Fidelity Core Bond Strategy

[COcheesehead]

Quote:

Originally Posted by RunningBum It seems like you'd be taking rungs out of your ladder if you do this. I know this is a true statement, but I don't get why it's so important. I don't know what that money will be worth when I get it back years later.

You brought up liquidity, I just addressed it.

If you don’t know why par is important, then invest in a bond fund. If rates rise, your value will decrease. Not so with a par bond which returns to its original value at maturity. There is no maturity to a fund.

[COcheesehead]

Bonds are still a mystery to so many.

[RunningBum]

Quote:

Originally Posted by COcheesehead Bonds are still a mystery to so many.

I'm making statements, challenging others, declaring my position, and asking questions to try to learn more.

[COcheesehead]

Quote:

Originally Posted by RunningBum I'm making statements, challenging others, declaring my position, and asking questions to try to learn more.

Questions are good, but when you challenge without having a clear understanding of what you are challenging...it comes across differently.

[pb4uski]

Quote:

Originally Posted by COcheesehead ... There is no maturity to a fund.

Actually while they are fairly rare, there are target maturity bond ETFs available, which are in between individual bonds and bond funds/ETFs.

[RunningBum]

[COcheesehead]

Quote:

Originally Posted by pb4uski Actually while they are fairly rare, there are target maturity bond ETFs available, which are in between individual bonds and bond funds/ETFs.

I wonder if they have a par value though. A maturity date without par means they can float around like a typical bond fund.

[pb4uski]

Of course they have a par value... the par value is the aggregate par value of all the bonds that the ETF holds.

See this link for the Invesco 2021 Corporate Bond ETF.... par is $1.987 billion.

https://www.invesco.com/us/financial...or&ticker=BSCL

What they will do in 2021 is to reinvest par received and bonds mature into short-term bonds and then in Dec of 2021 they'll make a terminal distribution to shareholders for all of their cash.... and that will be the end of that series.

[COcheesehead]

Quote:

Originally Posted by pb4uski Of course they have a par value... the par value is the aggregate par value of all the bonds that the ETF holds. See this link for the Invesco 2021 Corporate Bond ETF.... par is $1.987 billion. https://www.invesco.com/us/financial...or&ticker=BSCL What they will do in 2021 is to reinvest par received and bonds mature into short-term bonds and then in Dec of 2021 they'll make a terminal distribution to shareholders for all of their cash.... and that will be the end of that series.

Do you get back to the original issue NAV? If so, that would be attractive.

[pb4uski]

Yes, I believe so. Here is a chart for BSCJ... I think the inital offering was at $20/share... in addition to the monthly income distributions the final distribution was $21.09... I suspect that the difference was because not all income was distributed to shareholder over the term of the ETF.

Basically, what they do is raise money and buy bonds that mature in a target year... distribute some income and in the final year get the par values (assuming no defaults) and in December wind down the fund. So the fund evenutally received par since all bonds mature in the specified year (subject to credit defaults). It is like owning a share of a portfolio of bonds that mature in a specific year so from an interest rate risk perspective it is the same as owning individual bonds.

https://www.barchart.com/etfs-funds/...eractive-chart
https://www.invesco.com/us-rest/cont...CRD&dnsName=us

[pb4uski]

The one issue that I had with the structure is that in the final year yields lag because the bonds mature throughout the year and are invested short term until the terminal distribution in December... so the return in that final year was not very good. My solution was to just sell it in January of the final year rather than wait until December to avoid that lag.

[COcheesehead]

Quote:

Originally Posted by pb4uski The one issue that I had with the structure is that in the final year yields lag because the bonds mature throughout the year and are invested short term until the terminal distribution in December... so the return in that final year was not very good. My solution was to just sell it in January of the final year rather than wait until December to avoid that lag.

I get that. It makes sense, there is dead money for a bit.
These could make sense for someone who does not want to build a ladder, but still wants the precision and safety of a par value. Interesting product.

[pb4uski]

I used the product for a while as a bond/CD substitute.

For example, the 2025 Corporate Bond product has a portfolio yield to maturity of 1.21%... less 0.10% managment fee nets 1.11% vs 0.45-0.50% for 5-year brokered CDs at Vanguard or Fidelity or 1.20% for a 5-year CD at Navy Federal.

Definitely more credit risk, but another option. I will admit that I am more into CDs these days because I prefer to avoid corporate credit risk at this juncture.

https://www.invesco.com/us/financial...or&ticker=BSCP

[COcheesehead]

Quote:

Originally Posted by pb4uski I used the product for a while as a bond/CD substitute. For example, the 2025 Corporate Bond product has a portfolio yield to maturity of 1.21%... less 0.10% managment fee nets 1.11% vs 0.45-0.50% for 5-year brokered CDs at Vanguard or Fidelity or 1.20% for a 5-year CD at Navy Federal. Definitely more credit risk, but another option. I will admit that I am more into CDs these days because I prefer to avoid corporate credit risk at this juncture. https://www.invesco.com/us/financial...or&ticker=BSCP

I am living off a muni ladder I built a few years back so the yield is still nice. It will carry me to 2027, plus a bit more into the 2030’s.
I was lucky to buy a lot at higher interest rates.

[RunningBum]

Quote:

Originally Posted by COcheesehead If you don’t know why par is important, then invest in a bond fund. If rates rise, your value will decrease. Not so with a par bond which returns to its original value at maturity. There is no maturity to a fund.

Quote:

Originally Posted by COcheesehead Bonds are still a mystery to so many.

Quote:

Originally Posted by COcheesehead Questions are good, but when you challenge without having a clear understanding of what you are challenging...it comes across differently.

Since I was admonished for asking questions about this, I did some investigation on these mysteries. Turns out I'm not so uninformed after all.

From a Vanguard paper on Bonds vs. Bond Funds https://personal.vanguard.com/pdf/ICRIBI.pdf

Quote:

The ‘principal at maturity’ myth Holding an individual bond to maturity primarily confers an emotional, rather than economic, benefit and tends to be most practical for funding of near-term liabilities with highly predictable values. ... This price adjustment punctures the common myth that holding an individual bond to maturity will provide an economic benefit to the investor. Absent transaction costs, when interest rates are rising, the total return and present value of the cash flows will be equal from that point forward, regardless of whether the bond is held to maturity or sold at a loss prior to maturity with the proceeds reinvested in a bond with a comparable maturity date, but a higher coupon. Therefore, the fact that an investor is able to get principal back at a specific maturity date adds no economic value compared with a mutual fund that does not have a specific maturity date.

My summary is that while it's true you get your full investment back even when interest rates rise, you pay the price in that environment of getting sub-market interest payments. In other words, look at total return. Absent fees, your return is the same whether you hold the bond to maturity or sell it, and that's true whether the bonds are held individually, or in a fund.

I'll refrain from any snide remarks, but I've got one more thing to say: I'm not going to be bullied into staying quiet. I'll ask questions whenever I damn well want to.

[pb4uski]

I agree.

If you had a bond fund without fees that had money invested equally in bonds that matured in 1-10 years and a 10 year bond ladder of the same bonds... ignoring fees, the returns should be the same.

[COcheesehead]

Should be the same and are the same is the crux of the matter.
I like prefunding spending. I have a ladder funding 100% of my budget until 2027 and then some. I know exactly what I am getting. I like the precision and virtual guarantee of individual bonds.
If I have a fund and start pulling money from it each year, the NAV in a rising rate environment drops, so I am taking a hit on each withdrawal. With an individual bond the mark to market price price may fall as rates rise, but the bond eventually returns to par. I like that.

[COcheesehead]

Quote:

Originally Posted by RunningBum Since I was admonished for asking questions about this, I did some investigation on these mysteries. Turns out I'm not so uninformed after all. From a Vanguard paper on Bonds vs. Bond Funds https://personal.vanguard.com/pdf/ICRIBI.pdf My summary is that while it's true you get your full investment back even when interest rates rise, you pay the price in that environment of getting sub-market interest payments. In other words, look at total return. Absent fees, your return is the same whether you hold the bond to maturity or sell it, and that's true whether the bonds are held individually, or in a fund. I'll refrain from any snide remarks, but I've got one more thing to say: I'm not going to be bullied into staying quiet. I'll ask questions whenever I damn well want to.

Who is bulling? I simply brought up you challenged me on something you didn’t understand. I am glad you finally took the time to understand it better. Have a good weekend.

[RunningBum]

Quote:

Originally Posted by COcheesehead Who is bulling? I simply brought up you challenged me on something you didn’t understand. I am glad you finally took the time to understand it better. Have a good weekend.

It sure felt like bullying to me. It's unfortunate you don't see it, because that means it'll probably continue. Nobody should be discouraged from asking questions.

I understood it just fine before. All I did was find a solid source that said it in a better way.

My issue stems back to this half-truth in post #33, warning bond fund holders about rising interest rates while implying that individual bond holders area unaffected. That statement should have an appropriate warning for bonds.

Quote:

Originally Posted by COcheesehead Anyone buying a bond fund right now needs to understand the dynamics of interest rates. You will see erosion in the value of your investment if rates rise. Interest payments may remain equal or increase, but your initial investment will likely decrease, at least in the near term. If you buy a bond, you will see that same erosion of value if you decide to sell the bond before maturity. If you hold to maturity, you will get your principal back, but at the cost of a sub-market interest rate. Both bond and bond fold holders are negatively impacted by rising interest rates, which have the ultimate effect of reducing your buying power.

There's probably a better way to word it, but the point is that all are negatively impacted by the same amount in the end.

If you like the fixed, non-COLA interest rate and return of capital with individual bonds, stay with it. But it's in no way more superior or safer than bond funds.

[COcheesehead]

Quote:

Originally Posted by RunningBum It sure felt like bullying to me. It's unfortunate you don't see it, because that means it'll probably continue. Nobody should be discouraged from asking questions. I understood it just fine before. All I did was find a solid source that said it in a better way. My issue stems back to this half-truth in post #33, warning bond fund holders about rising interest rates while implying that individual bond holders area unaffected. That statement should have an appropriate warning for bonds. There's probably a better way to word it, but the point is that all are negatively impacted by the same amount in the end. If you like the fixed, non-COLA interest rate and return of capital with individual bonds, stay with it. But it's in no way more superior or safer than bond funds.

You missed the point I have been trying to make. My response above to PB #57 maybe says it clearer. I’ll leave there.