here is how things worked out for Vanguard Short Term IG (VFSUX), Vanguard Total Bond Mkt (VBTLX), and Pimco Total Return (PTTRX). Also should mention that Prime Money Market returned just -0.3% real during this time period and Dodge & Cox Income (DODIX) behaved almost identically to PTTRX.

This chart is a bit cluttered, sorry:

Of course, no guarantees history will be similar.

 

[audreyh1]

Lsbcal - Would you be willing to add the 10yr to 2yr (or 10 yr to 5yr) spread on your beautiful graph? I've been wanting to know how the 10yr treasury historically behaves with respect to the 5 yr.

 

[veremchuka]

I look up PGBOX, and see that it is has a relative short duration of around 5 years.

I'd consider 5-9 years as intermediate duration. NOTHING is safe even treasury notes/bonds and treasury bond funds have risk - interest rate risk and funds also manager risk.

 

[Lsbcal]

Here is the graph with the 10yr - 2yr spread added. Also I show DODIX (Dodge & Cox Income) instead of VBTLX (VG Total Bond Mkt).

and here is a picture of some the 3mo, 2yr, 5yr Treasury yields:

 

[aaronc879]

I'd consider 5-9 years as intermediate duration. NOTHING is safe even treasury notes/bonds and treasury bond funds have risk - interest rate risk and funds also manager risk.

So what are we taking about here? When rates rise, an intermediate-term fund will fall how far? 5%/yr,10%/yr? Even in bad years a bond fund won't fall 20%+ like equities, right?

 

[haha]

So what are we taking about here? When rates rise, an intermediate-term fund will fall how far? 5%/yr,10%/yr? Even in bad years a bond fund won't fall 20%+ like equities, right?

An hour of basic reading on the internet will explain these things for you.

Ha

 

[aaronc879]

An hour of basic reading on the internet will explain these things for you far better than a discussion here. There are people here who understand these things very well, but they are not guaranteed to be the only ones who might post about them. It can seem confusing.

Ha

I've spent the last couple days reading a couple dozen articles online and all it got me was confused. I guess i'll just hold what I have.

 

[NW-Bound]

It depends on how much the yield of that bond rises or falls.

As a refresher (for myself too), the present value of a bond is the sum of the discounted value of its income stream and the discounted value of its principal that is paid back at maturity.

Here's an example. For a 10-yr bond of $1000 principal paying 3% interest a year ($30/yr), if the current interest rate (or inflation?) is 0%, then its value is $1000 + 10 * $30 = $1300. If the current rate is 3%, then the discounted value of the interest payments is $255.906 and that of the principal is $744.09, and the sum is exactly $1000. The first case is trivial and can be easily seen. The latter case is more complicated, yet the result is as can be expected, because the interest payment exactly cancels out the inflation.

The actual formulas are PVA = I[1-(1+k)^-n]/k and PV = FV/(1+k)^n, where PVA and PV are the values of the interest stream and the principal, FV is the returned principal at maturity, I is the annual interest payment, k is the current interest rate (inflation rate?), and n is the number of annual payments. Note that when k=0, then the formula blows up but we already know that PVA = I * n, and PV = FV for that limiting trivial case. Or if one wants to be fancy, remind yourself of freshman calculus and take the limit when k approaches 0.

The problem is the new interest rate is assumed constant in the remaining duration of the bond, which we know is not true. And the bond yields of different duration often have a strenuous relationship. Long bonds should have a higher coupon rate than short-duration bonds, but the yield curve has been inverted in the past.

And in the above formula, should I use expected inflation rate which reflects the discounted value of the principal and interest stream, or do I use the current bond yield which shows the lost opportunity relative to selling this bond and buying a new one now?

It's really weird stuff, and I admit that I have not been following this closely in the past. I made most of my money from stocks, but now that I am not working and have more time when not RV'ing, I am willing to learn a new trick.

However, I will note that if the bond yield changes 2% from a high value like 6% to 8%, the effect is nowhere as big as a change from a low value of 2% to 4%, which we observed recently.

"In theory there is no difference between theory and practice. In practice there is." -- YogiBerra

 

[haha]

I've spent the last couple days reading a couple dozen articles online and all it got me was confused. I guess i'll just hold what I have.

I have a very tenuous understanding of this, not enough that I want to try to teach others.

Here is a decent non-technical article. Bond investors face a reckoning as interest rates jump - Page 2 - Los Angeles Times

Also, I have a bond fund that was running a duration of around 4 years last spring when 10 year interest rates abruptly rose, as I remember from about 1.7% to almost 3%. My fund dropped roughly 5% in quoted value, which is close to the short cut prediction of capital value changes = duration * delta interest rates. I am using 10 year rates, because they are easily found, and because this fund owned a lot of mbs, and rates on these tend to key off 10 year government rates. Of course if you are re-investing dividends, your share count starts rising and tending to close the gap created by that loss. I have noticed that it does not seem to pay to be extremely conservative regarding duration, because a higher interest rate combined with dividend reinvestment can catch up to cash or near cash pretty quickly. And of course if rates fall, you are much better off. I do not subscribe to the meme that rates from here must necessarily change only in one direction-up. If 10 year rates were 1.7% last April, is it impossible for them to be 1.7% once more? If the answer is yes, why would this be true?

Maybe some expert will have time to stop by later.

Ha

 

[FIRE'd@51]

I have a fairly large portion of my portfolio in a rollover IRA invested in PGBOX. Is that an example of a "bad" bond fund when rates go up? I put the money there because I thought it was far more conservative than anything involving equities. Now i'm not so sure.

A problem I see with PGBOX is its expense ratio of 0.74%. Vanguard probably has a very similar fund with an expense ratio of 0.10%.

 

[nun]

I'm 50% in FI. Vanguard short term investment grade and intermediate term investment grade and stable value in my 401k. The ITIG fund makes me nervous, the STIG not so much. Since I reinvest dividends in both and have no distributions planned until 70 1/2, the ITIG fund's duration may not be a problem as that's a bit beyond the 5-6 years of the ITIG fund and RMD.

That's my plan too.

My only bonds are those I hold in Wellesley and 7% of my AA in Vanguard Intermediate Investment Grade. The majority of my fixed income is in cash, stable value and TIAA-traditional. Last year I moved all my TBM allocation to Stable Value in my 457 to prepare for ER so that I have enough to cover 7 years of spending from 52.5 to 59.5. I don't plan to touch the bonds I still have for at least 10 years.