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Old 08-08-2020, 01:47 PM   #61
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.... It'd be a bond slide, which seems a little better than a bond ladder.
Interesting concept, a "slide." Better? I don't know. Buying bonds directly and holding them to maturity involves no principal risk, something that is baked into bond funds to various degrees --- but never zero. There are clearly a lot of folks who feel that govvie funds are right for them, though.
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Old 08-08-2020, 04:06 PM   #62
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Originally Posted by dixter View Post
I'll never understand why people but a bond " fund " your just paying a company to choose the bonds they purchase for the fund.... just look at your favorite bond fund and look at the top 10 bonds in the fund and then just create your own bond fund...
Some of us are still w*rking and have most of their fixed income in 401k accounts! Individual bonds is not a realistic option for a lot of us w*rking (but aspiring) folks.
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Old 08-08-2020, 10:38 PM   #63
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Bond funds are fine, IMO, if you hold them for a very long period, well past the average duration. And you can simply rebalance with stocks as they go up and down.

But I only use short and intermediate duration bond funds and avoid long.

If thing go south - well, the damage has already been done, so you donít get any benefit by selling when bond funds are down.


Ditto. Iíve heard the opinions about bond funds tanking if interest rates rise for over a decade now. Meanwhile Iíve made good money in bond funds that whole time with lower risk to balance out my portfolio. I just rebalanced my portfolio and bought $125k more in 8-10 bond funds.
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Old 08-09-2020, 03:58 AM   #64
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Very good thread and an interesting discussion of the conundrum created by the Fed's unbelievable forays into the market.

I posed a version of this question several months ago:

"When does AA = Greater Fool Theory"
https://www.early-retirement.org/for...ry-102614.html

On one hand, setting and maintaining an asset allocation with rebalancing is designed to deal with exactly this situation. As bonds values rise, rather than having some moment of radical action that requires a decision (its time to sell my bonds), it happens slowly overtime as a natural function of rebalancing. The AA machine just does its work.

On the other hand, ever since they started with QE and its cousins, the Fed has essentially been price fixing the most important asset class in the world (US Govt Debt) and yanking everything else around with it. We're at the intersection of two conventional wisdoms

1) "Don't fight the Fed"
2) "Something that can't go on forever won't"

I read an article the other day suggesting the Fed may come out and explicitly say that until inflation is sustainably in the 2-4% range rates will not be going up. If that happens, wisdom #1 prevails for quite a long time.

However interesting this is ... and I find it quite concerning on many levels ... I've decided to just hit the snooze bar for the time being and let my AA continue to do its job. I may take the action of using CDs and/or defined maturity bonds in place of my bond funds, but for right now I'm just standing pat.
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Old 08-09-2020, 07:22 AM   #65
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Interesting concept, a "slide." Better? I don't know. Buying bonds directly and holding them to maturity involves no principal risk, something that is baked into bond funds to various degrees --- but never zero. There are clearly a lot of folks who feel that govvie funds are right for them, though.

and what happens when the bond insurer fails to pay off the bond. It does happen. So I would not say no principal risk. When a company goes bankrupt some bond holders may not get paid... but they are higher on the food chain than equity holders.
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Old 08-09-2020, 08:08 AM   #66
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The context was govvies not corporates. ergo, no principal risk.
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Old 08-09-2020, 09:34 PM   #67
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The comments on the risk to bond funds under rising rates and also the points on bonds as a diversifier, etc are fine; I agree.
What I haven't seen (but probably needs to be factored) in terms of "bond risk" is the possibility of negative rates. We aren't there yet, but Europe went there in the Great Recession.

Given the Fed actions over the last months, I would not categorically dismiss the possibility of negative rates, although 15 years ago I would have said you were crazy.
Just a thought. I'm not saying we are going there, but I think the bond (fund) critics might want to factor this into their thinking, now. Before the pandemic, I would have weighted the risks more on the bond risk crowd.
Now, I'm an agnostic; it might happen and it might not. Given the US susceptibility to the virus, I would rank it 50-50 since I don't think the economy will recover until and if we control the virus. Even at that, the current unemployment numbers compare to the GD and GR. I'm in Nevada; y'all may be doing somewhat better than us (and probably are), but I think the market is still assuming a quick economic recovery. I don't see it (hope I'm wrong!).
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Old 08-09-2020, 10:00 PM   #68
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and what happens when the bond insurer fails to pay off the bond. It does happen. ....
Do you have any examples or are you just making crap up? I'm not aware of any.
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Old 08-10-2020, 03:23 PM   #69
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Do you have any examples or are you just making crap up? I'm not aware of any.

Here's a few:

MW-IE703_HY_def_20200417150602_NS.jpg
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Old 08-10-2020, 06:12 PM   #70
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Here's a few:

Attachment 35917
No... those are defaults and are probably not insured bonds.... typically only municipal bonds have been insured. The post that I was responding to was bingybear's claim that bond insurers had failed to pay (as opposed to the bonds themselves... big difference).
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Old 08-10-2020, 06:17 PM   #71
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Our (my wife's and my) fixed income includes CDs, I-Bonds and bond funds: VG Total Bond and Short-Term Treasury. The overwhelming majority of the funds are in our modest IRAs from which we take RMDs. We generally reinvest the RMD money in a taxable account or use it for QCDs.

So here's my question: Given the concerns about the impact of rising interest rates on fund NAVs (which I completely understand), are we less affected because the bond funds are in IRAs? After all, we have no plans to withdraw any more than our RMDs for as long as we're alive. So, by definition, the majority of that IRA money is going to remain invested well past the fund durations and only small amounts will be withdrawn annually to satisfy RMDs. It seems to me that this will, over time, moderate the impact of rising interest rates, if and when they occur. What do you think? Please shoot holes in my thinking. (BTW, our only likely alternative to the bond funds is CDs.)
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Old 08-11-2020, 03:44 AM   #72
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Our (my wife's and my) fixed income includes CDs, I-Bonds and bond funds: VG Total Bond and Short-Term Treasury. The overwhelming majority of the funds are in our modest IRAs from which we take RMDs. We generally reinvest the RMD money in a taxable account or use it for QCDs.

So here's my question: Given the concerns about the impact of rising interest rates on fund NAVs (which I completely understand), are we less affected because the bond funds are in IRAs? After all, we have no plans to withdraw any more than our RMDs for as long as we're alive. So, by definition, the majority of that IRA money is going to remain invested well past the fund durations and only small amounts will be withdrawn annually to satisfy RMDs. It seems to me that this will, over time, moderate the impact of rising interest rates, if and when they occur. What do you think? Please shoot holes in my thinking. (BTW, our only likely alternative to the bond funds is CDs.)
In the long run, bond fund holder should want rates to rise. In time, the increased return more than compensates for the initial hit to the NAV.

Do a search over on bogleheads.org for details.
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Old 08-11-2020, 06:04 AM   #73
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Exactly.

However, most folks cannot grasp this, or do not understand how big an issue this really is. When interest rates get so low and it appears that it will be that way for some time, folks begin to become conditioned to it and will chase yield wherever they can find it.

I cannot in good conscience be buying any bonds or funds with such low yields. I would rather sit in raw cash, earning nothing (or as others would say, lose to inflation). Putting money in to fixed income yielding well under 2% at these levels is akin to picking up pennies in front of a steam roller. The risks are simply not worth it in my view.
Stocks are too high also and will never go up from here.....
Timing interest rates is no more exact than timing the stock market.
2 years ago, everyone was saying the same thing. I have made 10%
a year for the last 2 years on intermediate bond funds with at least
50% in treasuries/government backed securities.
You will be correct some day, maybe soon, maybe later.
Risk is something you have assume for higher returns than cash.

Cash works for you, and that is great.
Everyone has different goals and ways to get there.

Best to you,

VW
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Old 08-11-2020, 06:23 AM   #74
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No... those are defaults and are probably not insured bonds.... typically only municipal bonds have been insured. The post that I was responding to was bingybear's claim that bond insurers had failed to pay (as opposed to the bonds themselves... big difference).
When I posted I did not realize it was this limited of scope.


I thought that not all were paid when Detroit went bankrupt. But some went to pensions.


But now this is "insured" and not just government issued.
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Old 08-11-2020, 07:55 AM   #75
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So it would not be wise to invest in something like Schwabs SCHZ bond fund?


https://www.schwabfunds.com/resource...chz-fact-sheet
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Old 08-11-2020, 09:47 AM   #76
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When I posted I did not realize it was this limited of scope.


I thought that not all were paid when Detroit went bankrupt. But some went to pensions.


But now this is "insured" and not just government issued.
OK, I'm confused. When you said "and what happens when the bond insurer fails to pay off the bond." , I thought you meant to say "bond issuer" instead of "bond insurer" which makes a big difference. Which did you mean?
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Old 08-11-2020, 11:10 AM   #77
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When I posted I did not realize it was this limited of scope. ... But now this is "insured" and not just government issued.
Possibly you misunderstood my posts. (1) it is very difficult, maybe almost impossible, for an individual to build and maintain a well-diversified portfolio of corporate bonds. (2) Diversification is not an issue for bonds/CDs backed by the full faith and credit of the US government, aka "govvies," because they are zero risk.

Re municipal bonds, aka "munis," I expressed no opinion.
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Old 08-11-2020, 02:57 PM   #78
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Originally Posted by bingybear View Post
When I posted I did not realize it was this limited of scope.


I thought that not all were paid when Detroit went bankrupt. But some went to pensions.


But now this is "insured" and not just government issued.
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OK, I'm confused. When you said "and what happens when the bond insurer fails to pay off the bond." , I thought you meant to say "bond issuer" instead of "bond insurer" which makes a big difference. Which did you mean?
Jazz.... perhaps that is what he meant... issuer rather than insurer. If that was the case then he is right... issuers do occasionally default... that is why typically corporate bonds pay higher interest than US government bonds.

In the municipal bond market, some bonds are insured and some are not. Where they are insured the bond issuer pays a premium to a bond insurer and if the issuer's financial capability to make the contractual bond payments deteriorates to where they fail to pay the bond insurer steps in and makes the contractual bond payments to the bond holders. To my knowledge, there has never been an instance where a bond insurer has not been capable of making the payments (but I'll concede that I've been away from that niche industry for 20 years).

I'm not familiar with the details on Detroit, but there may have been some of Detroits issued bonds that were not insured and others that were.
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Old 08-11-2020, 03:40 PM   #79
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So it would not be wise to invest in something like Schwabs SCHZ bond fund?

https://www.schwabfunds.com/resource...chz-fact-sheet
It would be wise for some. It was actually my first choice for my Rollover-IRA, which still sits in cash (.01%). As more and more of these threads have grwon, I'm learning about new aspects to my decision.

Also, we have an allocation to a SCHW equivalent at Vanguard. Characteristics such as duration, when you'll tap the investment, these are important.

Good luck with your choice.
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Old 08-26-2020, 02:00 PM   #80
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Hi all;
I was thinking about creating a thread, but found this one that seems to be dealing with the issue I've been pondering. I've been quite perplexed recently over the "disconnect" between interest rates and the total return I've been seeing on some of the bond funds I have money in. I own VBILX which has a 12 month total return of 11.74% (as of 7/31) and a yield of .99% (as of 8/25). My wife's IRA has VWESX, which has a total return of 22.47% and yield of 2.21% (same dates)



I have quite a few years of investing experience, and it just seems to be a "bizarro world" situation to me. Like a lot of people here I use my bond funds as ballast to balance my stock/stock fund holdings, and I'm certainly gratified for the recent performance. However, I would think at some point, reality has to catch up with what I can only see as investor psychology -- that is possibly a flight to safety during the downturn earlier this year.


Anyway, just wanted to throw that out there for what it's worth. Although there's already been a lot of feedback on this thread, I would welcome anything else anyone wants to day.


Cheers.
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