Bonds - What to do?

[jkern]

Is anyone else worried about the potential Bond bubble? I've read several articles advising to reduce bond exposure to next to nil. With equities at an all time high and cash yielding an all time low, what are the alternatives?

Just curious what everyone else is thinking or doing?

 

[haha]

Is anyone else worried about the potential Bond bubble? I've read several articles advising to reduce bond exposure to next to nil. With equities at an all time high and cash yielding an all time low, what are the alternatives?

Just curious what everyone else is thinking or doing?

The only alternative that makes any sense would be cash. Only a remote chance would take bonds and not equities down strongly.

The whole purpose of these low rates is to drive savers toward more risk.

As anyone who has ever seen a loading chute knows, it is usually smart to avoid whatever you are being driven toward.

Ha

 

[F4mandolin]

The whole purpose of these low rates is to drive savers toward more risk.

As anyone who has ever seen a loading chute knows, it is usually smart to avoid whatever you are being driven toward.

Ha

So THAT'S why I have those whip marks on my back.....

 

[GrayHare]

Eventually (exactly when no one knows) the Fed will stop buying bonds at which time bond prices will drop and yields will rise. Historically during times of negative real interest rates, such as we have now, precious metals have performed well. Don't fight the Fed.

 

[FIREd]

About 50% of our fixed income allocation is invested in cash, CDs, or i-bonds. About 25% is invested in intermediate bonds, investment grade or better, with a duration < 5 years. The last 25% is invested in PIMCO Total Return (only bond fund choice in DW's 401K). Hopefully Bill Gross will see us through those uncertain times.

 

[ripper1]

Well, what is one supposed to do. You need bonds for ballast. I would just stay in the middle of the ship with intermediate bonds.

 

[aja8888]

Fed implied they will keep rates low until unemployment is down to 6.5% and inflation is increasing. I would suspect a lot of people will be asleap at the wheel when bonds and bond funds see their NAV start heading down.

 

[gerrym51]

Is anyone else worried about the potential Bond bubble? I've read several articles advising to reduce bond exposure to next to nil. With equities at an all time high and cash yielding an all time low, what are the alternatives?

Just curious what everyone else is thinking or doing?

if bonds are a bubble-and equitys are at all times highs-isn't that a bubble.

cash or cd-the only out..

you can't win so stay the course. what else can you do

 

[veremchuka]

I have kept about 35% of the portfolio in my 401k to use the stable value fund for fixed income, the yield now is 3.2%. Anything much higher than that would worry me they are taking too much risk but this fund has performed well over the the years. In a rollover IRA I have an equal allocation to the Vanguard TIPS (which I think was a mistake) and the Intermediate Investment Grade bond fund which I'm ok with.

It's a tough situation - bonds are paying dick and poised to take a hit while equities are sky high and have to correct to some point some day. Talk about a rock and a hard place!

 

[DeborahB]

Not a good time to be in bonds, IMHO - neither in funds or owning bonds directly. All of my good-paying bonds are being called. I expect my bond funds to go down in NAV... I'm seriously thinking of selling the funds Monday and doing other things with the money (more risky but way more profit).

 

[bUU]

I mentioned in another thread that I'm being pointed toward bank loans instead of bonds. I'm still unsure about it, but I haven't heard positive recommendations toward any other alternatives. :\

 

[timo2]

Eventually (exactly when no one knows) the Fed will stop buying bonds at which time bond prices will drop and yields will rise. Historically during times of negative real interest rates, such as we have now, precious metals have performed well. Don't fight the Fed.

What I was reading today speculated that the change in value will happen very quickly, so keep in short term bonds. Even though indications are the Fed will keep rates low until 2015, that still seem close to me.

 

[seraphim]

I mentioned the same thing as verumchuka a month or so ago: I have the option of moving about $500,000 from stable accounts (mostly paying about 1.62%, about $120k paying about 2,25%) into Vanguard accounts - my AA is and would be 60s/40b. My thought then was to leave the bond portion in the account paying 2.25% until a better time to pay into bonds. Have about a month before I can transfer anything (post retirement)

The rates are a bit different now than what I posted last time. The ones in this post are more accurate - not exact, but close enough to give an idea The large account follows ten year treasuries, and I'm not sure how the smaller account is figured.



http://www.early-retirement.org/forums/f28/thoughts-on-a-strategy-65556.html

 

[LOL!]

I thought the "bond bubble" was last month's worry and we are now beyond it.

Lots of threads over on Bogleheads were started in March-April on the subject, but the recent rally to all-time highs has quieted things down a bit.

Here are some recent threads to read on the subject:
Bogleheads • View topic - Vanguard: Six questions (and answers) about bonds (Links a Vanguard Q&A article which is very good)
Bogleheads • View topic - A graphic on the role of bonds (Role of bonds in a portfolio)

A surprising (to me) fraction of Bogleheads have reported that they shortened their bond durations. This is remarkable from the "stay-the-course" crowd. Folks have gone to CDs, stable value funds, I-bonds, and short-term bond funds.

 

[aaronc879]

I have kept about 35% of the portfolio in my 401k to use the stable value fund for fixed income, the yield now is 3.2%. Anything much higher than that would worry me they are taking too much risk but this fund has performed well over the the years. In a rollover IRA I have an equal allocation to the Vanguard TIPS (which I think was a mistake) and the Intermediate Investment Grade bond fund which I'm ok with.

It's a tough situation - bonds are paying dick and poised to take a hit while equities are sky high and have to correct to some point some day. Talk about a rock and a hard place!

I'm still somewhat new to investing but my understanding is that bonds don't drop by very much whereas equities could drop by 1/3 within a matter of months. Seems like bonds are better, even now, for people who are concerned about volitility. Am I wrong? When I say bonds, i'm referring to bond funds such as total bond market funds.

 

[gerrym51]

I mentioned in another thread that I'm being pointed toward bank loans instead of bonds. I'm still unsure about it, but I haven't heard positive recommendations toward any other alternatives. :\

fixed termination date funds

investigate this

Has Fidelity Solved a Major Problem with Bond Mutual Funds?


https://www.fidelity.com/mutual-funds/news-analysis/defined-maturity-funds


2023 version starting this month https://fundresearch.fidelity.com/mutual-funds/summary/31635V109

 

[ERhoosier]

fixed termination date funds

investigate this

Has Fidelity Solved a Major Problem with Bond Mutual Funds?


https://www.fidelity.com/mutual-funds/news-analysis/defined-maturity-funds


2023 version starting this month https://fundresearch.fidelity.com/mutual-funds/summary/31635V109

Another company with similar offerings as ETF's- and at lower exp ratios (~0.24% vs 0.4%) IF you use deep disc broker to buy 'em-

ETFs | Guggenheim Investments

 

[gerrym51]

Another company with similar offerings as ETF's- and at lower exp ratios (~0.24% vs 0.4%) IF you use deep disc broker to buy 'em-

ETFs | Guggenheim Investments

bulletshares(guggenheim) are corporate bonds


fidelity are
these are municpal bonds not taxable

i live in massachusetts where fidelity is so munis are also lower state tax rate and not taxable at all on federal tax

 

[brewer12345]

I mentioned in another thread that I'm being pointed toward bank loans instead of bonds. I'm still unsure about it, but I haven't heard positive recommendations toward any other alternatives. :\

Bank loans have little if any interest rate risk, which is why they are suggested. The problem is that they all have substantial junk grade credit risk and the junk market has gotten stupid. I owned this stuff as the markets clawed their way out of the bust, but would not touch them now.

If you want an alternative to index bond funds, keep your durations short, your credit quality high, and make sure your funds own no agency mortgage backed securities (fannies, freddies, ginnies). The optionality embedded in gubmint mortgage bonds means that bondholders will get disastrously killed when rates rise and reported durations on these securities are effectively meaningless.

Other alternatives I have been making use of are merger abitrage funds, CDs, I bonds and plain old cash.

 

[RobLJ]

Bonds

Brewer's advice is good, although I have moved about 10% of my bond allocation through harvesting gains into Floating Rate. Despite the important risk he notes. In a credit crisis, they would be killed; if it's interest rates rising, not so much. Also have moved similar allocations into emerging bonds (Fidelity New Markets) and foreign currency funds (Templeton GIM) . Also decreased duration, with more in short-term. Finally, you could consider a Guggenheim Bullet-bond ladder. And I bonds. And cash is not trash. Your mileage may vary; and most of these incur more risk, from a traditional perspective, than vanilla Treasury bonds. Pick your poison.

I've been making these changes over the last two years, gradually. Grundlich is probably talking his book but argued recently--as he has for the last two years--that with QE, we'll be in low yields and high bond prices for a long time. I tend to agree so I've been using primarily gains to make these moves.

 

[ejman]

A lot of commentary seems to be as if there is some sort of precipice we are rapidly approaching and it is very near. Is this a likely scenario? Rates in Japan have been very low for decades and there has been talk of a precipice scenario re Japan bonds for a long time (decades?). With all of the debt being piled on to government balance sheets all over the world how likely is it really that governments will start paying a large part of their budgets in interest payments by simply letting go in the immediate future?

 

[heeyy_joe]

Look outside the USA. Try AUD.

 

[photoguy]

A lot of commentary seems to be as if there is some sort of precipice we are rapidly approaching and it is very near. Is this a likely scenario?

Nobody knows. It's certainly plausible but I don't know that I would say it is the most probable outcome.

People have been talking about over-priced bonds and bond bubble bursting for a long time now and it hasn't come to pass. But it will eventually. However, if you had simply maintained your bond allocation (with a good chunk of longer durations bonds) you would have earned some nice returns that would offset future price drops.

 

[gerrym51]

your best bet might be to watch all episodes of

"DOOMSDAY PREPPERS"

 

[brewer12345]

Nobody knows when or if bond yields in the US will spike. However, I have learned a very few tricks in the last 20 years and I try to wait for the fat pitch, but I also try to reduce risk whenever it is cheap to do so. You give up vanishingly small amounts of yield these days to avoid a LOT of interest rate risk. I will take that trade any day of the week.