Anyone Else still holding Bond Funds?

[Bergamo]

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]

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-funds/profile/portfolio/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]

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.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.

 

[Bergamo]

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.

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.

 

[Freedom56]

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.

Bond funds have stupid rules that harm investors but in the end they lose other peoples money and still collect a fee. I don't make their rules but I try to analyze what they are likely to liquidate and pick up the quality holdings.

 

[Graybeard]

Thank you. That does make sense. Why buy every week? Is that to capture rising rates?

Yes. That's an assumption, rates may not change from week to week for a few weeks or even go down, look at how much the 10 yr note has dropped in the past 2 days!

I just realized today that each T bill purchase is an entry on my RO IRA or Trust account statements and that's 2 or 3 lines for each purchase. Buying each week will create 13 new entries before the oldest matures. I print my statements and this will make the 7-8 pages turn into 3-5 more pages. I'm now wondering if I should just make 1 purchase of the 13 week T bill every month buying the same dollar amount/number of bills as I would have making 4 purchases per month.

 

[Graybeard]

I have 19 calendar days before I can sell my Trust account's Intermediate Term Tax Exempt Bond fund for THL to avoid the Wash Sale rule. I dread to think how much more the nav can drop in those days. Those proceeds will fund T Bill purchases in the Trust account and maybe put some into the Total Stock Market Index if the market drops a good bit more, like around 3400 on the S&P 500.

 

[NomDeER]

Yes, I created my own ladder by buying them at auction. As they mature, they will be rolled over again and again until I decide to stop that process.

Could you please tell me how you went about creating a ladder? Thanks!

I have bond funds in my retirement accounts at both Vanguard and Fidelity. And I have some cash in my Vanguard settlement account, so maybe I could use some of that.

 

[lawman]

I have 19 calendar days before I can sell my Trust account's Intermediate Term Tax Exempt Bond fund for THL to avoid the Wash Sale rule.

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?

 

[Bergamo]

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.

 

[COcheesehead]

Could you please tell me how you went about creating a ladder? Thanks!

I have bond funds in my retirement accounts at both Vanguard and Fidelity. And I have some cash in my Vanguard settlement account, so maybe I could use some of that.

Fidelity has an easy to use bond ladder tool. Look it up on their website.

 

[aja8888]

Could you please tell me how you went about creating a ladder? Thanks!

I have bond funds in my retirement accounts at both Vanguard and Fidelity. And I have some cash in my Vanguard settlement account, so maybe I could use some of that.

As auctions come up at Treasury Direct, in my Schwab account I purchase 3, 6, 9, & 12 month T Bills and instruct Schwab to roll them over (repurchase as they mature.

 

[Rianne]

Could you please tell me how you went about creating a ladder? Thanks!

I have bond funds in my retirement accounts at both Vanguard and Fidelity. And I have some cash in my Vanguard settlement account, so maybe I could use some of that.

We sold our bond funds and those proceeds went to the settlement account (VG). From that settlement account to the buy bonds section. It will show you how much is in the settlement account to purchase a laddered CD or treasury note (I think this is less than a year) or a treasury bond (a year or more). This was confusing to us because the interest % looks wrong on a note once you buy it. Like .25% rather than 2.25%. But that's the increments the interest posts.

There are several steps in buying the laddered CDs or treasuries. It walks you through, how much $ and the institution you're buying from.

Edit: The bond desk at VG is very helpful. You can call them.

 

[COcheesehead]

Could you please tell me how you went about creating a ladder? Thanks!

I have bond funds in my retirement accounts at both Vanguard and Fidelity. And I have some cash in my Vanguard settlement account, so maybe I could use some of that.

If you use Fidelity, they will also build one for you to your desired specs. You just need to talk to their bond desk. They’ll do it at no extra charge.

 

[Freedom56]

This article is from Forbes yesterday. It discussed bonds versus bond funds.

Here are some points from the article:

To be sure, bonds can still be excellent investments. It is just that bond funds are not good proxies for individual bonds – at least not in the same way equity funds are good proxies for individual equities. This is a crucial distinction that has big implications when it comes to the construction of an investment portfolio.

Unlike equity funds, bond funds are very different from the assets they hold. While an individual bond has a periodic, fixed payment and a stated maturity date at which principal is repaid and the bond ceases to exist, bond funds operate in perpetuity and pay dividends that fluctuate over time. This means that while bond buyers receive a known yield when they buy a bond and hold it maturity, bond fund buyers have no way of knowing what total return they might receive in any given period.

Take, for instance, a simple bond fund like IEFIEF -0.2%, the iShares U.S. Treasury 7-10 year ETF (-12.99% YTD). It contains 12 U.S. Treasury bonds maturing between 2029 and 2032. To maintain the 7-10 year range over time, the fund will periodically sell the bonds that fall short of the 7-year maturity and purchase bonds that are closer to 10 years. 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.

With the Fed in a rate-hiking mission, bond funds are doomed to continue their money-losing record. This may be hard to accept for some market participants, because they have had a good run with bond for 40 years. Since 1982, the super-cycle of declining interest rates gave bond portfolio managers the built-in advantage of buying their fund constituents at low prices (high rates) and selling them at higher prices (lower rates). This trend is now starting to reverse, and is turning this process-driven bonanza into a curse.

This, however, does not mean that investors should avoid bonds. Individual bonds can still provide excellent diversification and decent returns to offset losses in equity portfolios. This will not be an easy transition for many.





https://www.forbes.com/sites/raulel...s-and-buy-some-bonds-instead/?sh=7571eb12628a

 

[mathjak107]

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.“

 

[ejman]

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%.

How does taking RMD's out of a bond ladder work in practice? Does one try an anticipate what interest rates will do and pick and choose what to sell accordingly - sort of like a bond fund manager? How does a non financial spouse manage the bond ladder if the financially savvy spouse passes? Thanks

 

[Bergamo]

How does taking RMD's out of a bond ladder work in practice? Does one try an anticipate what interest rates will do and pick and choose what to sell accordingly - sort of like a bond fund manager? How does a non financial spouse manage the bond ladder if the financially savvy spouse passes? Thanks

If you built a 3/6/9/12 month Treasury ladder you will have bonds maturing every 3 months. For RMDs I would take some money from each maturing set of bonds and build up cash for the RMD. I have not done this and I hope someone who has will chime in.

Also one could build a 1/2/3 year ladder and then one would have bonds maturing every year.

 

[corn18]

If you built a 3/6/9/12 month Treasury ladder you will have bonds maturing every 3 months. For RMDs I would take some money from each maturing set of bonds and build up cash for the RMD. I have not done this and I hope someone who has will chime in.

Also one could build a 1/2/3 year ladder and then one would have bonds maturing every year.

I did the 1/2/3 years in my 401k but with CDs. I am lucky that my 401k offers brokerage link and the brokerage link is at Fidelity. So I have access to the stable value fund in my 401k and everything that Fido offers. Pretty sweet. And my 401k has a great rule of 55 with unlimited partial withdrawals. Should make it easy to do conversions between now (age 56) and whenever RMDs kick in (72 now but might change to 75).

 

[daylatedollarshort]

This article is from Forbes yesterday. It discussed bonds versus bond funds.

Here are some points from the article:

To be sure, bonds can still be excellent investments. It is just that bond funds are not good proxies for individual bonds – at least not in the same way equity funds are good proxies for individual equities. ......With the Fed in a rate-hiking mission, bond funds are doomed to continue their money-losing record. This may be hard to accept for some market participants, because they have had a good run with bond for 40 years. Since 1982, the super-cycle of declining interest rates gave bond portfolio managers the built-in advantage of buying their fund constituents at low prices (high rates) and selling them at higher prices (lower rates). This trend is now starting to reverse, and is turning this process-driven bonanza into a curse.
https://www.forbes.com/sites/raulel...s-and-buy-some-bonds-instead/?sh=7571eb12628a

It is a good article, but where was this guy back in January or December? Now it is a bit like locking the barn door after the horse got out. Kudos to the financial writers that gave us this same advice back then.

 

[Bergamo]

It is a good article, but where was this guy back in January or December? Now it is a bit like locking the barn door after the horse got out. Kudos to the financial writers that gave us this same advice back then.

Agreed. Pity also that Vanguard did not give sound advice to their investors. All we got were platitudes.

 

[jazz4cash]

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

I’ve been following your posts carefully and I’ve learned a lot but please give me some detail. This looks like an AA+ rated Apple bond with maturity in 39 months with 3.58 YTM. Why would I be insane for buying?

 

[Magus]

I’ve been following your posts carefully and I’ve learned a lot but please give me some detail. This looks like an AA+ rated Apple bond with maturity in 39 months with 3.58 YTM. Why would I be insane for buying?

You wouldn't be insane but why buy Apple at 3.58% YTM in 39 months when you can get a risk free 3.35% for same duration from US Treasury? I think his point though was someone actually bought that at 0.55% and below YTM.

 

[lawman]

You wouldn't be insane but why buy Apple at 3.58% YTM in 39 months when you can get a risk free 3.35% for same duration from US Treasury? I think his point though was someone actually bought that at 0.55% and below YTM.

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?