Why are bond prices and bond fund navs doing this?

[Koolau]

I had an early lesson in bond fund avoidance in 1987. Natively, I believed the "stocks zig, bonds zag" line. That was after my BIL warned me away from bond funds and urged short individual issues! But the impact was smaller back then as it was not as many years of saving. Unfortunately, the tax law based accounts I'm stuck with don't have the ability to buy individual bonds. One has a stable value fund, and everything in that account is in the SVF, but that leaves more to be allocated to bonds. So even though I'd rather not own any bonds through a fund because bond funds are forced to sell at fire sale prices when the "wisdom of the investors" takes flight to cash, I'm still invested in a bond fund.

A question about the statistic about flight into money market funds. Does that track through to the final destination? I can imagine selling the long bond fund and buying a very short one. It seems like market timing (of the bond flavor) would be to twist the knob to short in situations when there's going to be rate increases and twist the other way, towards long, when the rates aren't going any higher.

This makes sense to me. And I don't see it as "traditional" market timing. Of course, I'm the world's worst investor, so what do I know?

 

[daylatedollarshort]

I had an early lesson in bond fund avoidance in 1987. Natively, I believed the "stocks zig, bonds zag" line. That was after my BIL warned me away from bond funds and urged short individual issues! But the impact was smaller back then as it was not as many years of saving. Unfortunately, the tax law based accounts I'm stuck with don't have the ability to buy individual bonds. One has a stable value fund, and everything in that account is in the SVF, but that leaves more to be allocated to bonds. So even though I'd rather not own any bonds through a fund because bond funds are forced to sell at fire sale prices when the "wisdom of the investors" takes flight to cash, I'm still invested in a bond fund.

We have three 401Ks with different rules with what we can buy. One had only funds and no stable value, but we could put money into a money market fund. I put our stocks allocation in that one and switched to a dividend paying stock fund. It has still gone down, but less than the S&P the last time I checked. The rest I just left in the money market. We will take our withdrawal for the year from that account to help drain it and then probably convert the rest of the money market funds to an IRA.

 

[Graybeard]

I think I had you and Mr_Graybeard confused. My bad.

No problem. I have been thinking about a screen name change, my name and the other are way too similar.

 

[gayl]

Thinking about doubling up on my taxfree CA Muni ETF. Price is down, it's in my brokerage acct (why I sort out taxfree), no idea where else to park cash. Market sucks so I'll put 2K into stocks from current income.

WHY NOT??

 

[jazz4cash]

With a 3% divvy that CA tax free muni ETF looks pretty good to me.

 

[gcgang]

In 1981, 10-year Treasury stayed above 14% for several months, to give people plenty of time to buy, buy, buy... It even got as high as 15.7%. The 30-year Treasury was only 0.5% lower.

Imagine locking in that high rate for 10-30 years. Who needs stocks?

I was young and did not have much money nor financial experience to take advantage of that.


PS. In 1979, just 2 years earlier, 30-year bond was less than 8%. I imagine a lot of bond holders sold at a loss in 1981 to trade up to 14-15% interest for 30 years.

Had friends in brokerage business in the late 1970’s - early 1980’s. They did a ton of business doing “bond swaps”, recognizing tax deductible losses, buying other bonds to replace, which usually had higher coupons.

In hindsight, 15% for 30 years was pretty good, but few people did it. Although you could have locked in 15% for 30 years, you also could get about 15% in money funds or short term bonds. Maybe it was “recently bias” that prevented people from going long, thinking they’d always be able to get high rates without taking the interest rate risk longer bonds carry.

 

[NomDeER]

I was a large believer in the hold bond fund so I didn't sell at the beginning of the year.
However even though I was locking in my loss I sold the 3rd week in April...
Glad I did as the BND has fallen ~4% since then.
Literally ~$3 per share.

I'm not buying back into BND right now as I think it will go down further as I think interest rates will rise more. I've seen them at 15% or more before, so right now rates are very low.

People would not think what I did is bad if I called it re-balancing, selling my less loosing BND (-10.7%) fund to buy shares that have fallen 20%.

I have to wonder, if people sell the bond fund now are they locking in losses or preventing further losses...

I was on the phone with a Vanguard rep today. I was surprised when he told me that he had a lot of clients selling equity funds right now and buying bond funds. That really sounds like locking in losses.

But, I guess I am on the other extreme and too hesitant to lock in losses. When bond funds starting going down, I didn't want to lock in the loss. Now they are down much more, and I don't want to lock in the bigger loss. I think I'm going to do like you and transfer some of the money in my retirement account bond funds to equity funds that have lost even more. And, yeah, it's rebalancing.

I feel foolish for having accepted the conventional wisdom about bond funds and not doing more research into bonds and other fixed income alternatives. I really need to educate myself. Can anybody recommend a good book? I am admittedly woefully ignorant. I see terms like MYGAs, TIPS, I Bonds, etc. and don't really know much at all about them. I just know money markets, savings accounts and CDs.

 

[daylatedollarshort]

But, I guess I am on the other extreme and too hesitant to lock in losses. When bond funds starting going down, I didn't want to lock in the loss. Now they are down much more, and I don't want to lock in the bigger loss.

I don't really understand how you can lock in a loss by selling a bond fund. Bonds are not stocks and behave differently. Freedom56 has a good post here on the subject - https://www.early-retirement.org/fo...nd-meltdown-look-like-114386.html#post2788533

 

[Katsmeow]

I was talking about folks who just now are selling their depressed bond funds. That locks in the loss I believe. Holding the fund until it comes back (hopefully) is sort of a non-event if you come out the other side.

I'm just thinking that if there is ever a reason to hold bonds, that reason doesn't go away just because bonds are depressed in price - just like folks always want to be in equities, even when markets are falling. In theory, the balancing of a portfolio should still go on, even as both bonds and equities are falling in value - or did I miss something.

Now, switching bond funds for Treasuries is probably a good idea - if you know that bond funds are going to drop in value. I think you could make a case that we "knew" bond funds would fall beginning of the year, so going to Treasuries may well have been wise. Of course, we'll not even know that for a year or two (if we're lucky). Let us hope this mess is over in a year or two - but I wouldn't count on it.

I am struggling with this now. I did not sell my bond funds in January. The the total bond fund at Vanguard is down about 11 1/2%. The US Bond fund at Fidelity is I think down about 12%.

Note with equity funds I have no problem with that kind of thing. I haven't sold any of my stock funds -- down about 23 to 24% for the year. I haven't even sold Wellesley down about 11 1/2%. During that unpleasantness some years ago I didn't sell my equity funds when they were down 40+%. The point is that I don't panic because something is down and I don't try to do market timing.

But in this case I feel like I made a mistake in having all my fixed income in bond funds (well except for the part in Wellesley). And, if I recognize now that this was a mistake shouldn't I rectify it? Looking at it, yes, I don't like locking in the loss I've had so far which is about $11k. But, if I feel now that the bond funds were not a good idea should I continue to perpetuate something that wasn't a good idea?

But, I guess I am on the other extreme and too hesitant to lock in losses. When bond funds starting going down, I didn't want to lock in the loss. Now they are down much more, and I don't want to lock in the bigger loss. I think I'm going to do like you and transfer some of the money in my retirement account bond funds to equity funds that have lost even more. And, yeah, it's rebalancing.

I feel foolish for having accepted the conventional wisdom about bond funds and not doing more research into bonds and other fixed income alternatives. I really need to educate myself.

I feel foolish also. In my case I can't rebalance into equities as I was a bit over allocated in equities this year. I am not about to my target allocation. If I sell all my bond funds I am thinking that perhaps the Treasury bills for the moment would be OK while I try to learn more about all this.

 

[Graybeard]

Katsmeow, I hear you. With the Fed continuing to raise the FOMC rate at least 2, 3, who knows how many times, the losses will just deepen. You can cut your losses now and stop the bleeding or ride it down but it may well take several years or longer to break even again depending upon if rates stop or continue to rise. The duration of the Total Bond Market Fund is 6.7 years so a 1% rate increase will lose another 6.7% of your nav, 2% is 13.4%!

If it's in an IRA or Roth there's no tax consequences to exchanging out of the bond fund. I had a short and an ultra short term bond fund cuz I was concerned about duration and still lost a lot so I dumped them both, accepted the loss and will put the money into T bills. Maybe CDs one day. I'm done with bond funds unless we find ourselves in a decreasing rate environment, then your nav increases.

 

[mikes425]

Most of the damage already done IMO ... you guys really foresee treasuries like SCHO, TIPS or Ultra Short/ ST bond funds as going down substantially for years to come —from here? So there is nothing in them that you see as having any insurance or lower risk value in the volatility of, say, a 30+% equity crash?

 

[COcheesehead]

Most of the damage already done IMO ... you guys really foresee treasuries like SCHO, TIPS or Ultra Short/ ST bond funds as going down substantially for years to come —from here? So there is nothing in them that you see as having any insurance or lower risk value in the volatility of, say, a 30+% equity crash?

Your thoughts are likely true in the short term. Maybe one or two more rate increases, then a pause. Those increases will give bonds another haircut, but then the market will realize the Fed is likely done because a recession is imminent.
Longer term I think rates rise slowly.
I continue to endorse a ladder vs a fund to ward off NAV erosion and have an interest rate hedge.

 

[Freedom56]

The bond market has already discounted the fed funds going to 3.8-4% next year. The yield curve is beginning to normalize but at higher levels. That being said, bond funds have big issues going forward. Their yields are lower than treasuries and CDs.

 

[Katsmeow]

If it's in an IRA or Roth there's no tax consequences to exchanging out of the bond fund. I had a short and an ultra short term bond fund cuz I was concerned about duration and still lost a lot so I dumped them both, accepted the loss and will put the money into T bills. Maybe CDs one day. I'm done with bond funds unless we find ourselves in a decreasing rate environment, then your nav increases.

I sold my Vanguard Total Bond Fund and my Fidelity US Bond Fund holdings (all in an IRA). I do still own some Wellesley. About 31% of my fixed income was in Wellesley and still in. I think I will likely buy Treasury bills but am pondering that a bit.

Most of the damage already done IMO ... you guys really foresee treasuries like SCHO, TIPS or Ultra Short/ ST bond funds as going down substantially for years to come —from here? So there is nothing in them that you see as having any insurance or lower risk value in the volatility of, say, a 30+% equity crash?

Well, I don't know about years to come. What I do feel is that right now I see no benefit to having any of my fixed income in the two bond funds I mentioned. I may end up right now just buying Treasury bills. Maybe I will buy a ST bond fund in the not too distant future. We'll see. I mean I'm not going to just keep my proceeds in the money market. Of course, I do still have the Wellesley which I plan to keep.

 

[sengsational]

Unfortunately, the tax law based accounts I'm stuck with don't have the ability to buy individual bonds. One has a stable value fund, and everything in that account is in the SVF, but that leaves more to be allocated to bonds. So even though I'd rather not own any bonds through a fund because bond funds are forced to sell at fire sale prices when the "wisdom of the investors" takes flight to cash, I'm still invested in a bond fund.

Just a follow-up on the action I took. It wasn't much action (punch line: took half of intermediate bonds and put it in short bonds).

I learned that the rate I'm getting on the SVF is better than most, so although it isn't going to keep up with the current inflation rate, taking it out of the 401k isn't really an option. The the majority of my "bond allocation" is stuck there. A much smaller portion of my bond allocation was in a bond fund tagged "intermediate". My action: took half of the intermediate and put it in a bond fund tagged "short term". So no matter what happens, I made "half of a mistake". And going 50%, I started a race. We'll see who wins if I remember to check.

 

[Sunset]

I sold my Vanguard Total Bond Fund and my Fidelity US Bond Fund holdings (all in an IRA). I do still own some Wellesley. About 31% of my fixed income was in Wellesley and still in. I think I will likely buy Treasury bills but am pondering that a bit.

Well, I don't know about years to come. What I do feel is that right now I see no benefit to having any of my fixed income in the two bond funds I mentioned. I may end up right now just buying Treasury bills. Maybe I will buy a ST bond fund in the not too distant future. We'll see. I mean I'm not going to just keep my proceeds in the money market. Of course, I do still have the Wellesley which I plan to keep.

I sold my bond fund last month, now the BND is lower, so that was a good choice. I'm buying treasury bills now. It's pretty easy to put in a order for the auction ones.
Missed out on last week as I misunderstood, that I need to "order" the bonds ahead when it says "buy" at Vanguard, because they stop taking orders the day of the auction.

However I have bought some 6 month (26 wks) and 3 month (13 wks) ones. That money is earning 1.5 -> 1.75% with no loss possible. I'm staying relatively short as rates will go up over the summer.