Anyone Else still holding Bond Funds?

[Graybeard]

If you are closing out the entire position there are no wash sale concerns.

Or am I misunderstanding the issue?

From what I understand, you can not have purchased the investment 30 days prior to the sale, that triggers a WS. Same applies to 30 days after the sale but I have no intention to purchase that fund again unless the Fed goes on a rate cutting spree. It is the 30 days before part that I need to observe, it was last purchased via dividend reinvestment on 5/31. As usual, if I am wrong please correct me but I am pretty sure I am right but always learning.

 

[audreyh1]

From what I understand, you can not have purchased the investment 30 days prior to the sale, that triggers a WS. Same applies to 30 days after the sale but I have no intention to purchase that fund again unless the Fed goes on a rate cutting spree. It is the 30 days before part that I need to observe, it was last purchased via dividend reinvestment on 5/31. As usual, if I am wrong please correct me but I am pretty sure I am right but always learning.

Yes, I believe that is correct. Only wash sale on the new shares purchased via reinvestment, not the older shares >30 days.

 

[Kook]

Well, I am an amateur. I have an amateur question about “locking in a loss”. If I were to sell a total bond fund & buy treasury bills, how has that locked in a loss anymore than staying the course?
Wouldn’t the loss in value of the fund be offset by the increase it rate fairly quickly?

Trying to understand.

Thanks
Murf

Me too! Is your fund in a taxable or tax exempt account?

OP here and I am still sitting on my hands. I still have all my VBTLX and VWIUX. In my situation, these are both held in a taxable account since my tax free space is totally maxed out with Stable Value. With this being the case, I think I am going to tax loss harvest, plop the money into short term cd's and maybe buy the funds back in 30 or 60 days....or whenever things appear to have stabilized. This way I still earn comparable interest and harvest losses to offset future gains. I have harvested losses in stocks funds in years past but for some reason it seems different in bond funds.

 

[Kook]

Your yield table is out of date. The yields are higher across the board. See attached. There was a new issue under Agency/GSE this morning that sold out. It was a 5.48% 6/27/42 bond rated AAA/AA+. It's not a big stretch to earn $76K with $1.4M capital.

Wow! This almost seems to good to be true. I guess I have to learn more about individual bonds. If this is the case, then theoretically I can live off of almost double what I had planned for my SWR and never touch principal!

 

[Katsmeow]

Well, I am an amateur. I have an amateur question about “locking in a loss”. If I were to sell a total bond fund & buy treasury bills, how has that locked in a loss anymore than staying the course?
Wouldn’t the loss in value of the fund be offset by the increase it rate fairly quickly?

I just did exactly that. Sold total bond fund and bought treasury bills. I did not consider it locking in a loss because to my mind I was simply changing an investment but I was still holding to my asset allocation (I still have about 50% in equities).

I think of locking in a loss as when you see equities in particular and go to cash and you are now allocated differently and you can't offset the loss in value. You may stem any future loss but you aren't doing anything to get back what you lost.

 

[Freedom56]

Wow! This almost seems to good to be true. I guess I have to learn more about individual bonds. If this is the case, then theoretically I can live off of almost double what I had planned for my SWR and never touch principal!

My principal has continue to grow through retirement. I have been averaging 6.8% YTM or $68,000 per $1M invested through a combination of CDs, Investment grade corporate debt (BBB- to A+), and High Yield debt (BB-BB+). Remember bond funds are not bonds. Buying a fund that invests in treasury bills, notes, and bonds is completely ridiculous since you are adding risk to a risk free financial instrument and earning a lower yield. You are also paying a fund manager a fee to lose money at the same time.

 

[daylatedollarshort]

My understanding is that locking in a loss on a stock fund means selling at the bottom and then missing the days when the big gains occur in recovery. For that to be true with bond funds, you would have to sell now after losing 12%, and stay out of the bond funds when some huge and sudden interest rate cuts occur in the future.

While anything is possible, it seems unlikely with 8.5% inflation and significantly negative real interest rates, that the Fed will be dropping interest rates suddenly, at least until the indicators show inflation slowing down. Even then they usually give advance warnings for months ahead of time of what they intend to do. Like this year the members all said they planned 6 - 7 rate hikes fairly early in the year and stated fighting inflation was their #1 priority. I don't know why the bond fund market in general didn't react more to that, but those of us that did circumvented a 12% loss when the Fed raised interest rates significantly, just like they said they were going to do months earlier.

 

[Closet_Gamer]

Interesting thread.

We should remember that if the Fed's planned rate increases are the elephant in the room, then its move to quantitative tightening is the giraffe sitting in the corner.

The largest owner of bonds in the world has publicly declared themselves a net seller of bonds to the tune of $100B/mo. And they have $6T they need to get off their balance sheet.

Absent another black swan like covid that causes emergency measures, I don't see how interest rates drop appreciably in the near future. The pace of rate increases may moderate but if the Fed is selling $100B/mo and keeping one eye on inflation, I can't see how they drop.

We've all lived in a bond bull market for the last 40 years that was coupled with largely goldilocks inflation. Its a new day.

That combined with a flat yield curve caused me to sell my bond fund and built a two year treasury ladder. I felt the risk on the bond fund duration (7) was not being matched by good yield (2.7%). My treasury ladder is delivery 2.2% (or something like that) and I get a chance to re-invest all of it over the next 24 months.

YMMV

 

[Kook]

My principal has continue to grow through retirement. I have been averaging 6.8% YTM or $68,000 per $1M invested through a combination of CDs, Investment grade corporate debt (BBB- to A+), and High Yield debt (BB-BB+). Remember bond funds are not bonds. Buying a fund that invests in treasury bills, notes, and bonds is completely ridiculous since you are adding risk to a risk free financial instrument and earning a lower yield. You are also paying a fund manager a fee to lose money at the same time.

Ok, Freedom56....you have my attention! I have always subscribed to the Bogelheads philosophy and been an index fund investor. Individual bonds have always seemed intimidating to me and I have never completely understood how to buy and sell.

Obviously, the lower the grade, the higher the interest, but what is the default risk? I assume that I can trade through my Vanguard or Fidelity account?

I have Larry Swedroes book, The Only Guide to a Winning Bond strategy which I will start reading tonight. Maybe this should be a topic for a new thread, but are there any other books or reference material that you would recommend for someone just starting out with individual bonds?

Still learning.....

 

[Freedom56]

Ok, Freedom56....you have my attention! I have always subscribed to the Bogelheads philosophy and been an index fund investor. Individual bonds have always seemed intimidating to me and I have never completely understood how to buy and sell.

Obviously, the lower the grade, the higher the interest, but what is the default risk? I assume that I can trade through my Vanguard or Fidelity account?

I have Larry Swedroes book, The Only Guide to a Winning Bond strategy which I will start reading tonight. Maybe this should be a topic for a new thread, but are there any other books or reference material that you would recommend for someone just starting out with individual bonds?

Still learning.....

I can't tell you about books on the subject but I evaluate companies on a case by case basis. So I look at their 10K and 10Q reports and avoid many sectors outright like retail, airlines, energy, mining, and most industrial companies. You should not buy bonds based on ratings only. It's only one data point. There is a huge conflict of interest with rating agencies and issuers of bonds that pay these agencies. For example Boeing is rated BBB- now has yet to report a profit or positive cash flow for nearly 2 years. They are in effect paying their interest on existing debt with lines of credit. Boeing bonds were previously rated A+. I evaluate a bond/note on the length of the term, coupon, and the probability of default during that term. So companies in the storage sector like Seagate or Western Digital (both rated high yield) have a lower probability of default with surging demand for their products and their profitability in the next three years than Boeing. So if a fund wants to sell a Seagate Technology June 2023 4.75% note to me below par with a YTM of 7%, I have no issue buying it and I am 100% confident that they won't default. Equity investing carries far more risk than buying high yield bonds.

 

[copyright1997reloaded]

From what I understand, you can not have purchased the investment 30 days prior to the sale, that triggers a WS. Same applies to 30 days after the sale but I have no intention to purchase that fund again unless the Fed goes on a rate cutting spree. It is the 30 days before part that I need to observe, it was last purchased via dividend reinvestment on 5/31. As usual, if I am wrong please correct me but I am pretty sure I am right but always learning.

Your original post:

I did too... until I started to look closely at how much the nav has dropped!

I bought into it in 9/2020 and have reinvested the dividend each month because I don't need the income, I just wanted somewhere to get a better interest rate than Ally CDs.

So 1 year and 10 months later, every single purchase of the fund is a capital loss. In 2021 I made a little over $2,000 in tax free interest. Nice. Oh wait, I have lost $6,000+ in principal. Not nice. Remember, I don't need income.

I can't wait to dump this fund and buy T bills but I need to wait the 30 days after 5/31 to sell and TLH against my income over the next few years. I stopped reinvesting the dividends around June 10 so this month the dividend is going into my settlement fund.

When I bought this fund I didn't understand TLH or how raising interest rates effected a bond fund but I was aware of what duration meant. I just ignored the constant decreasing nav cuz buy and hold has been burned into my brain over decades. I finally realized this fund is not making me money, I'd have been better off putting it all into my checking account at my local bank that pays a 5 bp interest rate! I still would have lost money to inflation but my principal would still exist.

ASSUMPTION: This is held in a taxable account and you don't have the same or similar in another account (e.g. a tax-deferred account).

The wash sale rules are there to prevent you from taking a loss and buying back at a lower price and then holding that lower priced portion.

Since you are selling the entire position and NOT buying it back there is no wash sale to worry about. Yes, if you sold a portion of the holding then you have wash sale considerations - you would not be able to take the entire loss and the wash amount would be included in the remaining holding.

For example, let's say I buy
1 share of AAPL @ 182.00 on 3/31
Apple drops to $140 and I buy a second share on 6/15.
If I tried to sell 1 share of AAPL on 6/25 @ $143 and I specify the first lot (@182) as the cost basis of the share beings sold, it violates the wash sale rule and I would have a wash sale adjustment of $182 - $140.

If I waited until 7/17? (June only had 30 days), then I could sell the 1 share and specify the $182 priced lot as the one being sold.

However, if I sell BOTH shares on 6/28 the fact that I bought the 2nd share on 6/15 is irrelevant. For example, if I sold today @ $138 my loss on the 1st share should be $182-$138 and the loss on the 2nd lot would be $140-$138.

What is nice these days is that sites like Schwab, Ameritrade, Fidelity, etc. will calculate wash sale data for you.

 

[Graybeard]

Your original post:


ASSUMPTION: This is held in a taxable account and you don't have the same or similar in another account (e.g. a tax-deferred account).

The wash sale rules are there to prevent you from taking a loss and buying back at a lower price and then holding that lower priced portion.

Since you are selling the entire position and NOT buying it back there is no wash sale to worry about. Yes, if you sold a portion of the holding then you have wash sale considerations - you would not be able to take the entire loss and the wash amount would be included in the remaining holding.

For example, let's say I buy
1 share of AAPL @ 182.00 on 3/31
Apple drops to $140 and I buy a second share on 6/15.
If I tried to sell 1 share of AAPL on 6/25 @ $143 and I specify the first lot (@182) as the cost basis of the share beings sold, it violates the wash sale rule and I would have a wash sale adjustment of $182 - $140.

If I waited until 7/17? (June only had 30 days), then I could sell the 1 share and specify the $182 priced lot as the one being sold.

However, if I sell BOTH shares on 6/28 the fact that I bought the 2nd share on 6/15 is irrelevant. For example, if I sold today @ $138 my loss on the 1st share should be $182-$138 and the loss on the 2nd lot would be $140-$138.

What is nice these days is that sites like Schwab, Ameritrade, Fidelity, etc. will calculate wash sale data for you.

Thanks for your reply.

Yes this is in a taxable account, I don't think that this tax free bond fund is available to buy in an IRA or a Roth but I may be wrong.

I understand your AAPL example. But to THL you can't have bought shares of the fund 30 days prior to selling all shares, naturally there is no consideration for 30 days after since I won't buy this fund again. Since I reinvested the dividend on 5/31 (last purchase of shares of the fund) if I sold all shares of the fund within 30 days of 5/31 that should trigger the WSR which is why I need to wait until 7/5 which is just a little beyond 30 days.

Now I am far from an expert on taxes or TLH or the WSR but from what I have read I do have to wait 30 days after the last purchase which was 5/31. So if selling the entire amount of the fund only say 20 or 25 days after 5/31's purchase of the fund will allow me to TLH and not run afoul of the WSR then please tell me. At this point I am almost at the end of the 30 day period from 5/31 so it probably does not matter but I would like to understand this just for the sake of knowing.

 

[copyright1997reloaded]

Thanks for your reply.

Yes this is in a taxable account, I don't think that this tax free bond fund is available to buy in an IRA or a Roth but I may be wrong.

I understand your AAPL example. But to THL you can't have bought shares of the fund 30 days prior to selling all shares, naturally there is no consideration for 30 days after since I won't buy this fund again. Since I reinvested the dividend on 5/31 (last purchase of shares of the fund) if I sold all shares of the fund within 30 days of 5/31 that should trigger the WSR which is why I need to wait until 7/5 which is just a little beyond 30 days.

Now I am far from an expert on taxes or TLH or the WSR but from what I have read I do have to wait 30 days after the last purchase which was 5/31. So if selling the entire amount of the fund only say 20 or 25 days after 5/31's purchase of the fund will allow me to TLH and not run afoul of the WSR then please tell me. At this point I am almost at the end of the 30 day period from 5/31 so it probably does not matter but I would like to understand this just for the sake of knowing.

See bolded. Yes, your basis is affected by the wash sale, those lots have higher basis due to the wash sale.

The WSL isn't designed to keep the loss away from you forever (unless you do something like have the same security in an IRA). Once you sell ALL of your position, your entire basis can be recognized.

I repeat, if you close out the entire position, you can account for the entire basis.

See "Deferred Loss and Adjusted Cost Basis" in this article: https://www.thebalance.com/wash-sale-rule-3192972

 

[lawman]

I can't tell you about books on the subject but I evaluate companies on a case by case basis. So I look at their 10K and 10Q reports and avoid many sectors outright like retail, airlines, energy, mining, and most industrial companies. You should not buy bonds based on ratings only. It's only one data point. There is a huge conflict of interest with rating agencies and issuers of bonds that pay these agencies. For example Boeing is rated BBB- now has yet to report a profit or positive cash flow for nearly 2 years. They are in effect paying their interest on existing debt with lines of credit. Boeing bonds were previously rated A+. I evaluate a bond/note on the length of the term, coupon, and the probability of default during that term. So companies in the storage sector like Seagate or Western Digital (both rated high yield) have a lower probability of default with surging demand for their products and their profitability in the next three years than Boeing. So if a fund wants to sell a Seagate Technology June 2023 4.75% note to me below par with a YTM of 7%, I have no issue buying it and I am 100% confident that they won't default. Equity investing carries far more risk than buying high yield bonds.

Freedom, Who do you use to buy your bonds? When I pull up a bond on Schwab by CUSIP number it never has a YTM as high as yours.

 

[NomDeER]

I'm still educating myself on fixed income outside of bond funds, including ladders.

I've transferred a bunch of cash to my Vanguard settlement account. I'll be using much of this cash over the next five years and want any investment to be low risk, such as treasuries or CDs.

I have about $200k to invest in fixed income products. (Aside from this money, I'll be keeping about $50k in my settlement fund and bank account.) I'll be putting a total of $20k into IBonds between 2022 and 2023. (I know I can't buy them from Vanguard.)

I want to use the remaining 180k to set up a ladder, but am not sure what to do. I won't need any of this money for the next six months, but might need about 25k in the following six months and maybe about 50-60k the following year. I'd like to not commit any of it for more than 2 or 3 three years.

How would you set up a ladder, with what fixed income products, and when?

 

[sengsational]

Freedom, Who do you use to buy your bonds? When I pull up a bond on Schwab by CUSIP number it never has a YTM as high as yours.

Same with Fidelity. I've looked at the history on some of the issues discussed, and they never show 7% YTM in this history. But some trades might not be reflected. I think the technique employed is to put in a limit order with a hopeful YTM and don't be too upset if it doesn't get filled.

 

[madatrub]

Same with Fidelity. I've looked at the history on some of the issues discussed, and they never show 7% YTM in this history. But some trades might not be reflected. I think the technique employed is to put in a limit order with a hopeful YTM and don't be too upset if it doesn't get filled.

He's fishing on the Limit to get a better YTM.

 

[ERObjd]

I don't buy individual bonds, but I have Vanguard Wellesley and it consists of 66 stocks and 1280 bonds. Also have Vanguard Star fund has about 40% bonds, not sure how many bonds total in Star fund because it is a fund of funds...probably at least 1000 bonds. between those 2 funds that is all the bonds I want. My fidelity fzrox fund is 100% stocks I also have Fidelity FZILX (International) which has no bonds all stocks.

 

[Freedom56]

He's fishing on the Limit to get a better YTM.

You should always use limit orders to buy bonds. No doubt the same stupid funds that were buying this issue at $113-$117 not too long ago are now selling it below par.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C642369&symbol=ALLY4311981

On any given day the bid and ask spreads can be over 1% just between trades during the day. This is how brokers make money. If your limit order fills, then you are locked into that YTM, if it doesn't tomorrow is another day.

https://finra-markets.morningstar.c...42369&startdate=07/02/2021&enddate=07/02/2022

 

[Freedom56]

Same with Fidelity. I've looked at the history on some of the issues discussed, and they never show 7% YTM in this history. But some trades might not be reflected. I think the technique employed is to put in a limit order with a hopeful YTM and don't be too upset if it doesn't get filled.

You should check the FINRA site for bond trade history.

 

[VanWinkle]

"It’s counterintuitive, but you will likely maximize investment gains over your lifetime if you go out of your way to not maximize annual returns, instead focusing on merely good returns that you can sustain for as long as possible."

A quote from Morgan Housel and the reason many people hold bonds even when they are not performing well. They may be broken today, but they are not broken for the long game.

 

[Freedom56]

Freedom, Who do you use to buy your bonds? When I pull up a bond on Schwab by CUSIP number it never has a YTM as high as yours.

I use Fidelity to place my limit order. I have accounts at Schwab and TD Ameritrade but I have to call their bond desk to place limit order.

Here is an example of a note from Seagate that I bought around mid June with limit orders. It has a coupon of 4.75% and a duration now of under 11 months.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C614829&symbol=STX4152326

Bonds are not traded on central exchanges like stocks. The are traded within the firm and between bond desks at firms. So the prices can fluctuate. Brokerage firms make their money from fixed income trading. Scroll the trade history to see how much variation there is in price and yield. On June 13th the yield to maturity hit just over 7%.

https://finra-markets.morningstar.c...14829&startdate=07/02/2021&enddate=07/02/2022

Looking at the big picture, the probability of Seagate Technology defaulting on this note over the next 11 months is zero. Their operating income covers their interest expenses by a factor of 11 to 1. So as fixed income investors, we choose between CDs and treasuries that pay just over 2% for an 11 month term or buy a corporate notes at yields of 5-7%. During rate hike cycles, what is 100% predictable is that bond funds are in their buy high sell low mode. The same funds that were buying this corporate note from Seagate at 1% YTM at the beginning of the year are now dumping it at a loss. Six months from now, a short duration bond fund will start buying this same note above par at yields of 1-2%.