Anyone Else still holding Bond Funds?

[Magus]

But when that new issue bond first sold that .55% ytm may have been a good deal..Funds have to buy bonds to replace maturing bonds so what other choice did they really have?

Depends on the fund. Some will let managers sit on higher amounts of cash than others. Plus some have more discretion on what types of bonds and what duration of bond. But yes funds have obviously more limitations than what you as an individual will have.

 

[Katsmeow]

So -- for someone not really wanting to change their overall allocation percentages -- but who might want to get out of bond funds, what is the alternative? Our money is in IRAs at Vanguard and Fidelity so needs to be something I can buy there in an IRA.

I am a pretty simple investor. At Vanguard about 60% of what I have is Wellesley. The rest is either in the total stock market index found or their total bond fund.

More of our money is at Fidelity. At Fidelity things are divided between their total stock market fund and the US Bond Fund FXNAX.

I understand the argument that bond funds are not likely to get better so I am not that sure about keeping them. I don't want to put anything more into equities (I've rebalanced periodically and so my % allocation is fine).

I see a lot of complex things here about doing various things. But I am looking for something I can do at Fidelity/Vanguard. I mean I could just sell it and put everything in the money market fund. But are there better options?

 

[audreyh1]

As rates rise the fund is buying bonds at lower prices not higher , unless I am not following what they said …they have it backwards.

They may be selling at a loss but the bonds they are replacing will be cheaper .

From the article

“ . As interest rates rise and time passes, the fund will buy bonds at lower rates (higher prices) than when they sell them, sometime later, at higher rates (i.e at lower prices). That is, bond funds are forced to buy high and sell low.“

Yes, that quote makes no sense at all. They will be buying bonds at higher rates and lower prices.

 

[daylatedollarshort]

I see a lot of complex things here about doing various things. But I am looking for something I can do at Fidelity/Vanguard. I mean I could just sell it and put everything in the money market fund. But are there better options?

Some of us are buying short term Treasuries until rates level off. Bond funds have their advantages, just not in a rapidly rising rate environment. 1 year Treasuries are at around 3% right now, with no chance of capital losses. Bond fund yields are likely lower yields currently with the chance of large NAV losses yet to come as long as the Fed keeps raising interest rates. So why not invest in something with less risk, a higher interest rate and no loss of principal?

 

[lawman]

So -- for someone not really wanting to change their overall allocation percentages -- but who might want to get out of bond funds, what is the alternative? Our money is in IRAs at Vanguard and Fidelity so needs to be something I can buy there in an IRA.

I am a pretty simple investor. At Vanguard about 60% of what I have is Wellesley. The rest is either in the total stock market index found or their total bond fund.

More of our money is at Fidelity. At Fidelity things are divided between their total stock market fund and the US Bond Fund FXNAX.

I understand the argument that bond funds are not likely to get better so I am not that sure about keeping them. I don't want to put anything more into equities (I've rebalanced periodically and so my % allocation is fine).

I see a lot of complex things here about doing various things. But I am looking for something I can do at Fidelity/Vanguard. I mean I could just sell it and put everything in the money market fund. But are there better options?

I sold all my bond funds except 1 and all my VTI. I'm buying C.D.'s , treasuries and muni's. I still have a little exposure to equities but most of my portfolio is now fixed. I am buying mostly 3 month durations with hopes of locking in better rates this Fall. I just think their is a lot more chance of bonds funds and equities going lower than higher..I've taken a good hit selling out but at least I'm not dead..I think I'll sleep better..

 

[madatrub]

For the AAPL bond mentioned above, if its trading at $91 NAV today, at maturity, wouldnt the principal be paid back at $100?

 

[Bergamo]

Yes, that quote makes no sense at all. They will be buying bonds at higher rates and lower prices.

It does make sense but it is poorly written. Think of buying at lower rates two years ago, and now selling that low coupon bond when rates are higher.

 

[Graybeard]

I don't understand..I thought THL came into play if you bought back in after selling at a loss in less than 31 days..How are you affected by selling as long as you don't buy it back?

I was going to say the same thing. Is the OP sure a wash sale is in effect?

There are some TE bond funds which have unusual rules so we will have to wait for more information from the OP.

To not run afoul of the Wash Sale Rule (WSR) you can not have bought the investment 30 days prior to the sale of the investment and 30 days after the sale. That is a 61 day timeframe. In my case, I have been reinvesting dividends and cap gains back into the Vanguard Intermediate Term Tax Exempt Bond Fund (ITTEBF) for years. The fund declares a dividend on the last business day of every month. So, on 5/31 the dividend from the ITTEBF bought new shares of that fund. Around 6/10 I changed the reinvestment option to put the month end dividend into my settlement account which is a different type of security than the ITTEBF. Now I have to wait 30 days to meet the "prior" timeframe criteria of the WSR. I have no intention of reinvesting over the next 30 days after the sale cuz I want to sell the entire ITTEBF shares and put that into my settlement fund to use for T bill purchases. So to be safe, I will not sell the ITTEBF on 6/1 cuz it's right on the 30 day line. Monday July 4 the markets are closed so Tuesday July 5 is when I'll sell the shares which will be well past the 30 days since the 5/31 reinvestment.

If I am making a mistake on this please someone let me know! From what I understand, this strategy will not run afoul of the WSR and I can use thousands of dollars of losses for TLH.

 

[Bergamo]

To not run afoul of the Wash Sale Rule (WSR) you can not have bought the investment 30 days prior to the sale of the investment and 30 days after the sale. That is a 61 day timeframe. In my case, I have been reinvesting dividends and cap gains back into the Vanguard Intermediate Term Tax Exempt Bond Fund (ITTEBF) for years. The fund declares a dividend on the last business day of every month. So, on 5/31 the dividend from the ITTEBF bought new shares of that fund. Around 6/10 I changed the reinvestment option to put the month end dividend into my settlement account which is a different type of security than the ITTEBF. Now I have to wait 30 days to meet the "prior" timeframe criteria of the WSR. I have no intention of reinvesting over the next 30 days after the sale cuz I want to sell the entire ITTEBF shares and put that into my settlement fund to use for T bill purchases. So to be safe, I will not sell the ITTEBF on 6/1 cuz it's right on the 30 day line. Monday July 4 the markets are closed so Tuesday July 5 is when I'll sell the shares which will be well past the 30 days since the 5/31 reinvestment.

If I am making a mistake on this please someone let me know! From what I understand, this strategy will not run afoul of the WSR and I can use thousands of dollars of losses for TLH.

If you were reinvesting dividends then I believe you are correct. You have to wait and I do the same. Add a few days.

There are also different rules for TE funds that accumulate monthly rather than daily but I would have to go back and refresh my memory on those rules.

 

[Freedom56]

For the AAPL bond mentioned above, if its trading at $91 NAV today, at maturity, wouldnt the principal be paid back at $100?

Yes at maturity the principal is paid back at $100. If you own individual bonds to maturity you collect the coupon semi annually and the capital is returned at maturity just like a CD. The point being made was that the funds were buying a 5 year note that pays a paltry 0.55% at $100 or higher and then selling it for a 10% loss with three years to go to maturity. No sane investor would do that. Even at $90-91, it's still overpriced. But the fund managers are losing other peoples money and still collecting their fees.

 

[Graybeard]

Well this sucks! From the BH Wiki:

Loss on mutual fund shares held 6 months or less. If you sell shares of a mutual fund at a loss, and those shares have been held for 6 months or less, then there are special rules that may alter the loss you claim. First, if those shares produced any tax-exempt interest, then the loss is reduced, dollar for dollar, by that interest. Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced.[1][2] Vanguard, and likely most other brokerages, will not make the correct adjustment on your IRS Form 1099-B, so you will have to correct it yourself by filing Form 8949 and changing the type of capital loss.[3]
Note that most Vanguard Tax Exempt funds (and others like them) are not subject to the preceding 6 month rule because of the way they accrue and pay out interest (dividends). The 6 month rule for tax exempt interest comes from 26 U.S. Code § 852(b)(4)(B), but there is an exception in 852(b)(4)(E) for funds that declare dividends daily and pay them monthly or more frequently.[4] [5]
However, ETFs and the Tax-Exempt Bond Index Fund (which is the mutual fund class of an ETF) are subject to the six-month rule, because they declare dividends monthly, not daily. To see whether a fund is exempt from the six-month rule, check its prospectus for the statement, "dividends are declared daily and paid monthly"; if it says "dividends are declared monthly" (or quarterly), the six-month rule applies.

I can not find in any of the Vanguard literature for this fund whether the fund pays dividends daily or monthly. I know they have been reinvested monthly but it seems if I read this correctly that paying dividends daily does not invoke the 6 month rule whereas paying dividends monthly does. Anyone have any idea about this?

 

[madatrub]

Yes at maturity the principal is paid back at $100. If you own individual bonds to maturity you collect the coupon semi annually and the capital is returned at maturity just like a CD. The point being made was that the funds were buying a 5 year note that pays a paltry 0.55% at $100 or higher and then selling it for a 10% loss with three years to go to maturity. No sane investor would do that. Even at $90-91, it's still overpriced. But the fund managers are losing other peoples money and still collecting their fees.

Got it, and I agree. Thats pretty silly. And if I buy it at 91, I'm only getting 9% across 3+ years and 0.55%, right?

 

[Magus]

Yes at maturity the principal is paid back at $100. If you own individual bonds to maturity you collect the coupon semi annually and the capital is returned at maturity just like a CD. The point being made was that the funds were buying a 5 year note that pays a paltry 0.55% at $100 or higher and then selling it for a 10% loss with three years to go to maturity. No sane investor would do that. Even at $90-91, it's still overpriced. But the fund managers are losing other peoples money and still collecting their fees.

I don’t disagree with you but many foreign bonds were negative yield for much of the last 3 years, with worse credit ratings than Apple. I believe around $15 trillion in government debt had a negative nominal yield to maturity at one point in late 2020.

 

[Bergamo]

Well this sucks! From the BH Wiki:


I can not find in any of the Vanguard literature for this fund whether the fund pays dividends daily or monthly. I know they have been reinvested monthly but it seems if I read this correctly that paying dividends daily does not invoke the 6 month rule whereas paying dividends monthly does. Anyone have any idea about this?

Correct. That is what I was referring to above. Vanguard does its best to hide this information. If the TE fund shows a distribution yield then it is daily. If it does not show then monthly.

 

[Bergamo]

I don’t disagree with you but many foreign bonds were negative yield for much of the last 3 years, with worse credit ratings than Apple. I believe around $15 trillion in government debt had a negative nominal yield to maturity at one point in late 2020.

Sure but why stick that junk into a bond fund and sell it to unsuspecting investors?

I have a stock fund that has the worst stocks in it. Would you like to buy?

 

[Magus]

Sure but why stick that junk into a bond fund and sell it to unsuspecting investors?

I have a stock fund that has the worst stocks in it. Would you like to buy?

No one “stuck it” there - a bank, a fund manager or a person bought it because they believed it was the best option they had at the time. Mind boggling to me but it happened massively. You may not say the bond manager cares but they do - their bonuses depend on beating their indexes and these are not small bonuses, especially at the larger funds.

 

[Freedom56]

Got it, and I agree. Thats pretty silly. And if I buy it at 91, I'm only getting 9% across 3+ years and 0.55%, right?

If you buy at $91 you get $100 after three years plus that whopping coupon .55%.

 

[Katsmeow]

I sold all my bond funds except 1 and all my VTI. I'm buying C.D.'s , treasuries and muni's.

All of our money is in IRAs at Vanguard and Fidelity. So I need to buy something there. I've had an IRA CD in the past (years ago DH transferred part of his IRA to Penfed and bought one.

I honestly no nothing about treasuries, etc. I mean I know in a definitional sense but it isn't something I've ever done. I really want to keep the fixed portion pretty simple.

Does anyone have any ideas? Perhaps I could just put it in the money market fund? Anything else?

 

[daylatedollarshort]

All of our money is in IRAs at Vanguard and Fidelity. So I need to buy something there. I've had an IRA CD in the past (years ago DH transferred part of his IRA to Penfed and bought one.

I honestly no nothing about treasuries, etc. I mean I know in a definitional sense but it isn't something I've ever done. I really want to keep the fixed portion pretty simple.

Does anyone have any ideas? Perhaps I could just put it in the money market fund? Anything else?

Fidelity and Vanguard money markets are probably pretty safe from principal losses. They are designed to keep the NAV at $1. However, I don't think most of them are paying much in interest yet. Treasuries or FDIC insured CDs are even safer and will pay interest. One year Treasuries are paying around 3%, so for every $100K you have to invest that is an extra $3K of income.

You may consider just buying a $1K Treasury at auction or CD new issue and start out with a short duration just to get the hang of it, and then invest more as you feel more comfortable. That is what I do. Like this year I started buying my first zero coupon Treasuries, so I made a small test run first to get comfortable before I started toying with our life savings. I'm sure if you called their customer support they would walk you through the process.

 

[COcheesehead]

Fidelity’s government bond MM SPAXX is paying .59% and the treasury one FDRXX is paying .66%.

 

[audreyh1]

Fidelity’s government bond MM SPAXX is paying .59% and the treasury one FDRXX is paying .66%.

And the Premium MM FZDXX is paying 0.86%

 

[Katsmeow]

You may consider just buying a $1K Treasury at auction or CD new issue and start out with a short duration just to get the hang of it, and then invest more as you feel more comfortable. That is what I do. Like this year I started buying my first zero coupon Treasuries, so I made a small test run first to get comfortable before I started toying with our life savings. I'm sure if you called their customer support they would walk you through the process.

When you "their" customer support -- who do you mean? Is this something I can do through Fidelity or Vanguard? That is what I am looking for ... something I can do at Fidelity and Vanugard. To be clear all of our money is in IRAs at those places and I don't want to take money out of the IRAs to do this.

And, no, I am not looking to specifically do the money market since I know it doesn't really pay anything. Although perhaps better right now than the bond funds I guess

 

[daylatedollarshort]

When you "their" customer support -- who do you mean? Is this something I can do through Fidelity or Vanguard? That is what I am looking for ... something I can do at Fidelity and Vanugard. To be clear all of our money is in IRAs at those places and I don't want to take money out of the IRAs to do this.

And, no, I am not looking to specifically do the money market since I know it doesn't really pay anything. Although perhaps better right now than the bond funds I guess

Yes, Vanguard or Fidelity customer support should be able to walk you through the process. We have individual TIPS, CDs and Treasuries in our Fidelity IRAs. I've had to call Fidelity for other types of help, like setting up automatic withdrawals, and the rep took me through the process screen by screen.

You can start here: How to Trade Fixed Income Securities in Your Fidelity Account - Fidelity

and here: "Strategically located nationwide, our fixed income specialists work with you and your financial consultant to provide bond strategies and trading expertise when you need it." https://fixedincome.fidelity.com/ftgw/fi/FIServiceSolution

Just keep in mind they may also try to steer you to a comparable fund or ETF instead because they probably make more money off those with ongoing expenses, but most of those aren't going to have maturity dates.

 

[NW-Bound]

Many funds have sector allocation and duration allocation rules. So the lowest coupon debt is sold first and eventually the higher coupon debt of the same duration is sold later. Here is an example of a low coupon debt that no sane person would buy. It's carries a 0.55% coupon with a 5 year duration when it was issued and yet morons running bond funds bought it up at issue price and some even bought higher than par value. It has 3 years of duration left at has dropped to 90 cents on the dollar.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925717&symbol=AAPL5030515

Whereas this one has a coupon of 2.75% but has about the same duration and has held up better.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C721411&symbol=AAPL4562450

I personally wouldn't buy either but the example illustrates that eventually the higher coupon debt eventually is sold to meet redemptions.

I don't own any bond, let alone follow the bond market. Out of curiosity, I looked at the above two bonds, and saw that the 1st one at 0.55% coupon was offered in Aug 2020, while the 2nd one at 2.75% coupon was sold in 2017.

Back in mid 2020, there were no vaccines, no treatments for COVID. Ten-year Treasury was 0.5%. I guess it's not too absurd then to buy such low interest bonds.

It shows how things can change so drastically in just a couple of years. Who knows what the next 2 years will bring?

 

[retired1]

Yes I hold bond funds but I don't sell them. I let the interest re-invest which buys new bonds at lower price as interest rates go up. As long as I'm not selling, I am at peace with bond funds.