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What's so bad about bond funds?
Old 08-01-2020, 07:07 AM   #1
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What's so bad about bond funds?

I see numerous recent, negative comments about putting money in bonds right now.

The current 30-day SEC yield for Vanguard's short-term bond index fund is 1.33%; for the long-term index fund it's 2.17%. If that's the yield, those rates seem decent to me, much better than cash or CDs. And it's easy to transfer money out of the funds if/when things go south.

So what's wrong with parking money there until better options appear? What am I missing?
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Old 08-01-2020, 07:17 AM   #2
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The concern with bond funds is that with rates so near to zero and the Fed saying that they do not want to go with negative rates, that it is more likely that interest rates will go up rather than down or stay the same and the value of bonds and bond fund decline when interest rates rise.

BND has a duration of 6.4 years. In theory, if rates increase 1/2% then the value of bonds in BND would go down 3.2%... wiping out the 1.33% yield and then some.
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Old 08-01-2020, 07:31 AM   #3
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Originally Posted by pb4uski View Post
BND has a duration of 6.4 years. In theory, if rates increase 1/2% then the value of bonds in BND would go down 3.2%... wiping out the 1.33% yield and then some.
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.
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Old 08-01-2020, 07:37 AM   #4
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Money market savings accounts are still paying 1% so there is no need to buy bond funds. You are better off buying individual bonds in the technology or telecom sector if you want exposure to bonds.
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Old 08-01-2020, 07:45 AM   #5
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Money market savings accounts are still paying 1% so there is no need to buy bond funds. You are better off buying individual bonds in the technology or telecom sector if you want exposure to bonds.
Vanguard's Prime Money Market Fund currently has a .10% 7-day SEC yield - not even close.
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Old 08-01-2020, 07:58 AM   #6
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Originally Posted by lucky penny View Post
I see numerous recent, negative comments about putting money in bonds right now.

The current 30-day SEC yield for Vanguard's short-term bond index fund is 1.33%; for the long-term index fund it's 2.17%. If that's the yield, those rates seem decent to me, much better than cash or CDs. And it's easy to transfer money out of the funds if/when things go south.

So what's wrong with parking money there until better options appear? What am I missing?
If you are talking about this bond fund (Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)) the SEC yield is 0.39%. Maybe you meant intermediate?

In any event, the yield for short-term bond is well below Ally or Discover interest rates for high yield cash. CD rates from the past were even better. So that is where the negativity comes from for many here. So it is just not about yield.
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Old 08-01-2020, 08:03 AM   #7
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Quote:
Originally Posted by lucky penny View Post
I see numerous recent, negative comments about putting money in bonds right now.

The current 30-day SEC yield for Vanguard's short-term bond index fund is 1.33%; for the long-term index fund it's 2.17%. If that's the yield, those rates seem decent to me, much better than cash or CDs. And it's easy to transfer money out of the funds if/when things go south.

So what's wrong with parking money there until better options appear? What am I missing?
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 don’t get any benefit by selling when bond funds are down.
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Old 08-01-2020, 08:03 AM   #8
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Originally Posted by lucky penny View Post
Vanguard's Prime Money Market Fund currently has a .10% 7-day SEC yield - not even close.
depositaccounts shows that through banks and CUs, 1% is about the going rate.

https://www.depositaccounts.com/moneymarket/


Affinity Plus CU at the top of the list stands out at 2.02% (for up to $25k) - anyone can join for a one-time $25 donation if you don't qualify as a member of one of the organizations they are affiliated with:

https://www.affinityplus.org/persona...r-money-market

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Earn 2.020% APY* on balances up to $25,000.

And 0.750% APY on balances over $25,000.
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Old 08-01-2020, 08:06 AM   #9
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Originally Posted by lucky penny View Post
Vanguard's Prime Money Market Fund currently has a .10% 7-day SEC yield - not even close.
I think he’s talking about banks savings accounts which are still paying around 1% at the online banks.
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Old 08-01-2020, 08:19 AM   #10
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Originally Posted by njhowie View Post
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.
The NAV risk is real, but “everyone” has been eschewing bond funds since 2009 for that reason - and we’re still waiting. Those who’ve owned bond index funds have done far better than “raw cash, earning nothing.” Not I like market timing, being on the bond fund sidelines in cash for the past 10 years has reduced returns.
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Old 08-01-2020, 08:20 AM   #11
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Originally Posted by target2019 View Post
If you are talking about this bond fund (Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)) the SEC yield is 0.39%. Maybe you meant intermediate?

In any event, the yield for short-term bond is well below Ally or Discover interest rates for high yield cash. CD rates from the past were even better. So that is where the negativity comes from for many here. So it is just not about yield.
The 1.33% yield is VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares).
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Old 08-01-2020, 08:25 AM   #12
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Quote:
Originally Posted by lucky penny View Post

The current 30-day SEC yield for Vanguard's short-term bond index fund is 1.33%; for the long-term index fund it's 2.17%. If that's the yield, those rates seem decent to me, much better than cash or CDs. And it's easy to transfer money out of the funds if/when things go south.
Several posters here are using Vanguard Total Bond Market ETF (BND) as an example of fund risk while you clearly state that you are invested in VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares).

VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares) has less than 1/2 the duration of BND with far less credit risk.
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Old 08-01-2020, 08:35 AM   #13
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The NAV risk is real, but “everyone” has been eschewing bond funds since 2009 for that reason - and we’re still waiting. Those who’ve owned bond index funds have done far better than “raw cash, earning nothing.” Not I like market timing, being on the bond fund sidelines in cash for the past 10 years has reduced returns.
If you buy bond funds, you may be somewhat oblivious to what is taking place in the bond market. I don't fault you or anyone else who takes this approach. However, if you look at the underlying bonds, there is real risk "today". The market is almost completely discounting risk at this time. This is being pushed forward by the Fed, providing demand where there really is not demand, and for those who want to remain in bonds (all the funds which continue to experience inflows), forces them to pay up and continue buying in to this overpriced bond bubble. Things are very different today than over the prior 10 years.

In my mind, it's not just about "waiting", it's about looking around and making a judgement about what is taking place. Artificial support is being applied. This is not what the Fed does or where it is supposed to operate. In the corporate bond market, you have plenty of zombie companies that should be out of business, but because money is so cheap to borrow and there is an entire market of yield chasers, they just keep borrowing playing a financial shell game. It very likely doesn't end well.

In any case, if you are comfortable holding bond funds, more power to you.
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Old 08-01-2020, 08:42 AM   #14
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The 1.33% yield is VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares).
https://investor.vanguard.com/mutual.../profile/VFSUX

Look at the fund composition table by bond rating on the lower left. This is why the yield is 1.33% - this fund has quite a bit of risk as a good amount is lower investment grade in the Baa level. At this rating level, there is quite a bit of doubt regarding the quality of the ratings, in that many at this level have had their ratings inflated by the rating agencies, and really should be non-investment grade.
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Old 08-01-2020, 08:53 AM   #15
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I think bond funds are fine as an ongoing investment (similar to what Audreyh1 said). For taxable accounts, Muni bond funds can be attractive for taxable accounts and somewhat less synced with equities.

If you are "parking" money awaiting investment then it is the bank savings accounts.

As I have said, the only things more expensive than stocks are bonds. But if we get higher rates, your equities will decline more than good quality bonds or bond funds.

Stay Fully Invested.
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Old 08-01-2020, 08:58 AM   #16
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Originally Posted by njhowie View Post
https://investor.vanguard.com/mutual.../profile/VFSUX

Look at the fund composition table by bond rating on the lower left. This is why the yield is 1.33% - this fund has quite a bit of risk as a good amount is lower investment grade in the Baa level. At this rating level, there is quite a bit of doubt regarding the quality of the ratings, in that many at this level have had their ratings inflated by the rating agencies, and really should be non-investment grade.
And here I thought "Investment-Grade" was a good thing!

I appreciate the perspective, insights & info from everyone who has commented.
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Old 08-01-2020, 08:59 AM   #17
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If there's a flight to cash, the fund manager is forced to "sell low". That's not the case for individual bonds, which can be held to maturity. Still interest rate and default risks, but you should get what you bargained for when you bought it.
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Old 08-01-2020, 09:04 AM   #18
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The 1.33% yield is VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares).
Got it. You're talking about corporate, with less safety.
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Old 08-01-2020, 09:09 AM   #19
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Got it. You're talking about corporate, with less safety.
Thanks!
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Why "NO" Bond Funds
Old 08-01-2020, 09:19 AM   #20
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Why "NO" Bond Funds

Ditto previous post (former Institutional trader/market-maker here)
Individual bonds - latter-ed out thru time, ie multiple maturity years - is only way to use bonds effectively. Bond funds are a product of bundled for herd mentality and hugely ineffective when rates rise. Couple of issues of concern.

Interest rates have typically run in cycles (trends) of 30 to 32 yrs. Last uptrend ended in late 70's. Downtrend was set for reversal around 2010 -- been artificially suppressed since then. Short Take - we're way overdue for an uptrend to engage (ie 30+ yrs of up ticks) So, historically rates will most likely return to the 7-10% short term maturities within next 15 +/- years. Most people vitally alive today don't have an idea of what a continued rising rate environment will do to Bonds Funds - mainly because "funds" didn't exist on mass scale during the last up cycle. (didn't become Vogue until early/mid 80's)

Previous poster used a short term duration - 6.4 yrs - consistent with the old rule of thumb of 10 yr maturities with 1% rate increase correlates to a 8% drop in NAV. (Net Assett Value ie. share value of a bond fund) Hence, with short terms, for every 1% rise in rates - you lose 8% NAV - value in your holdings. Mid term - Long term bonds (15 - 30 yrs) go down 12% to 18% NAV for every 1%. So you might get a higher yield(income) but you can't sell the equity for your acquisition price-you have to take a substantial discount (loss) to rotate the equity for better yield quality. Or, you have to collect that higher yeild for 6-8 years to offset your value lose. (assuming no other rate hikes) Yea....They try to counter with new products like "Float Rate Funds" - not worth it, still at interest rate risk and other consequences (another time maybe) Like a see-saw yields and pricing are inversely related.

(ok, so those are "knowns" or givens!) What you may not know......human element.

Fund manager's job depends on yield/return. (to keep their job they have to put out highest yield) To be competitive they have to deliver new rates/yield. So when rates go up they cannot "not' react thus, they must sell old lower yield paper (bonds) at a discount in order to buy new paper (higher yields) at par or premium value - to stem off redemption orders (customers selling bond fund shares chasing higher yields elsewhere) because customers can find new offerings with a higher yield as soon as Fed's raise rates (that's new paper)

So, in essence, bonds funds have no maturity dates, only NAV - they are perpetual time wise. As opposed to individual bonds that have a finite maturity date - with a know value tied to stated yield per issue.

Hope this helps - I saw the question, strike'd a mood and felt like writing!

P.S. Google latter'd Bonds, time duration's, A paper.

BTW there is little to virtually no comp for a retail broker/advisor (common big brand brokerage houses) to reap on buying individual bonds. So, they have no incentive to use them - well, that is until they convince you to let them wrap a fee around the value. Not a fiduciary move at all, but no one out's it. (really another story) anyway good luck and stay away from bond funds, don't care if its free - you lose precious value in an uptick of rates.
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