Let's Talk Bond Funds

[lawman]

For weeks I've listened to people talk about what a bad investment bonds are now. I realize that as interest rates go up bond prices go down..So what? If you are invested for long term who cares about bond price? I care about default risk, inflation and interest rates..I want rates to go up..Have wanted higher rates for many years. To the extent investors are able to time bond prices I attribute that to luck. Bond traders have so much more knowledge and information available that I do not have. I continue to believe contrary to some that investment grade bond funds are safer and more predictable than equities and perhaps maybe even more important for investors today than in the recent past...Tell me what I'm missing..

 

[Midpack]

No one is telling you what to do. And I haven't seen anyone suggest equity funds are safer than bond funds under any circumstances, I must have missed that.

 

[tominboise]

I don't know. I've had about 35% bond fund allocation for the last 30 years. Probably wasn't the best move over that long haul but on the other hand, it allowed a lot of rebalancing through a couple of market corrections. Now I am sitting at 40%, which still is too high in my estimation, but I haven't really moved out of any bond funds to speak of.

 

[Jerry1]

I'm no expert, but one thing I'm experiencing is that it hurts just as much to see my financial net worth go down whether through stocks or bond funds. With interest rates going up, the framework I had become use to is changing. It seemed in the past that the bonds when counter to stocks. It seemed like when the stock market went down, there was ballast from the bonds. Now I look at my portfolio and both are going down.

While the concept that the bond funds pay interest and provide income so price does not matter makes some sense, but with everything going down, you have to draw down an asset class that has taken a hit. Painful. Glad I have some cash for a year or so.

 

[lawman]

No one is telling you what to do. And I haven't seen anyone suggest equity funds are safer than bond funds under any circumstances, I must have missed that.

Motley Fool gives some examples of when they think bonds are riskier than stocks

https://www.fool.com/investing/are-bonds-safer-than-stocks.aspx

 

[Midpack]

Motley Fool gives some examples of when bonds are riskier than stocks

https://www.fool.com/investing/are-bonds-safer-than-stocks.aspx

If you're an active trader/market timer, Motley Fool might be a helpful guide, their audience is not long term investors. Many/most retirees are long term investors.

 

[daylatedollarshort]

There are differences between owning bonds in a bond ladder and bond mutual funds. You might find The Bond Book by Annette Thau of interest. Since she doesn't have a vested interest in selling bond funds, her advice may be less biased than common mantras perpetuated by people who manage large bond funds or the publications with large mutual fund advertisers.

With a ladder you hold individual bonds to maturity and get a rolling average of interest rates. Only inflation protected bonds, not bought at negative interest rates, will at least keep up with government inflation indices, or whatever index they are tied to.

While individual bond market prices fluctuate, you get your principal back at maturity. With a bond fund, you may get more or less than your principal back when you decide to sell since the manager is constantly selling and buying bonds. In a rising interest rate environment, bond fund investors tend to bail and the managers may have to sell at suboptimal times.

 

[lawman]

There differences between owning bonds in a bond ladder and bond mutual funds. You might find The Bond Book by Annette Thau of interest. Since she doesn't have a vested interest in selling bond funds, her advice may be less biased than common mantras perpetuated by people who manage large bond funds or the publications with large mutual fund advertisers.

With a ladder you hold individual bonds to maturity and get a rolling average of interest rates. Only inflation protected bonds, not bought at negative interest rates, will at least keep up with government inflation indices, or whatever index they are tied to.

While individual bond market prices fluctuate, you get your principal back at maturity. With a bond fund, you may get more or less than your principal back when you decide to sell since the manager is constantly selling and buying bonds. In a rising interest rate environment, bond fund investors tend to bail and the managers may have to sell at suboptimal times.

I do worry about forced sales..I can see how that could be killer. I would have loved to set up bond ladders but the worry of default risk would keep me awake at night..

 

[daylatedollarshort]

I do worry about forced sales..I can see how that could be killer. I would have loved to set up bond ladders but the worry of default risk would keep me awake at night..

I mostly have TIPS in my ladder, which have the safety of Treasury bonds. Also some FDIC insured CDs and Treasuries. TIPS ladders in tax sheltered accounts are doing great right now. The market values are dropping but the idea with ladders is you hold to maturity anyway. Bonds bought at 2% yields + inflation are returning 9.5% 2% + 7.5% inflation factor). For a thirty year retirement, even a 0% real return bond allows for a 3.33% safe withdrawal rate (100 / 30 years = 3.33%).

The yields will likely rise again this year. The thirty years have been positive lately and the twenty years positive or not too far off.

 

[Out-to-Lunch]

I do worry about forced sales..I can see how that could be killer. I would have loved to set up bond ladders but the worry of default risk would keep me awake at night..

You might look into the Invesco BulletShares. They are a series of bond-fund ETF's, but that contain bonds of a certain maturity date. Thus, you can set up a ladder of maturities, but each rung is spread out over thousands of companies.


https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html

There is also a similar series from BlackRock: https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders

 

[lawman]

I mostly have TIPS in my ladder, which have the safety of Treasury bonds. Also some FDIC insured CDs and Treasuries. TIPS ladders in tax sheltered accounts are doing great right now. The market values are dropping but the idea with ladders is you hold to maturity anyway. Bonds bought at 2% yields + inflation are returning 9.5% 2% + 7.5% inflation factor). For a thirty year retirement, even a 0% real return bond allows for a 3.33% safe withdrawal rate (100 / 30 years = 3.33%).

The yields will likely rise again this year. The thirty years have been positive lately and the twenty years positive or not too far off.

I love my I-Bonds..Some thought I was nuts buying them 20 - 25 years ago..I have a substantial amount after all this time and happy to hold them until maturity unless disaster stikes.

 

[lawman]

You might look into the Invesco BulletShares. They are a series of bond-fund ETF's, but that contain bonds of a certain maturity date. Thus, you can set up a ladder of maturities, but each rung is spread out over thousands of companies.


https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html

There is also a similar series from BlackRock: https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders

Interesting...thanks!

 

[aja8888]

I do worry about forced sales..I can see how that could be killer. I would have loved to set up bond ladders but the worry of default risk would keep me awake at night..

You can easily set up a treasury bill/bond ladder and return about 2% annually right now. As rates go up, just replace maturing ones with ones that pay higher interest. Schwab and others have ladder builder tools to help you do this.

Ultra safe s if the U.S. defaults on these we are all screwed.

 

[sengsational]

You might look into the Invesco BulletShares. They are a series of bond-fund ETF's, but that contain bonds of a certain maturity date. Thus, you can set up a ladder of maturities, but each rung is spread out over thousands of companies.

I'm not sure how this differs from any other bond fund. That they group bonds by maturity date seems not to prevent the holders from bailing out at an inopportune time, forcing the sale of bonds before maturity. When the flight to cash happens, as it will from time to time, unless you hold individual bonds yourself, you're going to get a little bit shorter end of the stick. Also, as an individual bonds holder, you can actually be on the smart side of that trade!

 

[statsman]

I'm no expert, but one thing I'm experiencing is that it hurts just as much to see my financial net worth go down whether through stocks or bond funds. With interest rates going up, the framework I had become use to is changing. It seemed in the past that the bonds when counter to stocks. It seemed like when the stock market went down, there was ballast from the bonds. Now I look at my portfolio and both are going down.

This. And it's worse for us since we are ultra-conservative in our investments and have been for a long time. It worked well for us during the 14-15 years prior to 2021. 2021 was bad, but 2022 was been horrific. I hate that the conservative investors are being played right now (that's just my opinion).

 

[Out-to-Lunch]

I'm not sure how this differs from any other bond fund. That they group bonds by maturity date seems not to prevent the holders from bailing out at an inopportune time, forcing the sale of bonds before maturity. When the flight to cash happens, as it will from time to time, unless you hold individual bonds yourself, you're going to get a little bit shorter end of the stick. Also, as an individual bonds holder, you can actually be on the smart side of that trade!

First of all, the product is intended to be held to maturity, and the buyers are presumably seeking that feature in order to build a ladder. Thus, the situation you describe does not seem to me to be likely to be widespread.

But moreover, it is not clear to me that the behavior you describe would hurt the remaining holders anyway. Maybe I am not thinking about this correctly, but consider this: Say, 5 years before the bonds in the fund are set to mature, interest rates rise (and the value of the etf falls) enough that 50% of the holders decide to sell. So the fund liquidates 1/2 of the bonds to meet those obligations. The remaining 1/2 of the fundholders still have 1/2 of the bonds, and they hold their etf shares to maturity. How were the remaining fundholders harmed?

 

[razztazz]

You're not missing anything. Not essential anyway. There's nothing scary or shaky about bond funds vs owning bonds. Yes, as rates rise the share price will fall but as the bonds are rotated in and out it catches back up. It won't go to zero like the stock market (Ok so it probably won't actually hit zero) nor will they won't fall 50% in short order and take a decade or more to recover. You can predict where they're going with rate increases so the future to an extent is knowable/calculable. Try that with SPY's. If rapid rate increases are the fear and you want to arrest any price drops keep the duration short o a short as you need to.

As far as owning actual bonds... I don't know how one makes that work if one is going to rebalance on schedule in order to keep a never-fail/sleep at night asset allocation. Altho I know almost nobody actually hews slavishly to an AA /rebalance schedule orthodoxy. Maybe that makes it work? Tweaking.

 

[lawman]

You're not missing anything. Not essential anyway. There's nothing scary or shaky about bond funds vs owning bonds. Yes, as rates rise the share price will fall but as the bonds are rotated in and out it catches back up. It won't go to zero like the stock market (Ok so it probably won't actually hit zero) nor will they won't fall 50% in short order and take a decade or more to recover. You can predict where they're going with rate increases so the future to an extent is knowable/calculable. Try that with SPY's. If rapid rate increases are the fear and you want to arrest any price drops keep the duration short o a short as you need to.

As far as owning actual bonds... I don't know how one makes that work if one is going to rebalance on schedule in order to keep a never-fail/sleep at night asset allocation. Altho I know almost nobody actually hews slavishly to an AA /rebalance schedule orthodoxy. Maybe that makes it work? Tweaking.

I have a bond fund that I've owned for 15 - 20 years. Right now it shows a loss on paper but that is misleading..I don't fully understand why but I can tell you I have made money on the fund..Seems to me like if I own a fund with a 7 year duration if I hold that fund for 7 years I should make whatever those bonds have yielded during that 7 years regardless of the share price...

 

[statsman]

I have a bond fund that I've owned for 15 - 20 years. Right now it shows a loss on paper but that is misleading..I don't fully understand why but I can tell you I have made money on the fund..Seems to me like if I own a fund with a 7 year duration if I hold that fund for 7 years I should make whatever those bonds have yielded during that 7 years regardless of the share price...

Doesn't that make the assumption there isn't a sizable selloff of the bond fund in order to buy "low" in the stock market?

 

[lawman]

Doesn't that make the assumption there isn't a sizable selloff of the bond fund in order to buy "low" in the stock market?

The selloff might affect share price but not the dividends..

 

[Montecfo]

I think the reason you might not want to buy bond funds now is you are very likely "buying a loss". Yes it might turn around if you have enough time but why buy a loss?

Also as mentioned, bond funds underperform in down markets because investors flee.

Better to avoid duration now. Insured savings accounts and floating rate securities are a better bet in my view.

 

[daylatedollarshort]

I have a bond fund that I've owned for 15 - 20 years. Right now it shows a loss on paper but that is misleading..I don't fully understand why but I can tell you I have made money on the fund..Seems to me like if I own a fund with a 7 year duration if I hold that fund for 7 years I should make whatever those bonds have yielded during that 7 years regardless of the share price...

" As a general rule, for every 1% increase or decrease in interest rates, a bond's price will change approximately 1% in the opposite direction for every year of duration....Understanding duration is particularly important for those who are planning on selling their bonds prior to maturity. If you purchase a 10-year bond that yields 4% for $1,000, you will still receive $40 dollars each year and will get back your $1,000 principal after 10 years regardless of what happens with interest rates. If, however, you sell that bond before maturity (or if you are invested in a fund that buys and sells bonds while you own it) then the price of your bonds will be affected by changes in rates."
https://www.blackrock.com/us/individual/education/understanding-duration

You can buy stocks on sale during price dips, but bond funds don't work that way.

 

[scrabbler1]

I have owned shares of bond funds for the last 32 years, ranging from home-state munis to national munis to investment-grade corporates to borderline-investment-grade corporates. For the last 13 years, my entire ER, I have been living off the monthly dividends from one big bond fund where I own a LOT of shares. The price of those shares means nothing - only the number of shares and the cents-per-share I receive every month matters.

That cents-per-share dividends has eroded in the last 13 years, although I have added a lot of shares to compensate. If rising interest rates would at some point raise that monthly cents-per-share payout, I'm for it, even if the price of those shares took a hit.

 

[Montecfo]

Buying bond funds on a dip can work, especially closed end funds that may be trade at a discount to intrinsic value.

 

[lawman]

okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?