Bonds - Short Term or Longer

[2017ish]

Really? The symbol is VFSUX? Too funny.


Sent from my iPad using Early Retirement Forum

makes it easy to remember!

 

[mrfeh]

Morning All -

We have accumulated funds in non-IRA Vanguards Short Term Bond Fund (VFSUX).

Read an article in Money Dec edition suggesting that with expected interest rate small change, better to go to Intermediate Term.

We have enough liquidity in other accounts to whether storms over next 3-5 yrs so this money is more longer term.

I guess I may be answering my own questions if we should go from ST to IT. As long as we have enough liquidity then better to go IT.

If we do go IT, better to go Vanguard IT (VBILX 7.2 yrs avg maturity) or Vanguard Total Bond (VBTLX - 5.5 ys avg maturity)

Would appreciate your thoughts. This forum has amazing amount of knowledge and insight.

Thanks!!

Kannon

Don't try to time the bond market. Nobody knows what's gonna happen with interest rates.

The deciding factor is your time horizon - when will you possibly need to sell the fund. I look for a fund where the average duration is between .7 and 1.0 of my time horizon. If you may not need to ever sell the fund, then just use total bond.

 

[mathjak107]

a duration of less than 1 is not an incvestment in my opinion ,it is justr a place to store cash until you can put it in an investment. it is like a cash return.

i have been lightening up my bond investments.

i use two portfolios both from the fidelity insight news letter. the income and preservation model is almost all boinds except a 35% stake to a balnced fund.

i use the growth and income model as well which is about 70% equities.

everytime the markets slide and the income model has a higher return i shift more money to the other model portfolio. i am at about 40% - 43% equities now. already bond rates have been slowly rising and bond fund performance stalled out . i rather take my chances with more of the growth and income model.


i would go up to about 50/50 or so as an overall allocation . but if bonds continue doing poorly i would allocatre that bond money to better types of income funds rather than conventional bonds.

 

[audreyh1]

Don't try to time the bond market. Nobody knows what's gonna happen with interest rates.

The deciding factor is your time horizon - when will you possibly need to sell the fund. I look for a fund where the average duration is between .7 and 1.0 of my time horizon. If you may not need to ever sell the fund, then just use total bond.

+1 for bond funds held in a retirement fund. If you are owning them for decades the intermediate duration is fine.

But I don't bother with ultra-short bond funds (sub 2 year duration) because high yield savings accounts and 1 year CDs are currently offering higher yields and are much safer investments.

 

[mathjak107]

just becareful as what was fine for 35 years may not be fine once bond yields turn that corner.

the last 44 years we have seen the fed push up the fed funds rate by 1% or more lots of times and 50% of the time bonds rose. in fact only in one year 1994 did they lose money.

but that was because investors saw it differently and bid bond rates down.

well with little place to go at this point that history may mean little and those bond funds falling in value may cause some real pain.

just this past 4 weeks the long treasury bond has lost 7% . intermediate term treasury lost 2.50%, , corporate bond fund lost 1.70% and total bond lost 1.00 %. most of it over the last 2 weeks .


the benchmark us aggregate bond index fell 1.25% the last month . we may have reached the point that bond yields are on the rise and bonds may act more as a dead weight than adding to the party .

worse yet is it may take away.

equities and cash may be the best way to go according to quite a few top researchers .

 

[LOL!]

If one is going to own VCSH instead of VSCSX, then one might as well do some trading with it. Sell when it goes above 80.20 and buy back when it goes below 79.9 or something like that. But do not be fooled when it goes ex-dividend every month.

 

[mrfeh]

just becareful as what was fine for 35 years may not be fine once bond yields turn that corner.

the last 44 years we have seen the fed push up the fed funds rate by 1% or more lots of times and 50% of the time bonds rose. in fact only in one year 1994 did they lose money.

but that was because investors saw it differently and bid bond rates down.

well with little place to go at this point that history may mean little and those bond funds falling in value may cause some real pain.

just this past 4 weeks the long treasury bond has lost 7% . intermediate term treasury lost 2.50%, , corporate bond fund lost 1.70% and total bond lost 1.00 %. most of it over the last 2 weeks .


the benchmark us aggregate bond index fell 1.25% the last month . we may have reached the point that bond yields are on the rise and bonds may act more as a dead weight than adding to the party .

worse yet is it may take away.

equities and cash may be the best way to go according to quite a few top researchers .

Just so folks remember - if you aren't selling your bond fund shares, none of this matters. If you're holding bond funds for the long term, you want rates to go up, so that you are earning more money.

I don't plan on selling my intermediate bond funds for 10+ years, and I'm rooting for rates to go up, and the sooner the better.

 

[audreyh1]

Bond are just back to where they started at the beginning of this year. So it's just noise! We often go through periods of "rush to quality" when world events look scary, then rush out again when things look rosy. Repeated ad infinitum!

 

[mathjak107]

Just so folks remember - if you aren't selling your bond fund shares, none of this matters. If you're holding bond funds for the long term, you want rates to go up, so that you are earning more money.

I don't plan on selling my intermediate bond funds for 10+ years, and I'm rooting for rates to go up, and the sooner the better.

sorry but you are confused. rising rates do eventually cause the bond fund rates to rise for existing shareholders as older bonds are retired and new ones bought however that increase comes at a price and your nav falls to compensate.

getting 3% on a fund that fell 4% is a poor investment whether you are selling or not.

even if you stay for as long as the funds duration you can only get back to what your origonal deal was. if rates climbed to 3% your fund would have fallen enough to only get back to the origonal rate you had .

a bond fund that has a duration of 5 and an interest rate of 5% that cost 10 dollars will fall to 9.50 if rates go to 6% . you will get an extra 1% interest over 5 years but that offsets the 5% drop so you end up with the same deal.

in the real world though you always stay behind the curve when rates rise.


your net worth and value of the fund couldn't care less if you sell or not anymore than your equity performance cares if you sell. your worth is your worth.

 

[mathjak107]

Bond are just back to where they started at the beginning of this year. So it's just noise! We often go through periods of "rush to quality" when world events look scary, then rush out again when things look rosy. Repeated ad infinitum!

it isn't the fact they are where they started this year as much as the fact there seems to have been a big change in what investors are demanding as compensation for buying bonds in just the last 2 weeks.

1 to 2% drops in intermediate term funds and 7% in longer term does trigger a concern .

 

[karluk]

1 to 2% drops in intermediate term funds and 7% in longer term does trigger a concern .

Perhaps you are concerned, but I fail to see why most other investors should be. I think a number of posts in this thread were from people who were holding intermediate term bond funds in tax deferred accounts and had a time frame of over a decade. For this type of investor, a rise in interest rates should be a cause for rejoicing, not for concern. The higher interest rates will inevitably translate into better bond returns well before they expect to need the money.

As always, I am somewhat bemused by investors that are so risk averse that they are concerned by 1%-2% declines in intermediate term bonds, but at the same time are willing to hold substantial portions of their portfolios in stocks, which can be subject to 10%-20% declines in a similar time frame.

 

[mrfeh]

getting 3% on a fund that fell 4% is a poor investment whether you are selling or not.

This is where we disagree.

If I'm not selling a fund, why would I care what the NAV is?

Please look at the NAV of intermediate bond funds over large periods of time. You will see it wobble, but not stray very far, even when there are large changes in interest rates.

 

[mathjak107]

well how about i give you 3% and i keep all your principal. it is more than you are getting now .

 

[mathjak107]

This is where we disagree.

If I'm not selling a fund, why would I care what the NAV is?

Please look at the NAV of intermediate bond funds over large periods of time. You will see it wobble, but not stray very far, even when there are large changes in interest rates.

do not look at a 35 year old bull market where you could sit static in bonds during our lifetime with what will happen when the cycle reverses and goes up .

 

[mathjak107]

Perhaps you are concerned, but I fail to see why most other investors should be. I think a number of posts in this thread were from people who were holding intermediate term bond funds in tax deferred accounts and had a time frame of over a decade. For this type of investor, a rise in interest rates should be a cause for rejoicing, not for concern. The higher interest rates will inevitably translate into better bond returns well before they expect to need the money.

As always, I am somewhat bemused by investors that are so risk averse that they are concerned by 1%-2% declines in intermediate term bonds, but at the same time are willing to hold substantial portions of their portfolios in stocks, which can be subject to 10%-20% declines in a similar time frame.

the concern now is just for the reasons i mention above. a reversing interest rate cycle is something we have not seen in our investing lifetime yet but we are darn close now.

as they say this new period of cycles reversing possibly for the rest of our lives isn't going to be what we ever had before.

wee had rates rise for a year and fall but basically for 35 years the trend was down. the next long term poeriod can be trending up.

 

[mrfeh]

do not look at a 35 year old bull market where you could sit static in bonds during our lifetime with what will happen when the cycle reverses and goes up .

Look at the graphs in this thread; what bond fund investors care about is total return, not NAV:

Bogleheads • View topic - Bond Funds - Lower Rates - Impact on Total Return

Here's another explanation:

What Happens to Bond Funds When Rates Go Up?

 

[karluk]

the c9ncern now is just for the reasons i mention above. a reversing interest rate cycle is something we have not seen in our lifetime yet but we are darn close now.

Again, what's the reason for your concern? If the multi decade decline in interest rates really is at the cusp of a reversal, any long term bond investor should be absolutely ecstatic. Instead of looking at 2%-3% average returns in bond funds going forward, we can now look forward to the higher interest rates translating into better bond returns long before we will need the money.

 

[mrfeh]

Here's another example of what happened to total bond over a 4 year period where rates increased:

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=151665#p2273379

 

[mathjak107]

Look at the graphs in this thread; what bond fund investors care about is total return, not NAV:

Bogleheads • View topic - Bond Funds - Lower Rates - Impact on Total Return

Here's another explanation:

What Happens to Bond Funds When Rates Go Up?

duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

 

[mathjak107]

Again, what's the reason for your concern? If the multi decade decline in interest rates really is at the cusp of a reversal, any long term bond investor should be absolutely ecstatic. Instead of looking at 2%-3% average returns in bond funds going forward, we can now look forward to the higher interest rates translating into better bond returns long before we will need the money.

you need to see what happens to your funds price at it falls with each uptick in rates.

a funds duratuion number will tell you what happens . an intermediate term bond fund with a duration of 7 will fall in value by 7% for existing shareholders for every one point increase in rates.

since a fund always has older bonds at lower rates as they replace them you are always behind the curve and down even if you stay for at least 7 years in this case.

 

[mrfeh]

duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

Look closely at the graph where interest rates are rising. You will see that is a good thing, if the funds are not sold soon after the rise in rates.

I'm no longer going to argue with you; you seem to be stuck on a conclusion despite evidence to the contrary.

 

[mathjak107]

you need a lesson in how bonds work,. you are looking at graph where rates went up and then fell back into a downward trend. you have no graph yet that shows a long bear market in bonds.

that graph is showing a drop in bond rates not an increase.

as rates go higher bond values fall for existing holders. that graph is the reverse.

the one shown from 2003 to 2007 was a burp in the long term trend which was down. had rates continued upward it could have been carnage.

in this case in 2003-2007 you had 10k grow to 11k in 4 years . that is only 2.50% average return when bonds were paying over 5%.

that difference in 2007 of you averaging only 2.50% while new bond fund buyers are getting over 5% reflects the damage done in share price by rising rates.

 

[karluk]

duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

I'm not sure what point you are trying to make. The graph in the link clearly shows that bonds were a good investment in a four year period of rapidly rising interest rates. As I've said already, you are concerned, but I am happy. We'll have to wait to see which emotion is better suited to bond investors in the next four or five years.

 

[mathjak107]

I'm not sure what point you are trying to make. The graph in the link clearly shows that bonds were a good investment in a four year period of rapidly rising interest rates. As I've said already, you are concerned, but I am happy. We'll have to wait to see which emotion is better suited to bond investors in the next four or five years.

this is the point

in this case in 2003-2007 you had 10k grow to 11k in 4 years . that is only 2.50% average return when bonds were paying over 5% and if rates are at 5% you can bet inflation is close to 4% . you have negative real returns which are a loss. ..

that difference in 2007 of you averaging only 2.50% while new bond fund buyers are getting over 5% reflects the damage done in share price by rising rates.

if rates continued rising beyond 2007 and went to 7 or 8% you may be getting 3% or 4% total return on your invertment . 3% in 5 or 6% inflation is a loss no matter how you look at it. higher rates and higher inflation usually coincide.

you can do the math if you want but you will see your total return will likely be negative after inflation if you get caught in the bond fund as rates cycle up and stay higher.

rates and inflation generally move together as investors wan't more compensation for future inflation risk.

falling rates benefit existing bond holders , rising rates never do . you still may have a positive return but you can almost bet dollars to donuts that higher inflation went

with those higher rates so actual real returns turn negative.

it is like holding a bond until maturity. you will never lose money but getting back your 1000 bucks 30 years from now in todays dollars will have a purchaing power loss which is a loss no matter how you sugar coat it.

 

[karluk]

if rates continued rising beyond 2007 and went to 7 or 8% you may be getting 3% or 4% total return on your invertment . 3% in 5 or 6% inflation is a loss no matter how you look at it. higher rates and higher inflation usually coincide.

You seem to like slinging numbers around without providing any justification whatsoever. Inflation was never anywhere close to 5%-6% from 2003-2007. Intermediate term bonds provided positive inflation adjusted returns during this period, so they turned out to be a good investment in 2003. If rates had continued to rise after 2007 because of the huge spike in inflation you are envisioning, intermediate term bonds would have been an even better investment in 2007 than in 2003, because they were purchased during a period of high interest rates and the relatively high dividends would have been reinvested at even higher interest rates.

As I've said multiple times, you are concerned, I am happy. Assuming we both continue to contribute to ER.org, let's revisit this issue in future years and see how bond returns reflect our respective opinions. The key is to have a time frame that is at least as long as the average duration of the bond fund you're investing in.