Sell bond index funds at a loss in order to buy CDs?

[PointBreeze]

I don't want to start up the bond fund wars; so, yes, I get now why bond index funds are problematic

At this point I feel willing to sell at least 1/2 of the money we have in the bond index funds at a loss to stop the bleeding and put the money into a CD ladder at 4.5+%.

What are your thoughts?

 

[PointBreeze]

And we already have all the money we want to have in equities right now, so no, I don't want to buy more equities.

I know that inflation is currently higher than what I can get on CDs, but I want to have the cash we need for the next 10 years in something that won't lose value (other than to inflation).

 

[njhowie]

Why? Is the bleeding causing issues for you today, besides the psychological ones? Are you in retirement needing the money right now or the next maybe 5 years? Have you similarly considered unloading/reducing your equity holdings? If not, then why not?

Have you considered possibly buying more of the bond index fund now and going forward? If I had to wager, I'd guess that we are closer to the end of the interest rate hikes than a more prolonged period of further hikes. If you believe that rates will top out, and eventually go lower, it might be a good time to be buying bond funds now and going forward.

Keep in mind, you may very well be selling at/near the very bottom. If you do sell, I can almost guarantee that you will not be buying it back.

Try not to let the psychology get the best of you. The point of maximum pain is just before the reversal happens.

 

[statsman]

I don't envy your decision. I was always told to allow for a 5% NAV drop in total market/intermediate bond index funds in a really bad bond market. Worked well for us for roughly 14 years leading up to 2021. Well, that got blown away in 2022. The bond index funds are crippled.

 

[UpQuark]

At this point I feel willing to sell at least 1/2 of the money we have in the bond index funds at a loss to stop the bleeding and put the money into a CD ladder at 4.5+%.

I look forward to the replies, I have the same question about the expected future of the bond funds.

So far I am leaving mine alone, but if there is an easy way forward with the money that would work as well or better than leaving it sit, that would be nice.

I also wonder what to do with my pathetic retirement-year-target funds, they are half bond funds and a quarter international equities and a quarter domestic equities. If I sold it all at its current abysmal low, and re-invested the pittance similarly (except actual bonds instead of bond funds), would I do better or worse than waiting?

 

[audreyh1]

I’ll be buying a bit more in the near future I expect when I rebalance. I hold bond index funds indefinitely and rebalance occasionally.

All those sellers dumping their bond funds looks like a buying opportunity to me. Rebalancing takes care of that.

 

[COcheesehead]

I would do the math. Not sure what type of account you have them in, but there might be tax advantages too. If the break even is a year or two, I would consider it. You can also get better than 4.5% with a mix of relatively safe fixed income assets today. 5%-6% easy, likely more.

 

[daylatedollarshort]

I sold my bond funds earlier in the year and have been buying TIPS and laddering Treasuries with the money. I may move up to agency or even corporates next. Freedom56 has a wealth of knowledge he has been sharing on how to buy individual bonds in his Golden Period thread.

I am not opposed to bond fund investing, but they are too risky for me in an environment where rates still have a good chance of going even higher. If rate start to drop and the funds have yields higher than individual bonds for sale, I would consider moving back. But as long as there is a good chance of interest rates continuing to climb I'm sticking with individual bonds.

 

[pb4uski]

I think that is a good play. With rates rising, most bond funds will either decline in value or tread water at best.

I'm doing something similar. Just today I signed off on transferring two 3.0% and 3.5% CDs with 18-24 months left on them to Schwab. Even after paying the early withdrawal penalty if I buy similar maturity CDs/UST/Agency bonds then I'll come out ahead. Better yet. I'll have less accounts to deal with and a broader choice of investment options.

If you had told me a year ago that rates would increase so it would be advantageous to redeem those CDs early I would have thought you were crazy.

 

[Chuckanut]

I sold 1/2 of my short-term bond index fund shares about a week ago because I think inflation and thus higher interest rates will be with us well into 2023. I am using that money to build a ladder using CDs/Treasuries/Agencies paper. I can see the Fed pausing interest rate increases after next month to give the higher rates some time to soak into the economy and do their job. But, I don't see a reduction in interest rates any time soon. Interestingly, the fund has actually gone up a few cents since I sold.

I'm not a market timer, but I know there is a lot I don't know. So I like to hedge my bets.

 

[Graybeard]

I sold my bond funds in the Spring after seeing the losses mounting with each passing month. Threads here cemented the idea that holding bond funds in this environment was just asking for more pain. I've been buying T bills.

Are rates going to stop rising? No one knows. I reached a capitulation point and said the heck with the losses, I want out. If you are at that point then dump them. I suspect rates will continue to rise for at least another 3 if not 6 months but that's just a gut feeling, I could be wrong. One thing is certain, if you sell now you stop the losses but you have losses. You can put that money into CDs or bills, notes or bonds and while you won't get a return that offsets inflation at least you will get your principal back with the interest.

 

[jebmke]

I’ll be buying a bit more in the near future I expect when I rebalance. I hold bond index funds indefinitely and rebalance occasionally.

All those sellers dumping their bond funds looks like a buying opportunity to me. Rebalancing takes care of that.

I just bought some today with some dividend money that had built up from Q3 dividends. All of our IRA bonds funds are reinvested dividends and keep buying more shares at better prices. Fortunately in IRA because the income off these funds has really shot up - mine are fairly short maturity so the turnover has been rolling into higher yield quickly.

 

[Al18]

Sell all your bond index funds and build a CD ladder.

 

[Sunset]

And we already have all the money we want to have in equities right now, so no, I don't want to buy more equities.

I know that inflation is currently higher than what I can get on CDs, but I want to have the cash we need for the next 10 years in something that won't lose value (other than to inflation).

I sold some of our BND fund when it was $76 , so glad I did, wish I had done it when it was higher. Last week or so, I sold some straggling amounts of BND at $70, now it's $69.40
I sold some of my corp ones too, they have not lost as much so far.
I think BND will go down more so I didn't want to be in it.

I've been buying short term Treasuries, few CD's and few Bonds paying 5.5% or so. The Bonds are quite secure as they are put out by banks. Safer than the stocks I have in the same banks

Be sure to look at Treasuries, and 5 year TIPs (in IRA). Also you did buy some I-bonds correct ? And even some Large Bank Bonds would be very safe. I have found buying CD's at a brokerage gave me higher rates than at the same bank.

 

[DawgMan]

Like others here, I transitioned my bond fund allocation earlier this year to a 10 year ladder. I held bond funds primarily as a ballast during the accumulation years. Much of my decision was strategic as 2022 is year 1 of retirement for me. I know there are some here that chase cashflow from bond yields and might have a little more risk tolerance for lower rated bonds/higher yields. In my case, I am more about securing future spend needs as far out as 10 years in the event the apocalypses occurs so I try and focus more on treasuries, CDs, and specific A rated bonds. About 70% of my portfolio is equities so I rely on them for long term growth.

Also, inflation is a funny thing and how we individually interpret it can obviously affect your strategy. I look at "personal" inflation and how it really is impacting my desired spend. More than 50% of my annual spend is discretionary so I have allot of levers to pull to minimize inflation on MY spending. As it continues to be discussed on another thread, I would argue this is great time to be building a ladder and eventually locking in some longer term rates (up to 10 years). My retirement model was based on a very conservative WR and average annual returns of 5%. I did not expect to get 5% (or better) on my bond holdings, but now I can, so I look at that as extra juice!

No wrong answer here. Lot's of ways to get there. YOU DO YOU!

 

[arcyallen]

Just keep in mind what you're doing: Selling long term fixed income investments (after a near-record drop) and buying short term fixed income investments. What their prices did up until now are meaningless when you're doing your mental accounting.

 

[Chuckanut]

The big banks are concerned that their big depositors will flee to better paying institutions, so they offer them higher paying CDs through brokers. The assumption (<-- dangerous word) is that the little people don't know about brokered CDs or won't bother to make the effort to buy them if they do know.

 

[jblack]

I am in a similar boat. I sold my 401k bond fund last month to stop the bleeding and put it all into a MM fund.

Not the same as CDs and a bit off topic but I don't have other fixed income options in my 401k choices or the ability to rollover to an IRA to expand my choices. I feel like the MM is the least bad choice to keep my AA. Another alternative would be putting fixed income like CDs into my taxable account while putting more equities into my 401k but not sure that makes sense as I would want to undo that when rates stabilize.

 

[PointBreeze]

Thanks, everyone, for the sage (albeit varying!), advice.

I've just about finished moving the money we need for the next 3-4 years into a CD ladder. That money was in money markets, so I didn't have to sell any bond funds.

The money we need for years 5-12 is the money I'm most concerned about. That money is primarily in various bond index funds. As I understand it, bond index funds should eventually "catch up" to the rising interest rates and the prices should start rising again, as the shorter term bonds in the portfolios age out and newer bonds are purchased. Is my understanding basically correct?

If so, then perhaps sitting pat is the right thing to do, or maybe just selling enough for a couple more years of spending and leaving the rest be.

I have no trouble at all leaving equity funds to rise and fall, but bond funds have been bad-mouthed by so many in this community that I thought perhaps I should take this opportunity to get out of them and into CDs. A few of you agreed with me. Others counseled me to hold my original course.

I look forward to more wisdom and advice.

 

[audreyh1]

The burning question is how much of the rate rise is already priced in? Intermediate to long rates haven’t moved up nearly as much as short rates. Are they expecting an economic slowdown or recession? Are they anticipating that inflation has peaked and that the Fed won’t raise rates much at all in 2023? Are they looking forward to when rates drop a little?

 

[daylatedollarshort]

I am in a similar boat. I sold my 401k bond fund last month to stop the bleeding and put it all into a MM fund.

Not the same as CDs and a bit off topic but I don't have other fixed income options in my 401k choices or the ability to rollover to an IRA to expand my choices. I feel like the MM is the least bad choice to keep my AA. Another alternative would be putting fixed income like CDs into my taxable account while putting more equities into my 401k but not sure that makes sense as I would want to undo that when rates stabilize.

Our 401Ks have the same issue, though we are retired so have started to roll them over. Can you take a loan from your 401Ks as an option? At least some plans allow that. Then you could invest the loan proceeds as you see fit. You have to pay interest on the loan but the interest goes back into your own 401K account.

 

[jblack]

Our 401Ks have the same issue, though we are retired so have started to roll them over. Can you take a loan from your 401Ks as an option? At least some plans allow that. Then you could invest the loan proceeds as you see fit. You have to pay interest on the loan but the interest goes back into your own 401K account.

Thanks. The maximum loan I can take out is $50k which is a helpful feature but not significant enough to make an impact to my current situation and effectively (I believe) would be the same as buying CDs/bonds from my separate taxable account.

The money market option isn't horrible with ~60 day average duration. The ~3% return I'll get vs what I expect will be continued losses for several more months sticking with the bond fund is the bigger picture. Of course I could be wrong on rates continuing to go up.

 

[COcheesehead]

Short rates move more on Fed action. Longer rates are tied more to the economy. So the bond market is saying there will be a slow down or recession.

 

[xlf11]

I opened a brokerage account within my 401k to buy brokerage CDs for the bond portion of AA. Check with your 401k plan to see if there is this option...

 

[Freedom56]

I'll be even more blunt than I was back in early February 2022 (see below). Bond Funds are not bonds. They are not fixed income investments. They are not even good proxies for bonds. Those that they think they are have been duped by the financial media or their incompetent financial advisors. Take a look at the example I used back in February of the Apple 1.25% and where it is today. Only funds would lock in 1% yield for 10 years. No sane individual investor would do that. The ugliness that I predicted back in February is about to get much worse unless interest rates suddenly reverse and go to zero. You can assess the probability of that happening over the next 12 months. Those investors (including Bogleheads) that believe somehow that a bond fund with zero capital protection and distribution yields of under 2.5% and lower are going to compete with CDs, treasury notes, agency notes, and high grade corporates with coupons 2-3 times higher and preservation of capital are in total denial. They are the same type of investors that believed that Pets.com was a viable business. It's all about simple math. Bonds have a finite duration and mature or are called at par or $100 in most cases. You need to look at the duration and holdings of your fund and decide for yourself whether the bond fund has any means to increase their distributions to compete with even money market funds. For example, if you look at a the Boglehead favorite ETF BND, it has a duration of 8 years and average coupon of 2.6%. In other words it has no ability to increase distributions meaningfully for several years to come. If rates stay constant, it will continue to bleed slowly. If rates rise, it will bleed even faster. The 2.4% distribution is unlikely to keep pace with capital destruction. Some long term bond ETFs like TLT are doomed as they hold long term treasuries at record low coupons. Take the emotion out, and analyze the math before making any decision to sell or hold.

If you own individual bonds and time your purchases to moments when bond fund managers are in panic selling mode, all you will lose is the premium as rates rise. You will lose this premium in any case as the bond approaches maturity. We are approaching a long overdue moment when yields become attractive as bond fund managers begin their liquidation. CEFs will also sell-off to levels well below asset value. Investor should be focused on two thing when investing in bonds:

1- Fixed coupon payments
2- Return of capital

This is not that different from buying CDs. Investors should then ask themselves whether they would buy a fund that invests in CDs with no guarantee of return of capital or buy individual CDs themselves? Passive bond funds will not shield you from market risk and consistently underperform a portfolio of individual bonds due to their tendency to buy high and sell low. For example, the funds that bought Apple 1.25% coupon 2030 notes at or over par are watching it trade at 90 cents on the dollar and could very well drop to a low of 70 cents on the dollar during moments of panic bond selling as rates rise. Passive bond funds sell their lowest yielding investments first. Active funds and individual bond investors avoid these bonds/notes causing precipitous drops until the yield to maturity becomes attractive again. I have been saying for years that bond funds are dangerous and when rates rise or when markets fall, they revert to a "buy high/ sell low" mode. I have been profiting from these funds trading habits for the past 12 years as rates headed to zero and I limited my buying to periods of market corrections or rising rates.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925719&symbol=AAPL5030516

A fund that sells this note today will realize loss whereas an individual bond investor can buy today and hold it to maturity and earn the 1.25% coupon plus the capital gain at maturity and effectively earn 2.5% yield to maturity (YTM). If this Apple note were to trade down to 70 cents on the dollar, the YTM would be 6%. Over the past 18 months, the bond market has been flooded with issues like these so it will get very ugly for bond funds as rates rise but set up one of the best buying opportunities for individual bond investors.