Bond Funds when Interest Rates Rise

[Shabby]

We know that inflation is out of control (7%+) and the Fed needs to finally raise interest rates. Both my Equity and Bond Funds have taken a hit this year and I always hoped my Bonds would alleviate the pain from Equity losses. Sure they have a tiny bit, but not much. With Bond Funds losing me money and more interest rate hikes coming, why would I not sell these, sit in cash and wait for things to shake out. Or better, wait for more Equities to drop and jump into them later this year after a few interest rate hikes.

Please don't flame me completely, I know you are supposed to pick an asset allocation and live with it. market timing is bad, blah, blah.

 

[Montecfo]

It's not crazy. Zero beats negative and we have a lot of scheduled rates rises ahead. Even better: buy individual treasuries you plan to hold to maturity (ladder or otherwise).

Then your yield is positive and funds are in the safest securities.

 

[VanWinkle]

According to many(Schwab, Fidelity, Vanguard) the rate increases are already priced into bonds and selling now would be selling at a low point(locking in losses) I have 50% of my allocation in intermediate bond funds and have also seen them go down by 7% this year. I am not spending any of this bond money for 6 years when RMDs start. I will get increased interest from the bond funds every time the fund buys new bonds. At the duration of the fund(6.8 yrs) the return should match the yield of 2.5% or more. A 2.5% return sounds better than selling at a 7% loss, but that's just my opinion of how things will shake out. YMMV.

https://www.schwab.com/resource-center/insights/content/last-income-fixed-income-market

VW

 

[Closet_Gamer]

I worship at the alter of AA but admit that on this occassion I have sinned.

I dumped my broad bond fund (SWAGX). The duration is high and the yield is not.

I don't think this bond pounding is over...I think its just getting started. This inflation beast is real and the Fed is going to have to fight it hard. Maybe its just a point or two...but maybe its more than that.

I'm going to build 2-3 year treasury/muni bond ladders and ride it out with guaranteed return of principle for a while. I will continue to re-allocate to balance my AA but I won't be using funds.

I'm not making any changes to money in target date funds I have in my 401k. I will live with what comes on the bond portion of those holdings.

Before anyone asks:

No, I don't know when I will get back in to broad holdings.
No, I don't know how far this will go
No, I'm not going to try to "call the bottom" at some point in the future

But I just don't see the upside of holding anything far out the yield curve right now.

 

[Phroig]

BND lost another 0.5% on Friday. If you believe that rates are likely to rise, the selling shouldn’t be viewed as realizing a loss, but as preventing further loss of capital. (The YTD loss is 3 years of yield.) If you choose to be agnostic about rates, or if you believe that rates are likely to fall, then you should certainly continue to hold.

 

[djsander]

I have always been a stay the course person and have weathered the stocks up and down. However, the bonds are a different animal as they will probably be slow recovery. Most say the interest rates are already priced in but with total bond down about 7%. Most people will say it will recover over the duration, well why not take part and buy a 2 or 3 year treasury or treasury ladder and get the return of just over 2.5%? I admit I don’t fully understand the bond funds. Nobody fully knows what the fed will do, but it appears they will raising rates more than what is priced in. It seems like somebody from the fed opens their mouth every week and bond funds go down. I’m pretty confused right now and have always done the thing of when you aren’t sure what to do do nothing. I’m good at getting out of part of my bond fund and get treasury’s and so have some that will get the 2.5 or so percent and then watch the bond fund recover over the longer term. As I said I’m sort of at a loss, but think I‘be got an ok plan.

 

[Montecfo]

It's possible the prices are refecting the interest rate future but it seems unlikely to me. Is it reasonable to think that rates are done rising with the 10 year Treasury yielding just 2.7 percent ?

Of course it's possible the market is projecting a different reality i.e., recession.

But there is just so little margin for error with yields remaining this low. And little upside.

You did not want to enter this rate rise cycle carrying duration, such as Agg index funds or similar. Because this is what happens.

That's why I think positioning yourself in individual treasuries puts a fence around the risk while assuring a positive return during uncertainty.

 

[Freedom56]

Investment grade intermediate term bond funds will start bottoming out when they yield about 4.5%. If risk free 2-5 year treasuries are yielding 2.5 -2.75% why would anyone think that a bond fund yielding 2-3% after the sell-off is still an attractive investment? If this year is anything like 2013 or 2018, we won't see a bottom until late November or December 2022. All those so called financial experts who push bond funds as safe investments are going to look like idiots once again. For those that buy individual bonds and have a preservation of capital and investment income strategy, 2022 will be a golden opportunity to add to your laddered portfolio.

 

[Dtail]

According to many(Schwab, Fidelity, Vanguard) the rate increases are already priced into bonds and selling now would be selling at a low point(locking in losses) I have 50% of my allocation in intermediate bond funds and have also seen them go down by 7% this year. I am not spending any of this bond money for 6 years when RMDs start. I will get increased interest from the bond funds every time the fund buys new bonds. At the duration of the fund(6.8 yrs) the return should match the yield of 2.5% or more. A 2.5% return sounds better than selling at a 7% loss, but that's just my opinion of how things will shake out. YMMV.

https://www.schwab.com/resource-center/insights/content/last-income-fixed-income-market

VW

I am not currently in any bond funds, but nevertheless feel that some folks don't really understand the duration concept and just look at the short term losses.

 

[Graybeard]

These bond/bond fund threads are very informative.

I am at the stage of having to take RMDs starting this year. If equity funds are down a lot, it may be better to do the RMD from bond funds (Vanguard Ultra Short Term Bond Fund duration is 1 year and the Short Term Investment Grade Bond Fund duration is 2.8 years) assuming they would be losing less. So while I like the idea of buying Treasury bills vs these 2 bond funds, if it wasn't for the RMDs I'd move all my bond fund money into T bills. We have no idea whether rates will rise more and if so how much more so our bond funds could lose more, maybe a lot more. Probably the best thing to do is ignore the bond fund losses and assume as time passes new bonds will be bought at a higher coupon but it sure hurts to see capital losses that are 2 or 3 years worth of interest!

 

[Live And Learn]

I've been thinking about harvesting the loss I have in BND, waiting 30 - 60 days and repurchasing. At least that way I'd feel like I made some use out of the loss.

 

[marko]

With Bond Funds losing me money and more interest rate hikes coming, why would I not sell these, sit in cash and wait for things to shake out. Or better, wait for more Equities to drop and jump into them later this year after a few interest rate hikes.

This is where I am now. I've held a bond fund for 20+ years but started slowly moving my holdings there to equities and a CEF as things develop. I hate to completely liquidate (denial?) but for the past year I've had virtually zero total return and declining income.

My fear is that I'm not sure if the current status is a transitory thing or a long term change in the overall economy; i.e. would I be rewarded in 5-10 years for holding on?

 

[Lsbcal]

Here is what the market thinks that the Fed Funds rate will be at the end of 2022:

I use the CME site which is worthwhile to see what Tbills might be at in the future: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

*IF* Tbills will be at 2.5% in December (chart above), and *if* the yield curve slope remains the same then 10 year Treasuries would be at 4.5%.

Now how much of this is priced into bond funds? And what about corporate bonds? And how might the supply/demand picture and the Ukraine/Russia conflict and the November elections play out?

FWIW, I'm just rolling over Tbills in my nominal bonds until the picture somewhat stabilizes. But I don't know how I will identify stability.

 

[daylatedollarshort]

FWIW, I'm just rolling over Tbills in my nominal bonds until the picture somewhat stabilizes. But I don't know how I will identify stability.

No one knows that, but right now we know real interest rates on the one year Treasuries are -6.8%, so they will need to likely be at least 0 - 2% real returns with inflation ramped down before any bond funds or longer duration individual bonds seem like a good idea.

 

[Bergamo]

No one knows that, but right now we know real interest rates on the one year Treasuries are -6.8%, so they will need to likely be at least 0 - 2% real returns with inflation ramped down before any bond funds or longer duration individual bonds seem like a good idea.

For those who have held Total Bond Fund for a long time what would you suggest while real rates get to 2% with inflation ramped down?

You suggested bond funds don't seem like a good idea and I agree with you. But what about shorter duration funds like Vanguard Short-Term Treasury Index which is a 1-3 Year Treasury Index?

 

[daylatedollarshort]

For those who have held Total Bond Fund for a long time what would you suggest while real rates get to 2% with inflation ramped down?

You suggested bond funds don't seem like a good idea and I agree with you. But what about shorter duration funds like Vanguard Short-Term Treasury Index which is a 1-3 Year Treasury Index?

Even the short term bond funds I owned were all losing money year to date. I put most of the money in stable value funds and short term Treasuries (1 month to 1 year). I also bought some TIPS in the secondary market that mature in 1 - 2 years and some CDs.

 

[pb4uski]

Here is what the market thinks that the Fed Funds rate will be at the end of 2022:

...

That seems about right to me... 200 bps higher than today or four 50bp rate hikes between now and year end.

 

[foxfirev5]

Investment grade intermediate term bond funds will start bottoming out when they yield about 4.5%. If risk free 2-5 year treasuries are yielding 2.5 -2.75% why would anyone think that a bond fund yielding 2-3% after the sell-off is still an attractive investment? If this year is anything like 2013 or 2018, we won't see a bottom until late November or December 2022. All those so called financial experts who push bond funds as safe investments are going to look like idiots once again. For those that buy individual bonds and have a preservation of capital and investment income strategy, 2022 will be a golden opportunity to add to your laddered portfolio.

In 2013 I was still working and equity heavy. By 2018 I was a couple years retired with a 5 year ladder in place. I bought all I could get at a 3.5% yield while others were waiting for the inevitable 4%+ yields that didn't come. Today I'm stretching the ladder out and taking 3% Treasury strips to match my future needs. As time goes by I'll stretch further if rates go up but I'm good right now. I have no problem "tying up" a small part of my portfolio to ensure a fixed amount down the road. To me it's better than figuring out what I'm going to do when short term rates crater again.

While not a market timer with equities, my main goal with fixed income is to cover future needs. And since nobody knows nothin I'll always take the sure income with fixed assets. When I loan money I want to know what I'll get back at the end of the term. And although I also own them, bond funds can't do that.

 

[Bergamo]

Even the short term bond funds I owned were all losing money year to date. I put most of the money in stable value funds and short term Treasuries (1 month to 1 year). I also bought some TIPS in the secondary market that mature in 1 - 2 years and some CDs.

My short term bond funds are also losing money year to date. I don't have access to a stable value fund as I now only have an IRA at Vanguard.

Can you explain the reason for short term Treasuries (1 month to 1 year) rather than say rolling 1 year Treasuries?

 

[Bergamo]

That seems about right to me... 200 bps higher than today or four 50bp rate hikes between now and year end.

What do you think that will do to the Total Bond Market fund?

 

[pb4uski]

In theory, -13.8%.... 200bps rate rise * 6.9 duration. YMMV.

Will probably be a little less due to interest earnings as the rate increases happen... so let's say -12% or so.

 

[Bergamo]

In theory, -13.8%.... 200bps rate rise * 6.9 duration. YMMV.

Will probably be a little less due to interest earnings as the rate increases happen... so let's say -12% or so.

So -8.8% plus -13.8% = -22.6%?

In that case we would all likely be rebalancing from equities!

What is a better strategy for a retired Boglehead who is 70/30 with an IRA in TBM and taxable holding California Intermediate-Term TE?

After today's market close TBM is -9.3% year to date.

 

[daylatedollarshort]

My short term bond funds are also losing money year to date. I don't have access to a stable value fund as I now only have an IRA at Vanguard.

Can you explain the reason for short term Treasuries (1 month to 1 year) rather than say rolling 1 year Treasuries?

Because interest rates are going up pretty fast, I have a quasi rolling ladder of only up to about a year. The one year Treasuries are around 2% now, could easily be 4% by year end based on the planned rate increases and 8.5% inflation. For 1 -2 years out I bought TIPS.

Related link: Fed to raise rates aggressively in coming months, say economists: Reuters poll - Six more rate hikes expected this year. https://www.cnbc.com/2022/03/16/new...tions-show-six-more-rate-hikes-this-year.html

 

[Bergamo]

Because interest rates are going up pretty fast, I have a quasi rolling ladder of only up to about a year. The one year Treasuries are around 2% now, could easily be 4% by year end based on the planned rate increases and 8.5% inflation. For 1 -2 years out I bought TIPS.

Related link: Fed to raise rates aggressively in coming months, say economists: Reuters poll - Six more rate hikes expected this year. https://www.cnbc.com/2022/03/16/new...tions-show-six-more-rate-hikes-this-year.html

And today Powell referenced Volker.

https://www.cnbc.com/2022/04/21/pow...50-basis-point-hike-on-the-table-for-may.html

4% may not be enough to "tame" 8.5% inflation.

Can you explain how you built the rolling ladder up to a year? And how will you manage it between now and the end of the year and beyond?

 

[pb4uski]

So -8.8% plus -13.8% = -22.6%?

In that case we would all likely be rebalancing from equities!

What is a better strategy for a retired Boglehead who is 70/30 with an IRA in TBM and taxable holding California Intermediate-Term TE?

After today's market close TBM is -9.3% year to date.

Yes, -20% for 2022 seems plausable.

7yr Treasury was 1.55% at beginning of 2022 vs 2.96% today... a decline of 1.41% times 6.9 duration is -9.729%... close to the -9.3% YTD that you noted.

If rates rise another 2%, then * 6.9 duration is a price decline of another 13.8%.

So total price decline of 23.1% for the year, partially offset by say 2.3% of interest earnings would be a 20.8% decline for 2022.