What type of bond funds would you buy now?

[SecondAttempt]

I mentioned in other threads that I am trying to shift my asset allocation to about 60/40 S/B. I'm already 70/30 so these are not big moves.

What type of bond funds would you invest in now? I am leaning toward corporate income, high yield, and GNMA. I am concerned that the HY could get creamed in a recession and that GNMAs are still at long duration. An alternative would be to look at managed bond funds that have flexibility to adapt to changing conditions.

Honestly I am shocked that all the interest rate rises have not percolated out past about 1 year. Is this a good sign?

 

[DrRoy]

If you have a concern about something then avoid. Lower long rates suggests that the market does not think they will persist.

 

[mrfeh]

I mentioned in other threads that I am trying to shift my asset allocation to about 60/40 S/B. I'm already 70/30 so these are not big moves.

What type of bond funds would you invest in now? I am leaning toward corporate income, high yield, and GNMA. I am concerned that the HY could get creamed in a recession and that GNMAs are still at long duration. An alternative would be to look at managed bond funds that have flexibility to adapt to changing conditions.

Honestly I am shocked that all the interest rate rises have not percolated out past about 1 year. Is this a good sign?

For long-term investing (ie. 5+ years), total bond market.

 

[jebmke]

US Treasuries and Munis are all I hold. Except for individual Tips, all in funds.

 

[FiveDriver]

It seems that as of right now, the sweet spot is the 2 year Treasury -- it's paying more than the other durations. Is your money currently with one of the Big Houses, like Fido or Schwab ? All the Big Houses have Short Term Bond Funds.

Check out a Bond Fund like SHY and compare it to other short term T-Bond funds, comparing the recent 1-Month activity and noting the Expense Ratio of each fund.

The fact that the longer term Bonds are not moving up yet is a major clue.

 

[COcheesehead]

Careful, short term funds like SHY are distributing less than a money market right now because they hold older bonds with small coupons. It would be better to ladder current short duration treasuries or agencies than buy a fund with legacy investments from lower interest rate times.

 

[Montecfo]

Maybe a short-term bond fund.

I would not buy anything tied to the Agg, as duration is too long, you are just buying a loss.

 

[Closet_Gamer]

Careful, short term funds like SHY are distributing less than a money market right now because they hold older bonds with small coupons. It would be better to ladder current short duration treasuries or agencies than buy a fund with legacy investments from lower interest rate times.

The older bonds with lower yields should have price down to normalize the rate increase vs. new issues of similar duration.

Shouldn't that have flowed through to the price of the ETF?

 

[Markola]

For long-term investing (ie. 5+ years), total bond market.

I agree and we own it. It will be interesting to see what happens in 2023, because it’s headed toward a rare, second down year and an historically awful one at that.

 

[OldShooter]

I think the lesson of the recent past is that bond funds are a bad idea in a rising rate environment. Just buy short-term bills or notes.

 

[COcheesehead]

The older bonds with lower yields should have price down to normalize the rate increase vs. new issues of similar duration.

Shouldn't that have flowed through to the price of the ETF?

I just looked at the math. SHY is distributing .14 on an $81 NAV, that’s 2% when I can get 3.79% in a money market and over 4% in short term treasuries.

 

[VanWinkle]

I think the lesson of the recent past is that bond funds are a bad idea in a rising rate environment. Just buy short-term bills or notes.

I think the lesson is that stock funds are a bad idea in a rising rate environment. Just buy short term bills or notes or individual stocks that
won't go down. If they are going to go down, don't buy them......
Bond funds are good when rates are falling.....

 

[Freedom56]

The only fixed income funds that are even worth considering are closed end funds that are actively managed. Even in that universe of funds there are only a handful that have consistently outperformed and maintained their asset values since inception. A fund that provides no capital protection has to provide yields superior to CDs, treasuries, or high grade corporates to compensate for risk. If they don't they are doomed. Those that believe otherwise are delusional.

Passive bond funds are financial sink holes. Look at the duration of your favorite loser passive bond fund, the average coupon, and that should give you and indication of long it will take the fund to shed the portfolio of low coupon bonds. The math is very simple and bonds are very predictable. Most passive bonds aren't even able to distribute anywhere close to the average coupon as they absorbing horrific levels of capital losses as investors head for the exits. Right now a money market fund yields more than the vast majority of passive bond funds. Those that believe that 2023 will be better for these passive bond funds are in for a rude awakening as rates continue to rise. With CDs and treasuries yielding 2-4 times with 100% capital protection, in what reality does anyone believe that better days lie ahead for these passive bond funds bloated with low coupon debt.

Keeping you money in a $1 NAV money market fund is a better option than the vast majority of bond funds today.

 

[Freedom56]

I just looked at the math. SHY is distributing .14 on an $81 NAV, that’s 2% when I can get 3.79% in a money market and over 4% in short term treasuries.

SHY has lost 5.84% YTD, so the pathetic yield distribution means absolutely nothing. A short duration bond fund will just kill you faster as rates rise from this point on. The funds invest in short duration treasuries that have no risk and manages to lose money on a steady basis while collecting management and hidden trading fees. Please tell me why that isn't a scam?

 

[COcheesehead]

SHY has lost 5.84% YTD so the pathetic yield distribution means absolutely nothing. A short duration bond fund will just kill you faster as rates rise from this point on. The funds invest in short duration treasuries that have no risk and manages to lose money on a steady basis while collecting management and hidden trading fees. Please tell me why that isn't a scam?

I agree with you. I am a ladder guy and have been for a long time.

 

[daylatedollarshort]

For those of you who think duration matching is going to protect your investment in a bond fund, before you buy a fund look at the past performance stats. Use today minus the duration, total return and NAV, and see how that would have worked out compared to if you had bought individual bonds or TIPS instead.

 

[swk7907]

The only fixed income funds that are even worth considering are closed end funds that are actively managed. Even in that universe of funds there are only a handful that have consistently outperformed and maintained their asset values since inception. A fund that provides no capital protection has to provide yields superior to CDs, treasuries, or high grade corporates to compensate for risk. If they don't they are doomed. Those that believe otherwise are delusional.

Passive bond funds are financial sink holes. Look at the duration of your favorite loser passive bond fund, the average coupon, and that should give you and indication of long it will take the fund to shed the portfolio of low coupon bonds. The math is very simple and bonds are very predictable. Most passive bonds aren't even able to distribute anywhere close to the average coupon as they absorbing horrific levels of capital losses as investors head for the exits. Right now a money market fund yields more than the vast majority of passive bond funds. Those that believe that 2023 will be better for these passive bond funds are in for a rude awakening as rates continue to rise. With CDs and treasuries yielding 2-4 times with 100% capital protection, in what reality does anyone believe that better days lie ahead for these passive bond funds bloated with low coupon debt.

Keeping you money in a $1 NAV money market fund is a better option than the vast majority of bond funds today.

I know you are very anti bond fund and pro individual bonds based on your posts. I wish I had seen some of them sooner as like many I got crushed on bond funds this year and only recently started buying individual bonds.

What are your thoughts of international bond funds if we want some exposure to the international bonds? My gut tells me the fundamental issue with those are going to be the same as with domestic bond funds but I don't believe purchasing international bonds is as easy (or as smart) as domestic ones.

Would you say just to pass on international bonds as a whole or would you say that the positives of some exposure to international bonds for diversification outweigh the negatives of holding them in a fund?

 

[Freedom56]

I know you are very anti bond fund and pro individual bonds based on your posts. I wish I had seen some of them sooner as like many I got crushed on bond funds this year and only recently started buying individual bonds.

What are your thoughts of international bond funds if we want some exposure to the international bonds? My gut tells me the fundamental issue with those are going to be the same as with domestic bond funds but I don't believe purchasing international bonds is as easy (or as smart) as domestic ones.

Would you say just to pass on international bonds as a whole or would you say that the positives of some exposure to international bonds for diversification outweigh the negatives of holding them in a fund?

I would not buy international bond funds. The domestic bond funds are bad enough. Do you really want to own a fund that was dumb enough to buy bonds at negative yields and is now stuck with them? How about funds that own Russian bonds? Funds are a bad idea in a rising rate environment period. International exposure is more likely to make things worse.

 

[youbet]

For those of you who think duration matching is going to protect your investment in a bond fund, before you buy a fund look at the past performance stats. Use today minus the duration, total return and NAV, and see how that would have worked out compared to if you had bought individual bonds or TIPS instead.

That sounds like a great idea! What's the best/easiest way to get performance stats for a hypothetical bond ladder so I can do the comparison? What's the best way to define the bond ladder to ensure an apples to apples comparison?

 

[Midpack]

I think the lesson of the recent past is that bond funds are a bad idea in a rising rate environment. Just buy short-term bills or notes.

That’s what I’ve done, converted all our bond funds to T-Bills starting back in July (better late than not) for now. And I’ll probably go longer Treasuries once rates stabilize. I don’t see any reason to buy bond funds at the moment, despite owning them in the past. YMMV

 

[daylatedollarshort]

That sounds like a great idea! What's the best/easiest way to get performance stats for a hypothetical bond ladder so I can do the comparison? What's the best way to define the bond ladder to ensure an apples to apples comparison?

My post didn't address ladders.

 

[youbet]

My post didn't address ladders.

Oh. When you said " see how that would have worked out compared to if you had bought individual bonds" I guess I made a bad assumption that you meant the bonds were in the form of a bond ladder. So, you're actually saying saying compare the fund performance to a stack of individual bonds all with the same yield and maturity purchased at the same time for the same price?

 

[daylatedollarshort]

Oh. When you said " see how that would have worked out compared to if you had bought individual bonds" I guess I made a bad assumption that you meant the bonds were in the form of a bond ladder. So, you're actually saying saying compare the fund performance to a stack of individual bonds all with the same yield and performance purchased at the same time for the same price?

Yes, it doesn't have to be a stack. It can be $100. Just compare what equal investments would have gotten you one duration in the past. When I mentioned selling my bond funds earlier in the year, the BH advocates all told me they would stay the course and come out ahead in 8 years or whatever. It is impossible to compare future returns, but it is possible to compare past returns, one duration of a bond fund into the past, and see how that would have worked out.

 

[Markola]

I would not buy international bond funds. The domestic bond funds are bad enough. Do you really want to own a fund that was dumb enough to buy bonds at negative yields and is now stuck with them? How about funds that own Russian bonds? Funds are a bad idea in a rising rate environment period. International exposure is more likely to make things worse.

Who knows though? Vanguard Total International Bond Index Fund has fallen 11.04% YTD while the total domestic bond index fund has fallen 13.72% I wouldn’t have predicted that. Not fun to experience but they both seem like they are still basically doing their jobs as ballast to the stock side, which is down internationally 16.88% and domestically 16.92% YTD.

 

[Freedom56]

Who knows though? Vanguard Total International Bond Index Fund has fallen 11.04% YTD while the total domestic bond index fund has fallen 13.72% I wouldn’t have predicted that. Not fun to experience but they both seem like they are still basically doing their jobs as ballast to the stock side, which is down internationally 16.88% and domestically 16.92% YTD.

Well I was one of the very few on this forum that predicted very early in the year what was about to happen to bond funds this year and 2022 would be one of the best buying opportunities for fixed income investors after bond funds sell off. The articles advising people to ditch their bonds funds in the financial media only started appearing in June 2020 after a lot of the damage was already done. Bond funds are not bonds and they are certainly not ballasts for anything. Those so called advisors that continue to recommend bond funds that earn less than money market funds, treasuries, or CDs, or high grade corporate bonds are either incompetent or really stupid. People should realize by now that the financial services industry does not attract the best and brightest talent. Those that believe market timing is some evil practice, just look at what JP Morgan was doing bank in July 2021.

"JPMorgan Chase has been “effectively stockpiling” cash rather than using it to buy Treasuries or other investments because of the possibility higher inflation will force the Federal Reserve to boost interest rates, Dimon said Monday during a conference."

https://www.cnbc.com/2021/06/14/jam...-very-good-chance-inflation-here-to-stay.html

Others such as Bridgewater were advising people to avoid buying low coupon bonds all throughout 2021.

Many of us who manage their own fixed income portfolios saw this coming and hoarded cash earning next to nothing rather than buy low coupon bonds. We weren't market timing, we were just applying some common sense that that near zero rates had nowhere to go but up.