Are You Worried About Your Bond Index Fund?

[pb4uski]

Look at the numbers in relative terms though. In 2021 yields increased 65%. But the actual yield only rose from .89% to 1.20%. So that was only 31 basis points.

For the yield to increase a full 100 basis points it would need to almost double. How likely is that to happen in the near future?

I dunno... given that it has increased from 0.93% at th beginning of 2021 to 1.54% today... a 0.61% increase in a tad over two months... a 100 bps increase if the ecomony recovers and we have an inflation threat seems very possible to me. YMMV.

 

[Freedom56]

My individual bond portfolio is up 2.79% YTD. As the economy recovers, investors turn to high coupon high yield bonds in stable industries. Some of my high yield bonds even received ratings increases. Many bond funds hold historically low coupon investment grade bonds that are getting wacked as rates rise. A bond fund like BND with a YTM of 1.2% with and effective maturity of 8.5 years is a big red flag.

https://investor.vanguard.com/etf/profile/BND

What it illustrates are these funds are willing to bid up bond prices to the point where the yield versus risk becomes irrational. I'm counting on another sell-off of bond funds so I can pick up more individual bonds. It looks like another repeat of 2013 with a slow gradual sell-off into tax loss selling season. If it is, that means that bargains are in the future for individual bond and preferred stock investors.

 

[Ready]

I started purchasing California municipal bonds through the Vanguard intermediate bond fund (VCADX) in 2012. At that time the NAV on the fund was $11.90. Today, nine years later, the NAV is $12.22. The lowest it every went (in 2013) was $11.09. So while yields have move around as much as 100 basis points in the past nine years, the NAV has been very stable.

While interest rate sensitivity is a real risk, there are other factors in play. When equities tank investors look to move money to bonds in a flight to safety. When this happens the NAV on bond funds can go up even if yields are not moving.

I’m not a huge fan on bonds right now. But I just don’t see anything else on the fixed income side that looks much better.

 

[audreyh1]

I’ll have to do some reading. I bought my first house when I was in my 20’s and interest rates were double digits. I’ve really only seen interest rates go down. Now that they’re zero and will likely go up, I need to have a better understanding on what to do investment wise. I always thought of bonds as a asset class that moves counter to stocks.

I expect the interest rate trend very long term will be up. However, within that long term trend, interest rates will go up and down a lot as they always do. They are never in a straight line. Poor bond years are often followed by rebounds.

 

[audreyh1]

Anyone else worried about YTD performance of their bond index funds?


No!! I had it when it made 8-9% last year, and I'll keep it while it loses 3-5 % this year. Over the long haul, it still supplies ballast for my equities which is why I have it in the first place.

VW

Exactly! Keep buying more bonds while stocks rocket skywards. Then when stocks occasionally stumble.....

 

[Markola]

I expect the trend very long term will be up. However, during that long term trend interest rates will go up and down a lot as they always do. They are never in a straight line. Poor bond years are often followed by rebounds.

+1. I hold bond index funds for their long-term, total return and as ballast for my stocks.

We also own an international bond index fund just to have something else that has the possibility of zigging while other stuff zags.

 

[RHONDAVE]

So, maybe worth another thread, but if rates are likely going up, which lowers the bond funds, and rates going up cause stocks to go down as well, where am I supposed to put my investments?

I have a low stock percentage “to be safe” and now it looks like I should just go to cash until things settle, which they never seem to do. I guess I could trade my bonds for cash with enough gold to hedge inflation.

Yes, Me Too, Ditto, We Are Alike. Ally Bank here we come.

 

[target2019]

Bonds. Doing the job forever.
From a real return data series (1920-2020) in Simba Backtest-Portfolio (spliced data).
Yes, there are down years, but panic not required.

 

[pb4uski]

VBTLX with 4% annual inflation adjusted withdrawals... has held up well historically despite a steady decline since 2012... will this time be different? Who knows, my crystal ball is broken.

https://www.portfoliovisualizer.com...3=Portfolio+3&symbol1=VBTLX&allocation1_1=100

 

[OldShooter]

... if rates are likely going up, which lowers the bond funds, and rates going up cause stocks to go down as well, where am I supposed to put my investments?...

Evolution has bred humans to be a race of optimists, but the brutal truth is that some problems have no good solutions.

Further, when faced with a choice among only undesirable courses of action, we tend to freeze and do nothing, taking instead the default undesirable action --- the status quo.

 

[GTFan]

No.

I just rebalance when appropriate which means buying more next year if rates continue to rise.

I’ve been through this scenario many times over the past two decades. Rates dropped dramatically last year and my bond funds appreciated a lot. Now they are giving some of that back. It comes and it goes.

I always have a chunk in cash and short-term bond index funds as well.

This. Bond funds are a counterweight to stocks, I'm not worried about year-to-year fluctuations.

If the Bogleheads still consider VBTLX part of a two/three/four fund portfolio that's good enough for me.

 

[Montecfo]

I have had a dynamic approach heading into this year. My bank loan (floating rate) ETF is up sharply and the market neutral Merger Fund is also up. I have added to the bank loan ETF.

My core plus bond funds are down YTD but have done well over past 12 months. Can't complain too much.

I'm glad I have some 3.3% CDs, and a lot of idle cash at the moment from trimming high fliers 2-3 weeks ago.

 

[pb4uski]

Relevant article that I just stumbled on: https://www.bloomberg.com/news/arti...all-in-on-u-s-treasury-market-s-big-short-bet

...The trifecta of more fiscal stimulus ahead, ultra-easy monetary policy and an accelerating vaccination campaign is helping bring a post-pandemic reality into view. There are of course risks to the bearish bond scenario. Most prominently, yields could rise to the point that they spook stocks, and tighten financial conditions generally -- a key metric the Fed is focused on for guiding policy. Even so, Wall Street analysts can’t seem to lift year-end yield forecasts fast enough.

“There’s a lot of tinder being put now on this fire for higher yields,” said Margaret Kerins, global head of fixed-income strategy at BMO Capital Markets. “The question is what is the point that higher yields are too high and really put pressure on risk assets and push Powell into action” to try and tamp them down. ...

 

[Sunset]

I manage Dad's money and sold off his BND fund in December as it had risen a lot.
Really glad I did. I was thinking of his directive: "Don't lose money" (talk about pressure )

For Our money, I've now, after some decline, sold off 50% of our BND fund. Also sold some other bond funds that are still (+), I don't really want to wait for them to go negative.

I have some term dated bond funds, which are down, but they've been down for a while and will pay out within 2 yrs, so will just wait to see if they rebound at payout time. They pay ~4%

I'm replacing them with either nothing (cash will loose less than the bonds if rates go up more) or high paying preferred, which will also sink in value, but pay 6%->9%.

There is no easy answer, and I remember when interest rates were at 18% , just imagine.

 

[corn18]

I moved out of total bond funds last year. Put it all in my 401k stable value fund @ 2.2%. Feel good about that and will leave it that way for a while. I will start converting the 401k to Roth next year, so will need someplace to put my fixed income. Will cross that bridge when we come to it.

 

[big-papa]

Anyone else worried about YTD performance of their bond index funds?
My Vanguard VBTLX is now -2.28 for the year. Whats the deal?
I have sold everything else, why not these as well??

No because that's market timing based on feelings and I don't choose to participate since I've finally learned to ignore my feelings when it comes to investing. I know people who do Tactical Asset Allocation, which is algorithmically based and has had some success in the past. But that takes more work and monitoring than I'm willing to put in, assuming there's an algorithm that can work going forward.

Stocks and bonds go up and down. More often up than down, fortunately. And with bonds, historically the movements aren't as extreme as stocks. But they both go up and down - it's what they do - all the time. I'd love to have a portfolio where all assets went up by large amounts all the time but I'm willing to live with what hopefully is a long term upward trend, event if it's got up and down with bumps along the way.

Cheers.

 

[Finance Dave]

I have been selling mine off slowly for about 6 months. Only have about 5% bond funds (BND) left in our portfolio....will probably keep that.

 

[twaddle]

I have sold everything else, why not these as well??

I'm apparently the only one who doesn't know what this means. You sold everything else?

 

[mrfeh]

Anyone else worried about YTD performance of their bond index funds?
My Vanguard VBTLX is now -2.28 for the year. Whats the deal?
I have sold everything else, why not these as well??

That fund was up 8.7% in 2019 and 7.7% in 2020.

Nobody was complaining then...

Seriously - if you don't want a fixed income asset to ever lose nominal value, then put it all in a money market account.

 

[mrfeh]

The above.
This concept gets lost sometimes in exchange for the simple price to yield inverse correlation of bonds.

+1000

In the long run, rising interest rates are a good thing for bond fund holders.

 

[VanWinkle]

That fund was up 8.7% in 2019 and 7.7% in 2020.

Nobody was complaining then...

Seriously - if you don't want a fixed income asset to ever lose nominal value, then put it all in a money market account.

+1

 

[VanWinkle]

No because that's market timing based on feelings and I don't choose to participate since I've finally learned to ignore my feelings when it comes to investing. I know people who do Tactical Asset Allocation, which is algorithmically based and has had some success in the past. But that takes more work and monitoring than I'm willing to put in, assuming there's an algorithm that can work going forward.

Stocks and bonds go up and down. More often up than down, fortunately. And with bonds, historically the movements aren't as extreme as stocks. But they both go up and down - it's what they do - all the time. I'd love to have a portfolio where all assets went up by large amounts all the time but I'm willing to live with what hopefully is a long term upward trend, event if it's got up and down with bumps along the way.

Cheers.

Well said big-papa. This sums up investing in so few words!!

Best to you,

VW

 

[ncbill]

Don't use bond index funds with rates this low.

 

[audreyh1]

Don't use bond index funds with rates this low.

Just hop in and out when you guess the future? No thanks!

 

[W2R]

Just hop in and out when you guess the future? No thanks!

+1

For me, selling low has never worked as well as buy-and-hold and rebalancing.