Is The Carnage Mostly Over For Bond Funds?

The current yield curve is not steep, rather inverted.
 
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Freedom56 said:
Why not look at the 10 year performance of these funds? That should give you a total picture of the "loss sharing" absorbed by many passive index funds.
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I have. BND, for example, matches its benchmark to within a smidge:

Month-end 3-Month total YTD 1-yr 3-yr 5-yr 10-yr Since inception (04/03/2007)
BND (Market price)
2.69% 3.28% 3.28% -4.70% -2.71% 0.94% 1.33% 2.99%
BND (NAV)
2.61% 3.18% 3.18% -4.73% -2.79% 0.93% 1.33% 2.99%
Bloomberg US Aggregate Bond Index
2.60% 3.01% 3.01% -4.72% -2.73% 0.95% 1.39% 3.05%

This was the point Audrey made upthread. If pb4's contention that buying and selling due to turnovers affects fund performance, then that under- (or over-) performance should show up relative to its benchmark. (The benchmark has no turnover-induced buying/selling.)

This point is distinct from the main one found in the many "bond funds are not bonds" threads. I have already agreed that the buying and selling that is necessary to maintain duration, etc., may be deleterious (or salubrious) to the fund, depending on the rate environment. But this thread is about bond funds.
 
Over this past month you could lock a 5 year CD ladder that yields over 5%. Your capital is 100% guaranteed and so are your coupon payments. You could choose how much to bias the ladder at 5 years at 5% or 1 year at 5.4%. If you want more yield, you can mix high grade corporate notes with CDs. You can also mix treasury notes for even more safety. Last summer CD yields were 4.25% and then up to 5% in the fall. In call cases you earn far more than what a bond fund distributes and your capital is returned in full when the CD, corporate note, or treasury note matures. Some people are riding the short end of the yield curve to maximize yield and duration risk. Some people are locking longer durations. The point is that you have that flexibility to chart your own course over the next 5-10 years which will be unlike the last 10 years.

Passive bond and equity funds are designed to take advantage of easy money policies. But easy money policies don't last forever. If you look at the CBO forecasts for the next 10 years the gross national debt is projected to reach $52T or $44T after deducting financial assets. I can't imagine a scenario where the treasury debt is not downgraded once again or a potential for hyper inflation as the dollar depreciates if nothing is done. Both scenarios will cause yields to spike. So the question is, do you what to steer your own ship or let a fund that has never faced extended periods of inverted yield curves or interest rates spikes manage your money and in return pay you less income and offer you zero capital protection.

https://www.cbo.gov/publication/58946
 

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Again, my point is not about the wisdom of using a passive index vs. trying to do a better job by timing the markets.

It is about whether inflows or outflows to a fund affect other investors.
 
Out-to-Lunch said:
I have. BND, for example, matches its benchmark to within a smidge:

Month-end 3-Month total YTD 1-yr 3-yr 5-yr 10-yr Since inception (04/03/2007)
BND (Market price)
2.69% 3.28% 3.28% -4.70% -2.71% 0.94% 1.33% 2.99%
BND (NAV)
2.61% 3.18% 3.18% -4.73% -2.79% 0.93% 1.33% 2.99%
Bloomberg US Aggregate Bond Index
2.60% 3.01% 3.01% -4.72% -2.73% 0.95% 1.39% 3.05%

This was the point Audrey made upthread. If pb4's contention that buying and selling due to turnovers affects fund performance, then that under- (or over-) performance should show up relative to its benchmark. (The benchmark has no turnover-induced buying/selling.)

This point is distinct from the main one found in the many "bond funds are not bonds" threads. I have already agreed that the buying and selling that is necessary to maintain duration, etc., may be deleterious (or salubrious) to the fund, depending on the rate environment. But this thread is about bond funds.
Click to expand...

The benchmarks are created for these funds and are completely meaningless. These funds should be comparing their performance to holding a CD ladder or a handful of high grade bonds held to maturity during that period. BND holds 30 year treasury notes with coupons of 1.25%. Who in their right mind would lock 30 years at 1.25% or 10 years at .7%? But since the index contains those components, so investors appear to believe it's okay. The reality is that a 1.33% return over 10 years is horrible and comparing it to benchmark of 1.39% is a pathetic example of how low the bar has been set.
 
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Out-to-Lunch said:
I have. BND, for example, matches its benchmark to within a smidge:

Month-end 3-Month total YTD 1-yr 3-yr 5-yr 10-yr Since inception (04/03/2007)
BND (Market price)
2.69% 3.28% 3.28% -4.70% -2.71% 0.94% 1.33% 2.99%
BND (NAV)
2.61% 3.18% 3.18% -4.73% -2.79% 0.93% 1.33% 2.99%
Bloomberg US Aggregate Bond Index
2.60% 3.01% 3.01% -4.72% -2.73% 0.95% 1.39% 3.05%

This was the point Audrey made upthread. If pb4's contention that buying and selling due to turnovers affects fund performance, then that under- (or over-) performance should show up relative to its benchmark. (The benchmark has no turnover-induced buying/selling.)

This point is distinct from the main one found in the many "bond funds are not bonds" threads. I have already agreed that the buying and selling that is necessary to maintain duration, etc., may be deleterious (or salubrious) to the fund, depending on the rate environment. But this thread is about bond funds.
Click to expand...

Thanks for digging up this information!

That reinforces my thoughts that there are many roads to Rome. You can build yourself a ladder, you can invest in a fund, you can buy CDs, buy I-bonds, etc. No tool is right for everyone, each tool has some advantages and disadvantages. The important thing is to know what you own, what its risks are and how it fits in to your goals and needs.

I see a couple of posters on this thread that capitulated last fall, probably right about the market bottom. If interest rates now come back down, they will miss out on the bond recovery (or already are missing out - since the 3rd week of October, BND, with reinvestment, is up 8.5%)
 
That's how I have access... I'm a subscriber and did a gift link. I also subscribe to NYT. Had WSJ but it went up over $20/month and I wasn't using it enough. Might do Barrons trial though. Perhaps I shouldn't be so [-]cheap[/-]frugal.
 
I going to give my two cents worth. I believe rates have finally stabilized. But inflation may take many quarters to come down and it might take years to reach the 2% Fed target. And just because inflation is coming down doesn't mean the Fed will lower rates in lockstep. Also with regard to the bond fund. I don't think the bond market behaves like the stock market in that you can "miss the boat' if you don't buy in fast enough. I think you have plenty of time to wait until the yield cure is stable & not inverted. In the meantime I'll work on my bond ladder and not going out more than 2 or 3 years.
 
pb4uski said:
That's how I have access... I'm a subscriber and did a gift link. I also subscribe to NYT. Had WSJ but it went up over $20/month and I wasn't using it enough. Might do Barrons trial though. Perhaps I shouldn't be so [-]cheap[/-]frugal.
Click to expand...

If you cancel your subscription to the WSJ and Barron's before the price reverts to normal, they will extend the deal for another year. The same thing with the NY Times. WP post was $29 for the year.
 
pb4uski said:
Try this link to avoid the paywall:

https://wapo.st/3mh3IJR
Click to expand...

Here is a brief synopsis:

"The Future Looks Messy for Passive Investors"

"What next you might wonder. Will social media influencers discover they found it easy to be thin and beautiful mostly because they were young? Will tech investors learn it was easy to get rich because interest rates were too low for too long? Will the managers of passive investment funds find they were successful only because market momentum was on their side?"

"The truth is that passive investing is simply momentum investing: Buy in and you get to hold lots of stuff that has done well recently (and the more overpriced they are, the more you hold) and not much of the stuff that hasn’t. That can be just fine — until conditions change. And change they have. "

"The stock market winners of the last few decades have been companies that have found the conditions of those decades rather brilliant: firms that have benefited from very low interest rates, easy credit, the lack of need for tangible investments (as everything gets made in China), off-shoring and financial engineering. The indices are jammed with those winners."
 
"momentum investing"

sure, stock market generally trends upwards

which is why we stay in it

despite the dips along the way
 
Aren't we supposed to set out asset allocations and ignore the noise?
 
Lisa99 said:
Aren't we supposed to set out asset allocations and ignore the noise?
Click to expand...

Yes, but the learning continues. Sometimes Treasuries or ibonds are compelling.

quite a range of ways to select an AA. The only real change I have made to my AA is to get rid of BND. Many ways to structure Fixed Income with the same AA.
 
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