Sell bond index funds at a loss in order to buy CDs?

[rkser]

https://www.schwab.com/learn/story/fixed-income-outlook

They say most of the damage to Bonds may be behind us

 

[audreyh1]

https://www.schwab.com/learn/story/fixed-income-outlook

They say most of the damage to Bonds may be behind us

I expect that it is. Bond index funds have been rallying since mid October.

 

[rkser]

I expect that it is. Bond index funds have been rallying since mid October.

In prior posts I read you have had VBTLX.
Please expand on the reasons if you still have/sold the Bond Index, it may help me/others understand this Bonds loss of historic proportions

For us, we bought VBTLX in our working years & have held since with no changes, except converting & replacing with VTI in our Roth Accounts.

Thanks

 

[Yipper]

I've started to like what I am reading about bond ETFs like iShares iBonds and BulletShares that buy and hold bonds for target years to maturity. Seems a nice compromise between holding individual bonds to maturity with little risk on the downside (early call, default, etc.) and benefit of diversification and liquidity.

 

[pb4uski]

I expect that it is. Bond index funds have been rallying since mid October.

That might well be true, and let's assume that it is. The more important question is whether BND will grow more than a 10 year ladder from here onwards.

It seems to me that BND is already dealing with a disadvantage compared to a CD/UST bond ladder. I did a look at 7-year CD/UST bond ladder 6 days ago for a friend-of-a-friend who had inherited some money and was not keen on the rate from local bank CDs... 7 equal rungs a year apart. I took the highest yielding CD or UST for each rung. The average yield was 4.23%. CDs were preferable in years 1-5 and UST in years 6-7.

Like I said in a prior post, I'm skeptical that BND will outperform a 10-year CD/UST bond ladder over the next 10 years, and I prefer the control of a ladder. YMMV.

 

[audreyh1]

In prior posts I read you have had VBTLX.
Please expand on the reasons if you still have/sold the Bond Index, it may help me/others understand this Bonds loss of historic proportions

For us, we bought VBTLX in our working years & have held since with no changes, except converting & replacing with VTI in our Roth Accounts.

Thanks

No, I don’t own that fund. Some others have posted mentioning that fund.

I’m still holding my bond index funds. I don’t care about holding individual bonds to maturity, guaranteed income streams or distribution yield. When bond funds have a bad year I usually end up buying more because I rebalance annually.

Like I said in a prior post, I'm skeptical that BND will outperform a 10-year CD/UST bond ladder over the next 10 years, and I prefer the control of a ladder. YMMV.

Different strokes……

And we’ll see in 10 years I suppose, although that still wouldn't change my investing style. I hold bond funds/fixed income to diversify against stock funds and reduce overall portfolio volatility. It works even in down years.

 

[all4j]

Is it not true that most of a Bond return is from the yield (dividend) it pays & not its price ?.

You are on the right track with this, but do need to consider some other aspects. I’m in the school that individual bonds & funds/etfs are 2 different products AND thus, should be used/evaluated differently. From what I skim on this board, more people agree with the 1st part of that than the 2nd. I don’t see 1 size fits all here. So, what to consider? First, what are your objectives? It is surprising to me how many different reasons people have for investing in “bonds” (whatever form, including CDs, etc). Are you in it for income? Diversification? Capital preservation (nominal terms)? Etc. Second, consider your time horizon & the environment you are investing into (I would suggest considering upcoming will be rising rates, high/moderate inflation). Third, your risk tolerance & how sensitive you are to various risk components.

For example, you might frame it this way. An individual bond will lock in a coupon & have a variable duration. A fund/etf will have a “stable” duration, but a variable “coupon”. I use quotes for this reason: duration isn’t technically locked in with a fund/etf, but won’t change considerably; coupon isn’t the proper term for the distribution from a fund/etf. This raises a key question: what do you do with the coupon/distribution? That alone may guide you to which is better for your situation. Generally, the fund might distribute to you monthly vs semiannual coupon. If your objective is income & you are spending it, your result will be different than if you are re-investing with a lengthy time horizon. Reinvesting monthly also affects the opportunity risk &, to a degree, affect of inflation. Some don’t care about re-balancing, some do. Just a sample.

Good luck with your decision – am sure you’ll get varied opinions.

 

[GravitySucks]

I've started to like what I am reading about bond ETFs like iShares iBonds and BulletShares that buy and hold bonds for target years to maturity. Seems a nice compromise between holding individual bonds to maturity with little risk on the downside (early call, default, etc.) and benefit of diversification and liquidity.

I'm in year 5 of an 8 year iShares ladder. It wasn't my best or worst decision.

I'm rebuilding my ladder and they no longer look very good. The December 2027 fund IBDS has an estimated yield of 2.75% but I see a 5 yr non callable CD from Medallion Bank yielding 3.9%. I'm not using iShares for my ladder rebuild at this time.

 

[all4j]

The December 2027 fund IBDS has an estimated yield of 2.75% but I see a 5 yr non callable CD from Medallion Bank yielding 3.9%.

I'm not in the market to buy this fund, but was curious as to why the gap. It wasn't clear to me exactly which fund you referenced or the source of the "estimated yield". I looked at a couple of 2027 funds, but they beat the CD.

If you are willing to share ticker & yield source, I'd probably look into to satisfy my curiosity. Again, not so interested as to invest! Thanks

 

[GravitySucks]

I'm not in the market to buy this fund, but was curious as to why the gap. It wasn't clear to me exactly which fund you referenced or the source of the "estimated yield". I looked at a couple of 2027 funds, but they beat the CD.



If you are willing to share ticker & yield source, I'd probably look into to satisfy my curiosity. Again, not so interested as to invest! Thanks

The ticker is IBDS - iShare Dec 2027 Corporate fund.
Estimated yield was from Fidelity.

 

[rkser]

Stuck with head in Sand - A RANT

We invested in BND (Now converted from VBTLX) & never looked back & did not look around for any alternatives or never ever looked at Bond section of the portfolio .

We did hear about CDs, Deferred & immediate Annuities, MYGAs but never really listened or did not have the guts/put in effort to go & change direction or at least try a new thing. I stuck my HEAD IN SAND with VBTLX.

Yes VBTLX has had some good years in the past, but now is 13% down if we sell & the word is, it may take a decade to recover the loss.

We have lost(If we sell now) hundreds of thousands of retirement monies in the process for sleeping on the job.
Either one is an aware investor, keeping eyes & ears open & work to change investments & change direction or give the darn investing to a Financial Planner(Yes, they are busy fishing around me).
I have been saving & investing myself in 3 to 5 Vanguard Funds for 30 yrs, must have surely made some mistakes & forgotten as we were busy working, money was coming in, everything was hunky dory.
Now in retirement, pretty sure this 13% loss in Bonds will not get us down & we can still maintain a comfortable lifestyle, but I do feel sad. Fortunately we are still mid to higher single digit millionaires
I am waiting for at least some recovery in BND, to reinvest in Ishares IBonds or Invesco Bullet Shares or Bank CDS, I am wide awake now instead of being foolishly committed to BND.

Friends, this is purely a Rant

 

[pb4uski]

I've started to like what I am reading about bond ETFs like iShares iBonds and BulletShares that buy and hold bonds for target years to maturity. Seems a nice compromise between holding individual bonds to maturity with little risk on the downside (early call, default, etc.) and benefit of diversification and liquidity.

I've held Bullet shares in the past and they're ok. I've observed that the returns in the final year tend to be low because maturities occur fairly evenly over the year and are invested short term until the terminal distribution is made in December.

I circumvented this by selling 12-15 months before the terminal distribution, but the recent increase in short-term interest rates may result in that previous problem that I observed no longer being an issue.

 

[pb4uski]

The ticker is IBDS - iShare Dec 2027 Corporate fund.
Estimated yield was from Fidelity.

My guess is that from what I've observed recently, high quality corporate bonds are yielding less than CDs or US treasuries for the 5-year. For example, right now on Schwab a 5-year CD is showing is 4.6% and a 4-year double a bond is 4.26%. That's likely part of it anyway.

 

[all4j]

The ticker is IBDS - iShare Dec 2027 Corporate fund.
Estimated yield was from Fidelity.

Thanks for the reply. I know some of these funds have quirks & thought I might learn something. I hadn't looked on Fidelity, but had gone to Blackrock site (provider of the etf) & it shows 5%. I would expect Fidelity just had stale data rather than flawed method. In any event, I wouldn't suggest you change your approach back to using this...I just wondered

 

[rkser]

Heck, even if the proceeds from the sale of BND sits in a money market fund until rsker figures out what to do with it it will be better than staying with BND. My money market fund, SWVXX is yielding 3.8%.

I sold some BND & am buying SWVXX,

Yes small steps......... THANK YOU !!!!

 

[daylatedollarshort]

I sold some BND & am buying SWVXX,

Yes small steps......... THANK YOU !!!!

That -13% loss occurred because rates were at near 0% before and now as you know even money markets are at 3.8%. In order to fully reverse your BND NAV loss, rates would have to go back down to near 0% again. While rates are down from the peak now with inflation finally slowing, which let the bond funds NAV recover a bit, near 0% rates, while possible, seem unlikely for the foreseeable future with The Fed still keeping a close eye on inflation.

 

[GravitySucks]

Thanks for the reply. I know some of these funds have quirks & thought I might learn something. I hadn't looked on Fidelity, but had gone to Blackrock site (provider of the etf) & it shows 5%. I would expect Fidelity just had stale data rather than flawed method. In any event, I wouldn't suggest you change your approach back to using this...I just wondered

All I saw on the Black rock site was the 30 day SEC yeild data.

 

[youbet]

That -13% loss occurred because rates were at near 0% before and now as you know even money markets are at 3.8%. In order to fully reverse your BND NAV loss, rates would have to go back down to near 0% again. While rates are down from the peak now with inflation finally slowing, which let the bond funds NAV recover a bit, near 0% rates, while possible, seem unlikely for the foreseeable future with The Fed still keeping a close eye on inflation.

The 13% loss is YTD isn't it? I'd think rkser should be more interested in the loss vs. his cost. Perhaps his average buy was earlier and his breakeven bar is set a bit lower.

I have, for example, an actively managed tax free bond fund that is down about 1% from my cost and has paid a nice (high yield fund) divy for many years. So, while it's disappointing it's down several percent YTD, my overall personal experience with the fund over many years has been fine, at least so far.

 

[youbet]

At the beginning of this thread, it seems like folks were generally referring to "bond funds." Now I notice the terminally has predominantly changed to "bond index funds." Any reasons for this?

Personally, I own a few actively managed bond funds: 4 tax free funds and PIMIX. The long duration tax free fund, of course, took a major bath this year. The shorter durations, not so bad. PIMIX is also way down but recovered ever so slightly in the last few weeks.

The anchor holding me from action is my speculation that PIMIX will recover a tad bit more of it's loss in 2023, say 3%. That plus 5% of dividends would put me at 8% for 2023, more than I'll likely find in a bond or CD if I sell and buy. But the 3% PIMIX partial recovery is speculation while the bond or CD would be guaranteed. The PIMIX is in an IRA so tax loss selling is not part of the equation. Thoughts?

 

[Markola]

We have about 30% of our AA in BND and we are staying put. What if there is a global flight to safety in 2023?

 

[audreyh1]

We have about 30% of our AA in BND and we are staying put. What if there is a global flight to safety in 2023?

If there is larger stock sell off and/or if a recession occurs there likely will be.

 

[daylatedollarshort]

We have about 30% of our AA in BND and we are staying put. What if there is a global flight to safety in 2023?

Flights to safety usually means assets like cash or short term Treasuries, which have less credit risk than corporate bonds and less market risk than bond funds without maturity dates.

Related links:

"Bonds are less risky than bond funds. You can choose to hold your bond until it matures, receive interest, and receive your full principal back, as long as the issuing entity does not default. Bond funds carry greater market risk than bonds, which means they carry more interest rate risk, because they are fully exposed to the possibility of falling prices within their holdings. Equal and opposite, you can enjoy rising prices with a bond fund. With a bond, you won't receive an increase in value unless you sell your bond in the open market before it matures for a higher price than you paid for it." - https://www.thebalancemoney.com/what-is-the-difference-between-bonds-and-bond-funds-2466581

Understanding Flight to Quality - "For example, during a bear market, investors will often move their money out of equities and into government securities and money market funds." - https://www.investopedia.com/terms/f/flighttoquality.asp

 

[daylatedollarshort]

The 13% loss is YTD isn't it? I'd think rkser should be more interested in the loss vs. his cost. Perhaps his average buy was earlier and his breakeven bar is set a bit lower.

You quoted my post but I can't speak for rkser. He has stated how he feels in several posts in this thread.

 

[audreyh1]

Bond index funds have a high exposure to US Treasuries plus hold additional US government-backed bonds. Overall credit quality is very high. They do benefit during “flight to quality” scenarios.

 

[Markola]

Flights to safety usually means assets like cash or short term Treasuries, which have less credit risk than corporate bonds and less market risk than bond funds without maturity dates.

Related links:

"Bonds are less risky than bond funds. You can choose to hold your bond until it matures, receive interest, and receive your full principal back, as long as the issuing entity does not default. Bond funds carry greater market risk than bonds, which means they carry more interest rate risk, because they are fully exposed to the possibility of falling prices within their holdings. Equal and opposite, you can enjoy rising prices with a bond fund. With a bond, you won't receive an increase in value unless you sell your bond in the open market before it matures for a higher price than you paid for it." - https://www.thebalancemoney.com/what-is-the-difference-between-bonds-and-bond-funds-2466581

Understanding Flight to Quality - "For example, during a bear market, investors will often move their money out of equities and into government securities and money market funds." - https://www.investopedia.com/terms/f/flighttoquality.asp

Thanks for the long reply but I’m out of creative ways to say that we are staying put.