Let's Talk Bond Funds

[Montecfo]

I think the reason you might not want to buy bond funds now is you are very likely "buying a loss". Yes it might turn around if you have enough time but why buy a loss?

Also as mentioned, bond funds underperform in down markets because investors flee.

Better to avoid duration now. Insured savings accounts and floating rate securities are a better bet in my view.

[daylatedollarshort]

Quote:

Originally Posted by lawman I have a bond fund that I've owned for 15 - 20 years. Right now it shows a loss on paper but that is misleading..I don't fully understand why but I can tell you I have made money on the fund..Seems to me like if I own a fund with a 7 year duration if I hold that fund for 7 years I should make whatever those bonds have yielded during that 7 years regardless of the share price...

" As a general rule, for every 1% increase or decrease in interest rates, a bond's price will change approximately 1% in the opposite direction for every year of duration....Understanding duration is particularly important for those who are planning on selling their bonds prior to maturity. If you purchase a 10-year bond that yields 4% for $1,000, you will still receive $40 dollars each year and will get back your $1,000 principal after 10 years regardless of what happens with interest rates. If, however, you sell that bond before maturity (or if you are invested in a fund that buys and sells bonds while you own it) then the price of your bonds will be affected by changes in rates."
https://www.blackrock.com/us/individ...nding-duration

You can buy stocks on sale during price dips, but bond funds don't work that way.

[scrabbler1]

I have owned shares of bond funds for the last 32 years, ranging from home-state munis to national munis to investment-grade corporates to borderline-investment-grade corporates. For the last 13 years, my entire ER, I have been living off the monthly dividends from one big bond fund where I own a LOT of shares. The price of those shares means nothing - only the number of shares and the cents-per-share I receive every month matters.

That cents-per-share dividends has eroded in the last 13 years, although I have added a lot of shares to compensate. If rising interest rates would at some point raise that monthly cents-per-share payout, I'm for it, even if the price of those shares took a hit.

[Montecfo]

Buying bond funds on a dip can work, especially closed end funds that may be trade at a discount to intrinsic value.

[lawman]

okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?

[daylatedollarshort]

Quote:

Originally Posted by lawman okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?

In an open ended bond fund, the bond fund managers are actively selling and buying bonds at prevailing interest rates, which may be higher or lower than 3%, as shares get bought and redeemed and interest rates change over time.

[sengsational]

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Originally Posted by lawman The selloff might affect share price but not the dividends..

Imagine this scenario: a flight to cash happens (that part should not require imagination). Fund managers forced to sell into a soft market because they need enough cash to pay people who want cash. They sell bond X for $98. The week before, they would have been able to get $100 for that same bond. Ok, now time passes, people are no longer fleeing to cash. The fund manager buys back the same bond sold earlier, but he pays $101 for it because bonds are in demand again. You don't need to complicate it with interest rate moves...the beginning and ending points are the same: bond X is held by the fund. The difference is that in order to pay the flight to cash, the fund took a hit. If you held the bond yourself, didn't panic out, you'd be ahead of those who held the fund.

[accountingsucks]

Quote:

Originally Posted by lawman okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?

You can't look at the yield but you can look at the 'yield to maturity' or ytm and yes all things being equalled that is the return you will get including dividends if you held the bond fund or etf from day 1 to the end of 7 years or whatever the average duration is for the fund.

How much lower can bond funds go? Right now there are about 8 rate hikes priced in to a mid duration bond fund (about 8 years). Do you think the Fed will raise more than 8 times (25 basis points each) before they stop hiking? If yes, then bond funds will continue to fall. If no, then you should be bullish on bonds. I have no idea so stick to my 30% bond allocation and yes it is painful but remember we will get higher yields at the end of this "normalization"

[Out-to-Lunch]

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Originally Posted by sengsational Imagine this scenario: a flight to cash happens (that part should not require imagination). Fund managers forced to sell into a soft market because they need enough cash to pay people who want cash. They sell bond X for $98. The week before, they would have been able to get $100 for that same bond. Ok, now time passes, people are no longer fleeing to cash. The fund manager buys back the same bond sold earlier, but he pays $101 for it because bonds are in demand again. You don't need to complicate it with interest rate moves...the beginning and ending points are the same: bond X is held by the fund. The difference is that in order to pay the flight to cash, the fund took a hit. If you held the bond yourself, didn't panic out, you'd be ahead of those who held the fund. [emphasis added]

Wait, there is another factor. It is not clear that the FUND took the hit.

Why did the fund manager re-buy the bond? S/He did so because someone was purchasing shares of the fund. And they were paying the going rate. Obviously, if the cost of the typical bond is back to $101, the NAV is similarly up 3% compared to when that bond was selling for $98. It isn't the case that the fund sold at $98, held the cash, then rebought at $101. Instead, the fund sold at $98, disbursed the cash, then later took in $101, and rebought at $101. I don't see where the other fundholders were harmed.

[pb4uski]

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Originally Posted by Out-to-Lunch You might look into the Invesco BulletShares. They are a series of bond-fund ETF's, but that contain bonds of a certain maturity date. Thus, you can set up a ladder of maturities, but each rung is spread out over thousands of companies. https://www.invesco.com/us/en/soluti...come-etfs.html There is also a similar series from BlackRock: https://www.ishares.com/us/strategie...r-bond-ladders

I'm somewhat of a fan of these and have invested in them in the past, but to keep it real it is hundreds of companies, not thousands. I downloaded the 2023 Corporate fund portfolio and it was 353 different issuers.

[garyt]

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Originally Posted by Midpack If you're an active trader/market timer, Motley Fool might be a helpful guide, their audience is not long term investors. Many/most retirees are long term investors.

Motley Fool is definitely for long term investors. They say be willing to hold any of their picks for at least 5 years and they very seldom sell a pick. They definitely aren't churners.

[pb4uski]

Quote:

Originally Posted by sengsational I'm not sure how this differs from any other bond fund. That they group bonds by maturity date seems not to prevent the holders from bailing out at an inopportune time, forcing the sale of bonds before maturity. When the flight to cash happens, as it will from time to time, unless you hold individual bonds yourself, you're going to get a little bit shorter end of the stick. Also, as an individual bonds holder, you can actually be on the smart side of that trade!

sengsational, these target maturity bond ETFs are like holding a portion of a portfolio if individual bonds... because the bonds all mature in a stated year the portfolio will receive the par value of the bonds in the portfolio as the bonds mature. In December of the target year, the ETF makes a terminal distribution of the cash to its investors and then that specific ticker ceases to exist because there are no assets left.

Different from a bond fund that has a perpetual life and is constantly reinvesting the proceeds from maturing bonds in new bonds.

So these target maturity bond ETFs are more similar to owning individual bonds than a bond fund. The portfolio is marked to market daily just like a portfolio of individual bonds are.

[daylatedollarshort]

Quote:

Originally Posted by lawman okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?

Here is an explanation from Wikepedia regarding open bond funds - - Bond fund - Wikipedia - Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation.......Disadvantages over individual bonds....Variable Dividends: Bond fund dividend payments may not be fixed as with the interest payments of an individually held bond, leading to potential fluctuation of the value of dividend payments.....Net Asset Value (NAV)of a bond fund may change over time, unlike an individual bond in which the total issue price will be returned upon maturity (provided the bond issuer does not default).

If you look at the dividend history of the Fidelity Total Bond Fund in this link, it changes every month - https://www.dividend.com/funds/ftbfx...tal-bond-fund/


You can also look at the holdings. The individual bond yields are all over the map from the manager buying and selling at different yields and durations over the years.

[pb4uski]

Quote:

Originally Posted by lawman okay someone here please correct me if I am wrong but it seems to me like if I buy a bond fund on Jan. 1 2022 with a 7 year duration yielding 3% that theoretically if I hold that fund for 7 years I will realize 3% dividends based on whatever the price was on Jan.1, 2022...I realize there will likely be different share price but assuming I do not sell I would still have realized a 3% annual yield.. Am I wrong?

Yes, you're wrong. Because a bond fund is continually having bonds mature and buying new bonds at current interest rates, your dividend will not be 3% for the entire 7 years unless interest rates were unchanged. If rates are rising then your dividends will increase but if rates are declining your dividends will decline as current holdings mature and new holdings are purchased at higher or lower interest rates.

Now if you buy a portfolio of 3% yielding bonds on Jan 1, 2022 that mature on Dec 31, 2027 then you would get a 3% yield (assuming no credit defaults).

If interest rates go up 1%.. from 3% to 4%, then the value of the fund will go down 7%. Or if interest rates spike 2%... from 3% to 5%, then the value of the fund would go down 14%.

And it will take 7 years for the new, higher yields on bonds purchased with the proceeds of maturing bonds to recover the decline in value.

https://www.blackrock.com/us/individ...20rates%20rise.

[Out-to-Lunch]

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Originally Posted by pb4uski I'm somewhat of a fan of these and have invested in them in the past, but to keep it real it is hundreds of companies, not thousands. I downloaded the 2023 Corporate fund portfolio and it was 353 different issuers.

Thanks for the friendly correction!

[target2019]

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Originally Posted by garyt Motley Fool is definitely for long term investors. They say be willing to hold any of their picks for at least 5 years and they very seldom sell a pick. They definitely aren't churners.

Many investors here use "forever" as their synonym for long-term. This makes MF and their 5-year yardstick rather short when compared to forever.

[mrfeh]

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Originally Posted by lawman For weeks I've listened to people talk about what a bad investment bonds are now. I realize that as interest rates go up bond prices go down..So what? If you are invested for long term who cares about bond price? I care about default risk, inflation and interest rates..I want rates to go up..Have wanted higher rates for many years. To the extent investors are able to time bond prices I attribute that to luck. Bond traders have so much more knowledge and information available that I do not have. I continue to believe contrary to some that investment grade bond funds are safer and more predictable than equities and perhaps maybe even more important for investors today than in the recent past...Tell me what I'm missing..

You aren't missing anything.

In fact, you are part of the minority that clearly understands the situation.

[audreyh1]

Quote:

Originally Posted by lawman For weeks I've listened to people talk about what a bad investment bonds are now. I realize that as interest rates go up bond prices go down..So what? If you are invested for long term who cares about bond price? I care about default risk, inflation and interest rates..I want rates to go up..Have wanted higher rates for many years. To the extent investors are able to time bond prices I attribute that to luck. Bond traders have so much more knowledge and information available that I do not have. I continue to believe contrary to some that investment grade bond funds are safer and more predictable than equities and perhaps maybe even more important for investors today than in the recent past...Tell me what I'm missing..

Nothing.

Works for me and has for a very long time because I’m a long term investor. I’ve been through numerous interest rate cycles and I rebalance occasionally as needed. I’m very happy with my bond index funds because they have high credit quality and extremely low expense ratios.

Temporary “forced selling” from a mutual fund doesn’t bother me at all because it gives me an opportunity to buy more at lower prices.

[lawman]

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Originally Posted by audreyh1 Nothing. Temporary “forced selling” from a mutual fund doesn’t bother me at all because it gives me an opportunity to buy more at lower prices.

Interesting..I'll have to think about that..Would that factor in the determination of end of year capital gains or how does that effect total return??

[audreyh1]

Bond funds rarely pay out capital gains, they are small, and do so mostly in falling interest rate environments.