Bond Market Anxiety

[mathjak107]

i haven't changed anything yet and run 50/50 with short term bonds , corporate bonds and a total bond fund making up the bond portion.

i am just watching as things unfold and at some point in the near future i think i will keep 20% in total bond , 10% in floating high yield and 20% in the unconstrained bond fund.

 

[Midpack]

People brushed off warnings of a real estate bubble as "doom and gloom," but a lot of people got hurt. People made fun of warnings of the tech bubble in the stock market calling it "doom and gloom," but people got hurt. Even back in the 30s people ignored warnings of a guy named Hitler as "doom and gloom," but people got hurt. The world doesn't have to come to an end for a lot of people to get hurt.

Lots of leveraged investors, speculators and people who took out loans they couldn't afford (and should have known better in many cases) certainly got hurt. But long term investors who stayed the course and rebalanced recovered and went on to new highs - many post here regularly.

Bonds gave seen a bull market for decades and people have forgotten no investment is perfectly safe.

That's a broad brush. I don't remember any knowledgeable member here saying any investment is perfectly safe, and they haven't forgotten anything significant.

It's more than interest rate risk with global debt reaching unprecedented levels. Liquidity risk is also real as a sell off of bond funds would find there aren't enough buyers of the underlying bonds causing prices to plummet. The world wouldn't come to an end, but the finances of people will get hurt. Just because it doesn't happen within the short sighted timeline view of most people doesn't mean it won't happen.

Are we likely to see the real returns bonds have provided over the past several decades, nope. Will future real returns on bonds be (much) less, even lagging some CD's, seems inevitable.

If bonds are a big concern, what are you recommending? CD's? Equity income funds (not an equivalent, more equity will increase volatility)? Other?

 

[samclem]

I wonder, with regard to the performance of the bond portion of the portfolio, if those invested in Wellesly or Wellington gain some advantage over those of us who are hard-core indexers and just rebalance. Do the professional bond traders at those funds add value in some way (e.g. adjusting duration in a way that beats the market consistently)? Since the overall holdings are both stocks and bonds, are the mangers able to gain some synergies that us plain 'ol indexers aren't able to harvest (maybe be adjusting the stocks owned to temper risks they are taking on the bond side, etc).
I ask because a lot of "hands-off" investors are trusting these funds to do well and not lose much ground regardless of the circumstances, and if interest rates rise (hurting both stocks and longer-duration bonds) it would seem that they might get burned like everyone else. But maybe these managed balanced funds have tools available that we don't.

 

[Dash man]

Lots of leveraged investors, speculators and people who took out loans they couldn't afford (and should have known better in many cases) certainly got hurt. But long term investors who stayed the course and rebalanced recovered and went on to new highs - many post here regularly.

That's a broad brush. I don't remember any knowledgeable member here saying any investment is perfectly safe, and they haven't forgotten anything significant.

Are we likely to see the real returns bonds have provided over the past several decades, nope. Will future real returns on bonds be (much) less, even lagging some CD's, seems inevitable.

If bonds are a big concern, what are you recommending? CD's? Equity income funds (not an equivalent, more equity will increase volatility)? Other?

I don't make recommendations and wouldn't expect anyone to take mine anymore than I'd take theirs. My point though is bonds are riskier than people think. Holding individual bonds to maturity are only as risky as the company or government that issued them, but bond funds are much higher risk because of the liquidity problem that would present itself if there is a sell off because of rate increases. Everyone remembers the mortgage backed securities and what happened in 2008. Imagine bond fund holders selling off as rates rise, fund values go down and more people want to sell their holdings. The funds have to sell bonds to pay off their customers, but too many people are cashing in their shares and no one wants to buy the bonds, so the fund companies are forced into a fire sale to raise the cash. Fund companies may find themselves going out of business before things stabilize.
I don't own bonds, but do have equities in companies that sell things people always need or have strong brands. I do have CDs and real estate. With the huge growing global debt and geopolitical instability, I think it's just a matter of time before there is another major financial crisis that will be different than what we've seen in our lifetime. But I realize most people prefer to think things will continue as they are and nothing will happen. Maybe they are correct, maybe not.

 

[REWahoo]

I wonder, with regard to the performance of the bond portion of the portfolio, if those invested in Wellesly or Wellington gain some advantage over those of us who are hard-core indexers and just rebalance. Do the professional bond traders at those funds add value in some way (e.g. adjusting duration in a way that beats the market consistently)? Since the overall holdings are both stocks and bonds, are the mangers able to gain some synergies that us plain 'ol indexers aren't able to harvest (maybe be adjusting the stocks owned to temper risks they are taking on the bond side, etc).
I ask because a lot of "hands-off" investors are trusting these funds to do well and not lose much ground regardless of the circumstances, and if interest rates rise (hurting both stocks and longer-duration bonds) it would seem that they might get burned like everyone else. But maybe these managed balanced funds have tools available that we don't.

I'll let you know...

 

[eytonxav]

i haven't changed anything yet and run 50/50 with short term bonds , corporate bonds and a total bond fund making up the bond portion.

i am just watching as things unfold and at some point in the near future i think i will keep 20% in total bond , 10% in floating high yield and 20% in the unconstrained bond fund.

Seems reasonable to me, thanks!