Anyone bailing out of bond funds?

[Which Roger]

Quote:

Originally Posted by REWahoo Someone always comes along to spoil a good story by wanting facts...

Speaking of facts, the common wisdom seems to be that interest rates are at rock bottom and have no where to go but up.

However...yesterday's 10-year treasury yield was 2.73%. As recently as May 2, the rate was 1.66%. That's a 64% increase in just two months. How can a value that's 64% higher than it was just a few weeks ago be considered rock bottom?

[RyanM]

According to ICI data there was 60 billion going out of bond funds in June. But since 2007 there was 1.275 trillion of net inflows into bond funds. Not sure what to read into that... I'm sure the Portfolio Managers at PIMCO were happy.

[pb4uski]

Quote:

Originally Posted by Gatordoc50 U.S. public pension funds - Asset allocations: past, present and future - Pensions & Investments Here is a link to an article that shows the general trend in the past year or so of public pensions reducing their bond allocation. I have also been studying individual states AA and have noticed a remarkable reduction in bonds in many of them.

Looks to me like they are reducing equities and increasing alternatives in recent years. I find the 8% reduction in equities more relevant than the 2% reduction in bonds. However, the alternatives are quite equity-like so for the most part it seems to be simply a tradeoff of equity for private equity (which is probably what a lot of the "alternatives" are). I don't know if I would read a lot into the 2% reduction in bonds and to characterize it as "bailing" seems like sensationalism.

[Gatordoc50]

Quote:

Originally Posted by pb4uski Looks to me like they are reducing equities and increasing alternatives in recent years. I find the 8% reduction in equities more relevant than the 2% reduction in bonds. However, the alternatives are quite equity-like so for the most part it seems to be simply a tradeoff of equity for private equity (which is probably what a lot of the "alternatives" are). I don't know if I would read a lot into the 2% reduction in bonds and to characterize it as "bailing" seems like sensationalism.

This chart was last year. If you go to specific States and check their AA as of now, you will find fixed income in the 8 to 10% range. Many are dumping fixed income.

[pb4uski]

Are you saying that they have gone from the mid 20s to 8-10% in one year?

[Gatordoc50]

Quote:

Originally Posted by pb4uski Are you saying that they have gone from the mid 20s to 8-10% in one year?

http://m.pionline.com/article/201306...YREG/130629986

Arizona has. Some states are still at 20+ but many are making significant adjustments.

[nun]

Quote:

Originally Posted by Which Roger Speaking of facts, the common wisdom seems to be that interest rates are at rock bottom and have no where to go but up. However...yesterday's 10-year treasury yield was 2.73%. As recently as May 2, the rate was 1.66%. That's a 64% increase in just two months. How can a value that's 64% higher than it was just a few weeks ago be considered rock bottom?

I'm looking forward to the higher interest rates that my bond funds will earn in the future. IMHO people put too much emphasis on NAV when it comes to bonds.

[scrabbler1]

Quote:

Originally Posted by nun I'm looking forward to the higher interest rates that my bond funds will earn in the future. IMHO people put too much emphasis on NAV when it comes to bonds.

+1. I am bond funds for the income, not the price changes. Bond fund monthly dividends per share have been dropping over the years so it would be nice to see them rise again.

[Lsbcal]

I'm not planning for the current situation to get worse or better in bonds, just sitting tight. But the nice thing is that it now pays to go further out on the yield curve. So that is a plus for intermediate term bonds and comforting to me.

Here is a historical perspective (right scale is the spread %, and left scale is the 5yr Treasury yield):

[gcgang]

Quote:

Originally Posted by nun I'm looking forward to the higher interest rates that my bond funds will earn in the future. IMHO people put too much emphasis on NAV when it comes to bonds.

Are you kidding? Yields will go up BECAUSE the NAV goes down. It does not necessarily mean that your income will go up.

You want higher standard of living? Invest for total return and spend part of your principal.

[daylatedollarshort]

We thought that the percent interest rates could drop versus the percent they could go (infinity times infinity ) up, the highest probability in making the most amount of money was in selling bonds and intermediate and long term bond funds when mortgage rates hit an all time, historic low and rebuying at some point later on.

Time will tell. So far I am not unhappy we refinanced the house and and bailed on intermediate and long term bonds when we did. I think we just went with the probabilities of rates rising this year or next, so even if this doesn't work out long term this time I'd probably make the same decision again in the future, as long as I had probabilities on my side.

[haha]

Quote:

Originally Posted by gcgang Are you kidding? Yields will go up BECAUSE the NAV goes down. It does not necessarily mean that your income will go up. You want higher standard of living? Invest for total return and spend part of your principal.

What you say would be true if he only held one bond. But in a fund, there is continual turnover of issues maturing and the money being reinvested. When interest rates are climbing, this reinvestment takes place at higher yields. This process is hastened if you are re-investing dividends, or some part of dividends.

Even in the case of one bond, it would eventually mature and if rates were rising, it would be reinvested at a higher rate. The money may be worth less, but there will be more of it.

Ha

[Lsbcal]

Quote:

Originally Posted by nun I'm looking forward to the higher interest rates that my bond funds will earn in the future. IMHO people put too much emphasis on NAV when it comes to bonds.

I don't even understand why NAV comes into the picture as it tends to be a fund byproduct. If you look at bonds, it's all about the yield and price. NAV just flows out from the constantly changing yield curves for companies and nations.

I'm no bond expert so that's just my current thoughts. When you read Bloomberg bond news, there is no talk about NAV's.

[daylatedollarshort]

Quote:

Originally Posted by Lsbcal I'm no bond expert so that's just my current thoughts. When you read Bloomberg bond news, there is no talk about NAV's.

That could be more because of who Bloomberg's advertisers are and how much money they make from management fees from bond funds and not because they have a burning desire to write about topics with only their readers' best interest at heart.

[Gatordoc50]

Quote:

Originally Posted by haha What you say would be true if he only held one bond. But in a fund, there is continual turnover of issues maturing and the money being reinvested. When interest rates are climbing, this reinvestment takes place at higher yields. This process is hastened if you are re-investing dividends, or some part of dividends. Even in the case of one bond, it would eventually mature and if rates were rising, it would be reinvested at a higher rate. The money may be worth less, but there will be more of it. Ha

I wonder what effect large net outflows from funds will have on the funds ability to recover from losses.i would think that if the fund is writing checks for redemptions, the less cash available to but new bonds. Any ideas?

[veremchuka]

Quote:

Originally Posted by Which Roger Speaking of facts, the common wisdom seems to be that interest rates are at rock bottom and have no where to go but up. However...yesterday's 10-year treasury yield was 2.73%. As recently as May 2, the rate was 1.66%. That's a 64% increase in just two months. How can a value that's 64% higher than it was just a few weeks ago be considered rock bottom?

Common wisdom was saying this for months prior to May, the big jump has happened in the last 2 months. Looks like they were right.

[scrabbler1]

Quote:

Originally Posted by Lsbcal I don't even understand why NAV comes into the picture as it tends to be a fund byproduct. If you look at bonds, it's all about the yield and price. NAV just flows out from the constantly changing yield curves for companies and nations. I'm no bond expert so that's just my current thoughts. When you read Bloomberg bond news, there is no talk about NAV's.

Don't forget about simple supply and demand for bonds and bond funds. Back in late 2008 (when I first ERed), the price of the bond fund I bought into had dropped sharply (along with everything else). [This was a HUGE advantage for me in the start of my ER.] But the NAV of the bond fund dropped in part due to the big drop in demand for those bonds. Nobody had any new money to invest. Bond issuance back then also took a dive, but not as big as the demand.

I have a WSJ article from 11/28/2008 which explained the fall in bonds, mainly munis, but the reasoning extended beyond only munis.

[Leon44]

NAV matters to me when I see my statements. This is the same as a stock price or equity fund.....it tells you the market value of your asset.

I also agree rates on bond funds are going up because the market value is going down.....a $100 dividend is still $100 whether it is a4% yield or 3.5% yield. It's true if you hold bond funds long enough, reinvest your dividends and interest rates stabilize you will someday catch up.

If anyone had a crystall to tell us what rates will be in a year then we could make a purely mathematical decision.

[Lsbcal]

If you choose to think about bond fund's NAV's then I guess you have to also include the current SEC yield since they go together. For most Vanguard bond funds, the distributions are payed out monthly and those distributions are directly related to that yield. At that point the NAV also drops. Also there are short and long term cap gains as part of those distributions. Maybe that is what some are referring to when they only mention NAV's ?

I compute monthly total returns for my bond funds. I do use NAV data for this + distribution data. So for the month:
total return = (NAV_change + distribution)/NAV_start_of_month
So in that sense I do use NAV data too.

When Vanguard describes annual performance they don't show NAV's just:
income return + cap gain return = Total Return

Example for Total Bond Market VBTLX:

[Leon44]

I'll use VBTLX to illustrate the point that I was trying to make:

On 1/1/2013 the NAV was $10.93 a share according to Yahoo finance historical data. It paid a dividend in January of .022 per share or 2.41% annually.

The current NAV 7/6/13 for VBTLX is $10.56 per share and still pays a dividend of .022 per share. But...now that same .022 is a 2.51% annual return.

If you have 5K shares you will receive a $110 dividend both in January and again in June.

But...the value of the holding is down -2.48% YTD. so your 5K shares loss $1,850 YTD. You received $660 in dividends through June....net loss of $1,190 YTD in VBTLX.

This is why NAV matters to me. I don't know if this is a blip in interest rates or if this will be the trend. I do know the NAV will be an indicator for me.

Nobody can deny bond funds have been great over the past, but remember we have been in a 30 year bond bull market.