Anyone Else still holding Bond Funds?

[Koolau]

Gold, gun powder, and lead?

Old timers on this forum would remember the mention of the above assets in the last economic fiasco of subprime bubble burst.

Are we there at that stage yet? I would say not yet.

At least we haven't gone back to no-doc loans. Whatever down turns in housing will likely be less pronounced than last time. YMMV

 

[daylatedollarshort]

The point is no one can predict the direction of bond rates …

The economy can only absorb a slowing to a point and then it spirals down and rates go with it and no one can predict when and at what point .

I don’t believe in timing my bonds anymore then I do trying to time my stocks.

Like stocks , by the time it looks like things are changing the asset prices have already made the juiciest gains and that is true of bonds to , especially the longer you go out .

By the time 2008 scared the masses , bond values were already bid up.

A portfolio is not really diversified if it does not own assets that appear to have no future.

As those are the ones that tend to flip under everyone s nose who thought they were going to time them back in

At this point, the people who switched to short term Treasuries at the beginning of the year are up 1% or so compared to a -12% loss for bond funds. We could switch back to bond funds when inflation starts to cool with a 13% higher balance.

The Fed has gone from a close to 0% federal funds rate to 1.75%, and projections are 3% - 4% by the end of the year. Bond duration math says every 1% increase X maturity = price change. So we have the 1.75% priced into the funds with 7 year maturities at a -12.25% drop. That is it. But based on the Fed's meeting minutes and last inflation numbers, it looks like another 1% to 2% hikes are highly probable, which would mean another drop in NAV of 7% to 14% for funds with 7 year maturities. All for a ~2% yield.

From Jason Zweig at the WSJ in April - "If, as nearly everyone seems to believe, the Federal Reserve raises interest rates aggressively this year to try snuffing out inflation, some bond investors will get battered. How much you will get hurt, though, depends on what you hold. And you can protect yourself with a few simple and sensible steps......Avoiding longer-term bond funds—with durations of 7 to 10 and up—should help prevent big losses if interest rates keep ratcheting higher." The Fed is on the March: Can Your Bond Fund Keep Up? - https://www.wsj.com/articles/fed-raising-rates-bond-fund-strategy-11648825117

And even Fidelity, in the fine print - "Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss." Bond Market Mid-Year Outlook https://www.fidelity.com/learning-center/trading-investing/bond-market-2022-outlook

 

[Bergamo]

At this point, the people who switched to short term Treasuries at the beginning of the year are up 1% or so compared to a -12% loss for bond funds. We could switch back to bond funds when inflation starts to cool with a 13% higher balance.

The Fed has gone from a close to 0% federal funds rate to 1.75%, and projections are 3% - 4% by the end of the year. Bond duration math says every 1% increase X maturity = price change. So we have the 1.75% priced into the funds with 7 year maturities at a -12.25% drop. That is it. But based on the Fed's meeting minutes and last inflation numbers, it looks like another 1% to 2% hikes are highly probable, which would mean another drop in NAV of 7% to 14% for funds with 7 year maturities. All for a ~2% yield.

From Jason Zweig at the WSJ in April - "If, as nearly everyone seems to believe, the Federal Reserve raises interest rates aggressively this year to try snuffing out inflation, some bond investors will get battered. How much you will get hurt, though, depends on what you hold. And you can protect yourself with a few simple and sensible steps......Avoiding longer-term bond funds—with durations of 7 to 10 and up—should help prevent big losses if interest rates keep ratcheting higher." The Fed is on the March: Can Your Bond Fund Keep Up? - https://www.wsj.com/articles/fed-raising-rates-bond-fund-strategy-11648825117

And even Fidelity, in the fine print - "Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss." Bond Market Mid-Year Outlook https://www.fidelity.com/learning-center/trading-investing/bond-market-2022-outlook

Not necessarily. The markets are well aware that Powell is going to raise rates in July, August, September etc. The Fed has said where they expect the FFR to be at the end of 2022. So the market may have priced those increases in already. Now if there were unexpected rate increases that would be a different matter.

 

[daylatedollarshort]

Not necessarily. The markets are well aware that Powell is going to raise rates in July, August, September etc. The Fed has said where they expect the FFR to be at the end of 2022. So the market may have priced those increases in already. Now if there were unexpected rate increases that would be a different matter.

Try Googling:

bond market not pricing Fed increases

and set the search criteria for the past month under "tools", then check out what The WSJ, Bloomberg and financial sites are saying on that topic.

 

[Bergamo]

Try Googling:

bond market not pricing Fed increases

and set the search criteria for the past month under "tools", then check out what The WSJ, Bloomberg and financial sites are saying on that topic.

As of Monday, the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—had returned minus 12% this year. Its second-worst performance over the same period was minus 2.9% in 1984, in records going back to 1976.

Many investors and analysts still believe that the worst is likely over for bonds, pointing to slowing housing demand and plunging consumer confidence as signs that higher interest rates are already having their intended effect of cooling the economy.

Still, others warn that the poor performance of bonds could even create its own negative momentum.

“Perhaps the biggest risk for higher rates is that investors just decide to sell bonds,” said Donald Ellenberger, a senior fixed-income portfolio manager at Federated Hermes. “If investors decide that bonds aren’t doing a very good job hedging stocks and still aren’t paying much income, we could see rates spike higher because Wall Street dealers don’t have the balance-sheet capacity or desire to warehouse bonds nobody wants.”*

WSJ June 14th.

It would appear that some believe the announced increases are priced in and some do not.

Do you have something definitive?

 

[daylatedollarshort]

As of Monday, the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—had returned minus 12% this year. Its second-worst performance over the same period was minus 2.9% in 1984, in records going back to 1976.

Many investors and analysts still believe that the worst is likely over for bonds, pointing to slowing housing demand and plunging consumer confidence as signs that higher interest rates are already having their intended effect of cooling the economy.

Still, others warn that the poor performance of bonds could even create its own negative momentum.

“Perhaps the biggest risk for higher rates is that investors just decide to sell bonds,” said Donald Ellenberger, a senior fixed-income portfolio manager at Federated Hermes. “If investors decide that bonds aren’t doing a very good job hedging stocks and still aren’t paying much income, we could see rates spike higher because Wall Street dealers don’t have the balance-sheet capacity or desire to warehouse bonds nobody wants.”*

WSJ June 14th.

It would appear that some believe the announced increases are priced in and some do not.

Do you have something definitive?

When I do the above search with a past week time frame, I get an article from Bloomberg "Bond Market Losses Just Beginning" and another from The WSJ "Bond Slide Deepens with No End in Sight" as the first 2 results. Plus the duration calculations from the above post.

Bond Market Losses Just Beginning as Fed Sets Path to 4% Yields - Bloomberg - Some signs suggest the market is yet to face its biggest challenge. Powell said it’s too soon to declare victory over inflation that’s surged to a four-decade high -- or even see much evidence of an economic slowdown that would contain it. And policy makers boosted expectations for where the Fed’s benchmark rate will end next year to a median of 3.8% from 2.8% previously. Five predicted it would exceed 4%."

We will all know soon enough which forecasts are correct.

 

[Rianne]

My concern is: what do corporate pension funds invest in? Probably depends on how conservative the corporation is, but I don't want the down bond funds to affect our pension. We already sold our bond funds for T-bills/notes and CDs. I wonder if our pension fund did.

 

[Koolau]

My concern is: what do corporate pension funds invest in? Probably depends on how conservative the corporation is, but I don't want the down bond funds to affect our pension. We already sold our bond funds for T-bills/notes and CDs. I wonder if our pension fund did.

I have been blessed that Megacorp can make up the losses to the pension fund - though, so far, I don't believe they have needed to. IIRC, the last pension degradation (legal, but not too kind to empl*yees) has kept Megacorp well in the black on their pension funds. We get a report each year, and I've never seen a serious shortfall - not even during 2008/9. YMMV

 

[Rianne]

I have been blessed that Megacorp can make up the losses to the pension fund - though, so far, I don't believe they have needed to. IIRC, the last pension degradation (legal, but not too kind to empl*yees) has kept Megacorp well in the black on their pension funds. We get a report each year, and I've never seen a serious shortfall - not even during 2008/9. YMMV

Good to know. The corporation of concern is over 100 years old. I assume they've been through this before. Checking on Google, it looks like Worldcom and Enron were approx. 25 ish years old before collapsing.

True story, a friend of mine from high school whom I lost touch with over the years became an executive in Worldcom (HR Dept.) She was a millionaire one day and a pauper the next.

 

[sroby2020]

I still have BND, and it's down about 14% from my cost. Since I live off of dividends, I'm keeping it in hopes of the dividends increasing as interest rates rise.

 

[Cheesehead]

THIS REPLY IS TO KOOK THE OP:

You still here Kook? I'm in the same boat as you, I rode VG Investment Grade Bond Fund and VG TIPs down, it is against my nature, in my DNA not to sell when it's in the red but I think that's more of an equities philosophy with me and one month ago I was considering selling.

I signed up for a webinar with the VP of bond investing at a large corp (think Schwab, Fidelity, Vanguard) I don't want to mention which one, and it was too complex for me, it seemed more for bond traders. The VP mentioned he was coming to my city and I privately messaged him to his email begging for 30 minutes of his time when he comes to town. He graciously agreed.

I went to their offices with my spread sheet (mainly invested with his company) and laid out my FI portion which is about 50% of my $1.4 mil nest egg, some of the bond portions are from my Wellesley holding. I use the Bucket Strategy and the FI is in Bucket #2. We have 5 years of cash in Bucket #1 so we don't need to sell anything for income unless there's a Zombie Apocalypse. Naturally, as a bond man, he came right out and said he hates bond funds. OK, I get that but should I sell at a loss? It's against my grain. He said he could not offer me advice but basically said at the losses we are now, it will take about 4 or 5 years for these two positions to get back into the black. He had a scary caveat: IF we were to get into a real war, I assumed he meant NATO vs Russia, then everyone would flee the stock market and bonds will rise. I didn't want to contemplate that.

I then re-phrased my question so he could give me a straight answer: "Sir, what would you do if you were me, meaning I don't want to buy individual bonds?" I had tried bond ladders in the past and sometimes blue chip names go south, like Boeing, Morgan Stanley, the cruise lines and casinos during Covid, etc. No more bond ladders for me. He said I should sell these two bond funds at their loss and do a CD and Treasuries ladder but not go out more than 18 months because of the rate increases we will see (this was a couple of weeks before the .75% increase.) We did buy several CDs but I still hold these two red positions, want to pitch them but don't know where this 50% of the nest egg should go.

So...I am now looking for a financial advisor who will make me a portfolio with about $1.3ish mil to throw off $35-$40 a year, that's all we need after our pension and SS, because we are in such unchartered waters I don't know what to do with FI, I need income. I was very good over all these years making the equities portion grow but any drunken monkey could until lately. This needing steady income, $3500ish a month, that's a different bird and now I see the need for a pro that comes highly recommended from close, rich friends. We are doing interviews now, I don't mind paying 1% as long as we can get this income in a low risk manner.

This reply was for Kook, pls private message me. The VP of bonds of a monster size financial firm told me to sell in the red and that's what I'm gonna do. Good luck to everyone.

 

[slowsaver]

I'm hanging onto my Intermediate Term Tax Exempt (VWIUX) bond fund. It still gives me $1k/month of tax free income -- every month, regardless of the share price.

Besides, stocks have been going down more, so I have to put my cash in stocks to maintain my aa.

 

[yakers]

I'm hanging onto my Intermediate Term Tax Exempt (VWIUX) bond fund. It still gives me $1k/month of tax free income -- every month, regardless of the share price.

Besides, stocks have been going down more, so I have to put my cash in stocks to maintain my aa.

Sounds pretty reasonable. If you have all dividends, interest and cap gains (from any sales) going to cash then spend what you need and reinvest back to balance the portfolio AA. But I don't think AA has to be rebalanced too frequently, can float a liter, and you can withdraw needed funds from necessary aprt of portfolio to keep AA as well.
Best we can do when most things are down.

 

[lem1955]

I sold enough to buy a CD for expenses in 2024 at the beginning of May. I already had a CD for 2023 expenses. Otherwise, I am holding steady with about 34% in Bond Funds, 59% in Equity Funds and 7% in MM, CD's and iBonds.

 

[VanWinkle]

If my 7 year bond paying 1% should now be sold for 15% less than face value, why not wait for it to mature and get 100% back? I don't need the money until year 7. I can buy more 3% bonds now to make up the difference. Oh wait, I'm in a bond fund and that's what they are doing.

 

[daylatedollarshort]

Kiplinger's has a good article on what to do now for fixed income - https://www.kiplinger.com/investing...-rough-year-here-are-3-actions-that-can-help: Bonds Are Having a Rough Year. Here Are 3 Actions That Can Help - 1. Individual bonds instead of funds now, short dated bonds that will mature in a few years. 2. Consider a bond ladder 3. Tax loss harvest - "As investors begin the process of selling bond funds, there is one benefit. Most bond funds purchased in the last five years have likely declined in value. Investors holding them in a taxable account, the investor can use the loss from the sale to offset part of their tax bill. This is called tax-loss harvesting."

 

[jdiaz]

I'm hanging onto my Intermediate Term Tax Exempt (VWIUX) bond fund. It still gives me $1k/month of tax free income -- every month, regardless of the share price.

Besides, stocks have been going down more, so I have to put my cash in stocks to maintain my aa.

Yep, we love VWIUX and that monthly payout!

 

[MrEd]

Bond Perspective

I own FFRHX. Seven Figures. Junk bonds of short duration.

True the principle goes down as rates go up. However, the interest earned monthly rises as rates go up offsetting, somewhat, the drop in principle.

So last year I was earning 3k monthly. Recently as rates rose I have been earning 4k monthly.

I reinvest the dividends and when the Federal Reserve starts to cut rates the principle will once again rise as the income starts to fall.

Works for me.

 

[Graybeard]

Not necessarily. The markets are well aware that Powell is going to raise rates in July, August, September etc. The Fed has said where they expect the FFR to be at the end of 2022. So the market may have priced those increases in already. Now if there were unexpected rate increases that would be a different matter.

I don't think this is a matter of pricing in what is known, this is bond math. Even very very low duration bond funds will be hit hard with another 2-3% FFR increase, forget intermediate term bond funds.

 

[mikes425]

I own FFRHX. Seven Figures. Junk bonds of short duration. .....
However, the interest earned monthly rises as rates go up offsetting, somewhat, the drop in principle.

I reinvest the dividends and when the Federal Reserve starts to cut rates the principle will once again rise as the income starts to fall.

Works for me.

Same sentiment here with no shift in bond funds in a 50/50 AA - I can’t time the market now any more than people said i shouldnt have tried in 2009 - Mainly ST duration treasury and TIPs funds..+ some floating rate... Down abt. 12% YTD - could be worse but my bonds dont look look the broad Agg index -

At this stage what would the value be in exiting bond funds. Projected annual dividend from total PF is about 60k, with roughly 2.1m assets - At a young age of 64 and basically semi- retired with no debt, not much choice but to “play the long game” from here right?

 

[Graybeard]

Yep, we love VWIUX and that monthly payout!

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.

 

[Graybeard]

cheesehead, you have $1.4M and need $35,000 in income. What about a 50/50 allocation to equities/1 year T bills. The coupon today is 2.9% and that would be $20,300 for the year. Could you make up the $15k from equities or sell some equities to generate that? Just a thought.

 

[Al in Ohio]

Over a half mil still in my portfolio, why?

You think I’d do something stupid and lock in and loss with a knee jerk reaction to sell?

Amateur.

 

[COcheesehead]

THIS REPLY IS TO KOOK THE OP:

You still here Kook? I'm in the same boat as you, I rode VG Investment Grade Bond Fund and VG TIPs down, it is against my nature, in my DNA not to sell when it's in the red but I think that's more of an equities philosophy with me and one month ago I was considering selling.

I signed up for a webinar with the VP of bond investing at a large corp (think Schwab, Fidelity, Vanguard) I don't want to mention which one, and it was too complex for me, it seemed more for bond traders. The VP mentioned he was coming to my city and I privately messaged him to his email begging for 30 minutes of his time when he comes to town. He graciously agreed.

I went to their offices with my spread sheet (mainly invested with his company) and laid out my FI portion which is about 50% of my $1.4 mil nest egg, some of the bond portions are from my Wellesley holding. I use the Bucket Strategy and the FI is in Bucket #2. We have 5 years of cash in Bucket #1 so we don't need to sell anything for income unless there's a Zombie Apocalypse. Naturally, as a bond man, he came right out and said he hates bond funds. OK, I get that but should I sell at a loss? It's against my grain. He said he could not offer me advice but basically said at the losses we are now, it will take about 4 or 5 years for these two positions to get back into the black. He had a scary caveat: IF we were to get into a real war, I assumed he meant NATO vs Russia, then everyone would flee the stock market and bonds will rise. I didn't want to contemplate that.

I then re-phrased my question so he could give me a straight answer: "Sir, what would you do if you were me, meaning I don't want to buy individual bonds?" I had tried bond ladders in the past and sometimes blue chip names go south, like Boeing, Morgan Stanley, the cruise lines and casinos during Covid, etc. No more bond ladders for me. He said I should sell these two bond funds at their loss and do a CD and Treasuries ladder but not go out more than 18 months because of the rate increases we will see (this was a couple of weeks before the .75% increase.) We did buy several CDs but I still hold these two red positions, want to pitch them but don't know where this 50% of the nest egg should go.

So...I am now looking for a financial advisor who will make me a portfolio with about $1.3ish mil to throw off $35-$40 a year, that's all we need after our pension and SS, because we are in such unchartered waters I don't know what to do with FI, I need income. I was very good over all these years making the equities portion grow but any drunken monkey could until lately. This needing steady income, $3500ish a month, that's a different bird and now I see the need for a pro that comes highly recommended from close, rich friends. We are doing interviews now, I don't mind paying 1% as long as we can get this income in a low risk manner.

This reply was for Kook, pls private message me. The VP of bonds of a monster size financial firm told me to sell in the red and that's what I'm gonna do. Good luck to everyone.

I can get you 3%+, likely 4%+ tax free all day long.

 

[daylatedollarshort]

It would appear that some believe the announced increases are priced in and some do not.

Do you have something definitive?

I did a bit more searching on this and I do see some articles saying the pricing on the longer term bonds may have already been priced in because there is a less direct relationship to the duration calculations than with shorter term funds, plus other market forces that come into play. So some articles say the hikes are priced in and others like I posted say there could be further significant declines yet to come.

But as Freedom56 has pointed out, Treasuries and CDs have higher yields than many of the bond funds and no NAV drop risk at all.