Anyone Else still holding Bond Funds?

[corn18]

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Originally Posted by Freedom56 I don't know if people are paying attention to the markets now, but things are starting to get ugly. I just initiated another large transfer of cash from my money market account to my brokerage account. We might get a March 2020 moment soon and I have to be ready.

Total stock -25.06%
Total international stock -23.90%
Nasdaq -33.63%
S&P 500 -23.70%
Total bond -17.61%

Yikes!

[daylatedollarshort]

Just read this from Yahoo - Bond Market Losses Just Beginning as Fed Sets Path to 4% Yields - https://finance.yahoo.com/news/bond-...000000384.html. "It’s very clear the Fed will do whatever it takes to forcefully reduce inflation and the terminal rate is going to be closer to 4% and maybe even go higher,” said Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management. “The Fed is on a path to higher rates and even as Powell tried to downplay another 75 basis points hike next month, he said rates are still extremely low.”

[Koolau]

^^^^^

Glad my bond fund is very short term. Now, I guess we'll see if Pssst! Wellesley can finesse the pressure on the bond portion of their fund. YMMV

[Bergamo]

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Originally Posted by corn18 Total stock -25.06% Total international stock -23.90% Nasdaq -33.63% S&P 500 -23.70% Total bond -17.61% Yikes!

What is the starting date on those percentages?

[Bergamo]

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Originally Posted by mathjak107 Interesting enough is anytime the last 40 years the fed raised interest rates more than 1% in a year , intermediate term bonds went up in value , not down . Only 1994 was the exception . The left is the fed increase and the right the total return on bonds

So why is TBM at -11.77%?

[Magus]

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Originally Posted by Bergamo What is the starting date on those percentages?

Appears to be YTD numbers

[Bergamo]

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Originally Posted by Freedom56 Bond are for income. However Wall Street has managed to con investors into a believing that they are ballasts for their equity allocation. Just keep plenty of dry powder for the last quarter of this year as we enter tax loss selling season. The March 2022 moment is coming but turbo-charged. Those clueless passive bond fund managers will be dumping investment grade bonds at steep losses while individual bond holders and active fund manager lock up 10% plus yields.

Not just Wall Street. Bonds are ballast is the one of the fundamental principles of the Bogleheads. I'm not saying they are wrong.

[Bergamo]

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Originally Posted by Freedom56 Explain how you lose money buying a one year corporate note with a YTM of 6.7%. The alternative is to park cash at .75%. Those who manage their own finance know how to manage expenses in an inflationary environment. Those who ladder short term notes can make a healthy return while rates rise. Those who buy CDs or treasuries will not suffer capital losses if they hold to maturity. Bond fund distribution yields are far too low relative to treasuries, CDs, and short term corporate notes. Many are holding too much debt with coupons as low as 0.5%. While the prices of those bonds have fallen to compensate for rising yields, the coupons are still 0.5% so distribution yields won't change until they sell those notes at a steep loss and replace them higher coupon notes. However they can only do that they have fund inflows. As I have stated many times, passive bond funds are dangerous to hold. They are not bonds. There is no return of capital. Bond funds do not protect you from market risk. Buying a bond fund that invests in treasuries is one of the dumbest moves you can make. You are taking products that have no capital risk and creating one that does for a fee.

This is a really good explanation of the situation bond funds are in now.

They can still sell the 0.5% coupon bonds even if they have no fund inflows. Is that not correct? Are they not selling those low coupon bonds to meet redemptions as it is?

Your last point about Treasury funds really made me think. What would your advice be to those who hold TBM at present? No one can predict rates going forward and with TBM at -11.77% YTD how does one move to a better situation? Especially for those in retirement already and not buying TBM regularly.

[Bergamo]

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Originally Posted by mathjak107 In real return even individual bonds lose money . As an example ,Getting paid back 1k in 10 years is a loss is a loss is a loss when it buys less then it did.. Bond funds increase over time in rising inflation while the nav adjusts downward so you come close to individual bond returns if held for the funds duration . A treasury bond fund that sells for 10 bucks and pays 5% the day you bought and has a duration of 5 years is no different for the most part than a 5 year bond. The bond fund will lose 5% in nav if rates rise a point but gain an extra 1% a year getting 6% instead of 5% ….at the end of the funds duration period you end up with the same 5% as the day you bought . No different then a 5 year bond paying 5% . In both case though you got only 5% in a 6% world so both are behind the curve, staying at least the funds duration and using a high quality bond fund with little credit risk will give you a total return similar to an individual bond . both will lose money if sold before its maturity or duration if rates went up . both will see similar returns if held , less expenses in the bond fund . however bond fund managers can do things an individual likely wont , like riding the bond curve . so that can off set expenses https://www.kitces.com/blog/how-bond...nterest-rates/

In a rising rate environment you are looking at (2 * duration) -1. So for TBM, 12.4 years to maybe break even. Look at the posts at Bogleheads for the analysis. 12.4 years is an awfully long time for those in retirement.

[mathjak107]

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Originally Posted by Bergamo In a rising rate environment you are looking at (2 * duration) -1. So for TBM, 12.4 years to maybe break even. Look at the posts at Bogleheads for the analysis. 12.4 years is an awfully long time for those in retirement.

I don’t come up with 12.4 years at all

It is much less from what I see…the duration on ftbfx is 6.3 years

[corn18]

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Originally Posted by Bergamo What is the starting date on those percentages?

Oops, forgot that important bit of information. That data is from the all time high for each.

[lawman]

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Originally Posted by mathjak107 Interesting enough is anytime the last 40 years the fed raised interest rates more than 1% in a year , intermediate term bonds went up in value , not down . Only 1994 was the exception . The left is the fed increase and the right the total return on bonds

How can this be? I'm more confused than ever...

[mathjak107]

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Originally Posted by lawman How can this be? I'm more confused than ever...

Rising short term rates slow us down and help squelch inflation ..bonds like that ….

But it has to look like the rates are actually working .we are not at that point yet

[Freedom56]

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Originally Posted by Bergamo This is a really good explanation of the situation bond funds are in now. They can still sell the 0.5% coupon bonds even if they have no fund inflows. Is that not correct? Are they not selling those low coupon bonds to meet redemptions as it is? Your last point about Treasury funds really made me think. What would your advice be to those who hold TBM at present? No one can predict rates going forward and with TBM at -11.77% YTD how does one move to a better situation? Especially for those in retirement already and not buying TBM regularly.

The low coupon holding are sold first to meet redemptions and fund holders assume the loss. But to meet fund duration and balance rules (all silly), they sell the highest coupon holdings. This is when investors like me place low ball limit orders to buy notes at well above market yields. Don't expect a fund to buy the higher coupon debt until money starts flowing in.

I don't know anything about TBM (VBTLX) but looking at the details of this fund it invests mostly in government securities. I could do that on my own.

https://investor.vanguard.com/mutual...ortfolio/vbtlx

The average coupon is only 2.6% and average effective maturity is 8.9 years. So it's not exactly something that I would ever consider buying. I personally would not put any new money into this when you could buy treasuries with shorter duration or CDs at higher yields without any risk of capital loss. I can't tell you what to do with your current holdings. That question should be directed to people who believe in these bond funds.

[Magus]

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Originally Posted by mathjak107 Rising short term rates slow us down and help squelch inflation ..bonds like that …. But it has to look like the rates are actually working .we are not at that point yet

Yup, plus we were always in real positive rates on bonds then. We are huge negative real rates now.

[Bergamo]

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Originally Posted by mathjak107 I don’t come up with 12.4 years at all It is much less from what I see…the duration on ftbfx is 6.3 years

Redo the calculation with multiple rate increases.

https://www.bogleheads.org/forum/viewtopic.php?t=373194

Read the posts and discussion by Kevin M. This is one discussion and there are other threads you can find by searching.

[daylatedollarshort]

I don't have many longer duration bonds except TIPS, all bought at positive yields and those are returning .125% to over 2% above I bonds right now. They are individual bonds in a ladder that will be held to maturity. They will be redeemed at maturity for par plus the inflation factor so the day to day price fluctuation don't impact our returns. Right now 1 year Treasuries are at almost 3% and no losses, unlike the funds, so we are good with those and stable value with our former bond fund money.

[Bergamo]

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Originally Posted by Freedom56 The low coupon holding are sold first to meet redemptions and fund holders assume the loss. But to meet fund duration and balance rules (all silly), they sell the highest coupon holdings. This is when investors like me place low ball limit orders to buy notes at well above market yields. Don't expect a fund to buy the higher coupon debt until money starts flowing in. I don't know anything about TBM (VBTLX) but looking at the details of this fund it invests mostly in government securities. I could do that on my own. https://investor.vanguard.com/mutual...ortfolio/vbtlx The average coupon is only 2.6% and average effective maturity is 8.9 years. So it's not exactly something that I would ever consider buying. I personally would not put any new money into this when you could buy treasuries with shorter duration or CDs at higher yields without any risk of capital loss. I can't tell you what to do with your current holdings. That question should be directed to people who believe in these bond funds.

Why do they end up selling the highest coupon holdings to meet fund duration and balance rules?

I am certainly not putting any new money into TBM. You are correct it is mostly in government securities, average coupon is only 2.6% and average effective maturity is 8.9 years.

Unless someone can suggest a better approach I plan to ladder shorter duration Treasuries which as you point out have higher yields and no risk of capital loss. I will just have to accept the capital loss on TBM and hope to be in a better situation over the next 5 years and beyond.

The Fed may reduce rates in the future once they create a recession but who know when and how much capital gain will be restored to TBM.

I want off this roller coaster as I have RMDs in the future and rebalancing at present is far from ideal with TSM -21.23% and TBM -11.77%.

[Freedom56]

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Originally Posted by Bergamo Why do they end up selling the highest coupon holdings to meet fund duration and balance rules? I am certainly not putting any new money into TBM. You are correct it is mostly in government securities, average coupon is only 2.6% and average effective maturity is 8.9 years. Unless someone can suggest a better approach I plan to ladder shorter duration Treasuries which as you point out have higher yields and no risk of capital loss. I will just have to accept the capital loss on TBM and hope to be in a better situation over the next 5 years and beyond. The Fed may reduce rates in the future once they create a recession but who know when and how much capital gain will be restored to TBM. I want off this roller coaster as I have RMDs in the future and rebalancing at present is far from ideal with TSM -21.23% and TBM -11.77%.

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.co...ol=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.co...ol=AAPL4562450

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

[Bergamo]

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Originally Posted by Freedom56 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.co...ol=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.co...ol=AAPL4562450 I personally wouldn't buy either but the example illustrates that eventually the higher coupon debt eventually is sold to meet redemptions.

Thank you for explaining. I see what is happening.

It's funny but before I clicked on your links I thought about the Apple bonds from a couple of years ago, and sure enough it was an Apple bond.

As you know TBM as an index fund is "required" to buy these bonds. I looked a while back and sure enough TBM does have low coupon Apple bonds. Good for Apple, awful for TBM holders.