Bonds in AA - what type of bonds?

[mitchjav]

Wondering what is typical for people in managing asset allocations for bonds -
for example - do those with a 60/40 AA, distinguish what type of bonds or bond funds make up that 40% - x% Government bonds, x% Corporate bonds, x% Munis, x% Global bonds, ...

For equities, I think, large-cap, small-cap and international allocations are pretty typical, but don't really know about bonds. Today I'm 60/40 and the 40% is broken down between domestic bonds (of all types) and a small holding in global bonds - should I be being more rigorous in allocating these bond types?

 

[madsquopper]

I do index etf investing. Did a lot of investigation via various simulations and found that yes if you break things down a lot you might be able to gain a small advantage but in practice I decided that for me it wouldn't make enough difference. So for my bond allocation I mostly use the overall domestic and international indices. Plus a small portion of US long term treasury as that did smooth things out a bit.

 

[DayDreaming]

My bond allocation is entirely VBTLX - Vanguard Total Bond Market.

 

[audreyh1]

I use high quality bond index funds. High credit quality bonds are poorly correlated to equities which means they work well as a diversifier/ballast. I use mostly Fidelity US Bond index and some Fidelity short-term index. I don’t allocate among different types of bonds, but I do allocate across duration: some cash, some short-term and the rest intermediate-term bond funds.

 

[racy]

You asked for "typical". I take a little more risk than others, so I doubt I qualify, but for what it's worth here's what I do:

Our bond funds allocation is about 45% of our portfolio, broken out as:
49% US Corporates, investment grade, intermediate term
23% US Corporates, high yield
18% US Government
7% International, developed
3% International, emerging

 

[Montecfo]

My bond allocation is largely in intermediate term corporate (core and core+) bonds through funds. Also have some international through a fund which is mainly sovereigns.

I also invest in a unique very short duration junk bond fund and a very low risk specialized equity fund as a bond alternative in this low rate environment.

I have a few longer term CDs in my "bond" allocation also, but have redeployed older CDs as they come due as rates have fallen off the table.

My bond allocation is about 25-30 percent of portfolio.

 

[pb4uski]

I think of bonds as having credit risk (I don't get paid as promised), interest rate risk (the value of my bonds fluctuate with changes in interest rates).

For credit risk the spectrum ranges from credit risk-free ("full faith and credit" U.S. government bonds) to government sponsored entities to high-quality corporates to high-yield (aka junk) and other in-betweens... obviously, generally speaking as credit risk increases interest yield increases all else equal... and spreads between credit categories flutuate over time... the bond pros try to take advantage of these spread differences.

Interet rate risk is the risk that your bonds value will change as market interest rates change... but that risk can be mitigated by holding to maturity or holding for longer than the duration after the interest rate change in the case of bond funds.

All of that said, it is easiest to just pick a bond fund or ETF that is of the average credit quality and interest rate sensitivity that you desire. These days I am favoring the safe end of credit risk because of the problems with the economy IMO increasing future credit defaults and lower interest rate sensitivity because with interest rates near zero and the Fed allegedly opposed to negative interest rates there seems to be no direction for rates to go but up... but I'll concede that I have thought that for 3-4 years now and been totally wrong.

About half of my "bond" allocation is actually credit union "special" CDs that I bought in 2019 that are 3.0% and 3.5% that mature in 2024 and that I intend to hold to maturity... no credit risk since they are FDIC insured and "no" interest rate risk other than an early withdrawal penalty if I end up needing the money before maturity. About 1/4 of my "bond" allocation are CDs averaging 1.85% that mature in 2021 and the other 1/4 is a portfoio of preferred stocks and baby bonds that I select with an income focus that is about 65% investment grade credits and yields about 5.6%. So I actually have no bonds in my "bond" allocation, which is why I refer to the category as "fixed income" more often than not.

 

[phil1ben]

The entirety of my bond allocation is in individual municipal bonds that I have picked and researched myself. My current bond allocation is now 24% but was 30% 18 months ago. It has been reduced due to calls and maturities. I treat cash (MM and CDs) differently than bonds and I am 20% in cash.

 

[jimbee]

My bond allocation is entirely VBTLX - Vanguard Total Bond Market.

VBTLX is also the majority of my bond allocation.

 

[VanWinkle]

VBILX and VBTLX with Vanguard Both intermediate bond funds with about half of each in government bonds. I use a 50/50 split at this time. I use this for ballast against stock market declines and pay little attention to yield. Reaching for yield should be done with equity exposure, not bonds in my opinion. There is no good substitute for bonds/government bonds in a declining stock market.

 

[audreyh1]

Just to be clear VBTLX is Vanguard Total Bond Market Index fund.

Not all Total Bond funds are index funds.

 

[audreyh1]

VBILX and VBTLX with Vanguard Both intermediate bond funds with about half of each in government bonds. I use a 50/50 split at this time. I use this for ballast against stock market declines and pay little attention to yield. Reaching for yield should be done with equity exposure, not bonds in my opinion. There is no good substitute for bonds/government bonds in a declining stock market.

I don’t worry about yield or interest rate risk either other than not using long bonds. I’ve been holding my bond funds for decades. Interest rates go up and down all the time. I’m rebalancing at least annually. So when stocks are happy, and bonds perhaps under a little pressure, I’m automatically buying more. And vice versa.

 

[Out-to-Lunch]

Right or wrong, I don't know: I took the advice of Larry Swedroe, and "Take my risk on the equity side." The notion is to keep your bond allocation very high quality, preferably government. The yield will be lower, but the performance in falling markets is generally better. I will let him explain it:

[T]he reason we recommend that is because correlations are time varying, and investors, many of them, fail to understand that. So, they look at, for example, something like a high yield bond fund, and they say it might have a correlation, maybe 0.4-0.5, something like that, with equities. And they say, “Okay, that's a low enough correlation, that's a good thing”. The problem is when the risk of equities shows up, and they get hit, you want the other portion of your portfolio doing well. Now the reason is twofold. One, that means that your entire portfolio is collapsing at the same time. So, you're trying to figure out what's the maximum loss you could take. You have to account for the riskiness of all the assets. Number two is you want to be able to rebalance. And if stocks are down, you want to be buying it with something that's gone up. So, you're selling that hot, right? You're not selling that also at distress price.

 

[scrabbler1]

(I lost a pretty long post before I could submit it, so I am reluctantly trying again using another place to type it first.)


I prefer mostly long-term bond funds in my taxable account because I am more willing to tolerate the NAV bouncing up and down more than I am willing to tolerate the reduced monthly dividends from shorter-term bond funds. I rely on these monthly dividends to pay my bills. I have no plans to ever sell shares from this fund.


When I was working, I had more of my bond funds in munis because I was in a higher tax bracket. Now in retirement, I use a long-term corporate bond fund which invests in slightly lower rated bonds; not purely junk bonds, just a bond fund which invests in corporate bonds at the low end of investment grade or slightly below that.


In my remaining muni bond funds, one has checkwriting privileges which is more of a rarity these days. That fund, an intermediate-term muni, acts as a second-tier emergency fund because of its added liquidity through checkwriting.


My rollover IRA has as its bond fund component an intermediate-term corporate bond fund (investment grade) which acts as a balance to the stock fund in the IRA.

 

[OldShooter]

We're outliers in almost any bond-buyers group. We hold TIPS (no funds) for about 90% of our fixed income. We hold to maturity and the yield is approximately inflation plus/minus the initial YTM. So for example, 2% inflation and a negative half percent at purchase gets a net of 1.5%. There is also not much of a yield curve for TIPS because projecting inflation is not needed, so we just hold a couple of issues. For us, no need for ladders except for liability matching. There is still interest rate risk if they are not held to maturity of course.

One caution: short TIPS pricing can look a little crazy because the principal value is adjusted in January and December and the coupon rate is paid based on the adjusted value. So purchase timing must be considered or, in our case, we don't buy 'em, leaving that game for the pros. (The adjustment amount is known 6 months in advance.)

Edit: We buy in tIRAs, so no tax issues.

 

[Animorph]

We're 75/25 with the 25% all in FXNAX, Fidelity's U.S. Bond Index fund. It has worked just the way I wanted it to, up during bear markets. It's easy to exchange with other Fidelity funds when rebalancing is required. And I don't have to manage anything beyond AA.

 

[pn3069]

I use iShares core+ bond index funds (IUSB/ISTB) - the first one is intermediate term, the second one is short term. I also hold a sizeable chunk in Wellesley fund which has 70%+ high grade corporate bonds.

 

[PaunchyPirate]

All my domestic bonds are in VBTLX - Vanguard Total Bond Index. All of my international bonds are in VTABX - Vanguard Total International Bond Index. Those are 34% and 6% of my total overall portfolio, respectively.

 

[FREE866]

I don't own bonds, but my mom has fixed income exposure and has a CD maturing next month.

You guys have any thoughts on PULS?


PGIM Ultra Short Bond ETF



The investment seeks total return through a combination of current income and capital appreciation, consistent with preservation of capital.The fund invests primarily in a portfolio of investment grade, U.S. dollar denominated short-term fixed, variable and floating rate debt instruments. Under normal market conditions, it invests at least 80% of its investable assets in bonds with varying maturities. Although the fund may invest in instruments of any duration or maturity, it normally will seek to maintain a weighted average portfolio duration of one year or less and a weighted average maturity of three years or less.

 

[pb4uski]

I don't own bonds, but my mom has fixed income exposure and has a CD maturing next month.

You guys have any thoughts on PULS?


PGIM Ultra Short Bond ETF



The investment seeks total return through a combination of current income and capital appreciation, consistent with preservation of capital.The fund invests primarily in a portfolio of investment grade, U.S. dollar denominated short-term fixed, variable and floating rate debt instruments. Under normal market conditions, it invests at least 80% of its investable assets in bonds with varying maturities. Although the fund may invest in instruments of any duration or maturity, it normally will seek to maintain a weighted average portfolio duration of one year or less and a weighted average maturity of three years or less.

I dunno... at first blush it looks pretty good... 0.6 duration, 1.5 average maturity, decent SEC and distribution yields.

However, why there could be a ~$2 difference between the 52-week high of $50.14 and low of $48.10 at NAV is a bit of a mystery... that's a 4% swing... I wouldn't expect such a swing in an ultra-short bond fund.

 

[doneat54]

We're at about 60% bonds. As follows as a % of the overall portfolio.

FIDELITY LIMITED TERM BOND FUND Short Term Bond 17.29%

PIMCO INCOME FUND CL A Multisector Bond 4.27%

Prudential Stable Value Fund Stable Value 13.94%

Vanguard Institutional Total Bond Market Index Trust Fixed Income - Intermediate Core Bond 13.95%

Prudential Stable Value Fund Stable Value 4.04%

Vanguard Institutional Total Bond Market Index Trust Fixed Income - Intermediate Core Bond 6.74%

60.24%

 

[FREE866]

I dunno... at first blush it looks pretty good... 0.6 duration, 1.5 average maturity, decent SEC and distribution yields.

However, why there could be a ~$2 difference between the 52-week high of $50.14 and low of $48.10 at NAV is a bit of a mystery... that's a 4% swing... I wouldn't expect such a swing in an ultra-short bond fund.

I actually see an even wider spread of the 52 week high of $50.51 and the low of $46.80.
I've attached a graph.
Looks like March 2020 was when it got it, but prior to that steady. Only thing I can think of is that there was that one week when there was sheer panic everywhere and bids just disappeared

 

[FREE866]

here it is

 

[audreyh1]

I dunno... at first blush it looks pretty good... 0.6 duration, 1.5 average maturity, decent SEC and distribution yields.

However, why there could be a ~$2 difference between the 52-week high of $50.14 and low of $48.10 at NAV is a bit of a mystery... that's a 4% swing... I wouldn't expect such a swing in an ultra-short bond fund.

Everything got temporarily whacked during a brief panic in March. Even US treasuries! Margin investors were scrambling to cover investments gone bad and liquidity had temporarily seized up. Thus the extreme Fed actions.

 

[DrRoy]

I buy BBB corporates.