Bond Management Strategy

[pn3069]

I think of bonds as follows:
- If I am looking for safety/ballast, I want a lot of US Treasuries and BND/AGG have healthy dose of treasuries since US Treasury issued a heck of a lot of bonds in the last decade.
- Also, if I have high stock allocation - I DO WANT safety/ballast
- If you are like me with a smallish stake in stocks (I am 30/70 AA), you want to stretch for yield and take risks in bonds
- So.. I take risks in bonds with high-grade multisector funds, high yield funds, funds that employ derivatives etc

My choices are: PIMIX (derivatives to manage credit risk/duration risk), FADMX/PDBAX (high grade), and FAGIX (junk)

Additionally, I have high quality corp bonds embedded in Vanguard Wellesley and STAR funds.

 

[pn3069]

Plus.. I would never let an investment house "sell" their unsold/lucrative individual bonds to me EVEN IF THEY don't charge a fee to manage them.

I really think the 0.4% deal is a bad deal. Would you mind sharing the name of the investment house? (ok if you mind - no worries).

 

[friar1610]

I concede sometimes wondering if it is worth it the hassle. Only done 3 so far... first being the PenFed 5-year 3% special from Dec 2013... second being a 3.5% 5-year Suncoast CU in April and most recent still in process... 3.5% 5-year from Navy Federal CU.

Current brokered 5-year CDs are 2.1% so I'm picking up 1.4% and soup-to-nuts spend probably 5 hours on the front end and 5 hours on the back end... so about $1,500/hour.

We've done a few brokered CDs w/in our IRAs - which are otherwise mostly Total Bond Index - and just recently jumped on an NFCU 40 month 3.7% direct CD special. I've tried to align maturity dates with RMDs. Also have a number of direct CDs in taxable - mostly NFCU. I've promised myself I won't go chasing rates at banks/CUs all over the country. Just PenFed (which seems to have stopped offering excellent rates), NFCU (which lately has had some great specials) and one local CU. Time will tell if I stick to that.

 

[gwraigty]

You are better off buying short term high yield bonds/notes of companies with good cash flows than investment grade companies that are headed for a downgrade. Even an investment grade perpetual preferred of a money center bank with yield over 6% is a better option.

I don't think I've ever bought a perpetual preferred. I have a few individual baby bonds/preferreds with maturity dates. I wish I felt more comfortable with the idea of that. During the financial crisis I had a Citigroup Trust preferred with a maturity date, paying 6.95%, plus some of their common stock. Well, you know what happened with that. Even the preferred issue tanked by over 50%. It eventually recovered and I sold it, perhaps a mistake in hindsight.

 

[jazz4cash]

I concede sometimes wondering if it is worth it the hassle. Only done 3 so far... first being the PenFed 5-year 3% special from Dec 2013... second being a 3.5% 5-year Suncoast CU in April and most recent still in process... 3.5% 5-year from Navy Federal CU.



Current brokered 5-year CDs are 2.1% so I'm picking up 1.4% and soup-to-nuts spend probably 5 hours on the front end and 5 hours on the back end... so about $1,500/hour.

What on earth takes 10 hrs on the front and back end?

I’m finding moving IRA funds around is much more hassle than I expected (esp if NFCU is involved) but it’s more like an hour or two. I try to save templates of the forms to reduce paperwork.

 

[pb4uski]

To be frank, I probably overestimated the time but I would rather overstate it than understate it.

The time includes setting up the savings account, setting up the IRA and most importantly the IRA rollover form and shepherding it through the CU and Vanguard until the money is moved.... getting it our seems to be equally laborious.

My point is that it is a minor hassle but worth it.

 

[BeachOrCity]

I will always time the market when it comes to bond purchases/sales. I have just over 20% in cash/money markets right now and increasing monthly as coupon payments come in. I dumped all my preferred stocks and baby bonds that I acquired last November and December during the month of April. I was up as much as 19% in some cases plus the coupon payments.

Kraft Heinz is a complete mess. Fidelity was trying to push Kraft Heinz bonds onto me about 18 months ago. They had an awful lot in inventory. During one week, I received 6 calls from their bond desk pushing those bonds. I would never buy a bond at almost 30 years to maturity at such a low yield. You are better off buying short term high yield bonds/notes of companies with good cash flows than investment grade companies that are headed for a downgrade. Even an investment grade perpetual preferred of a money center bank with yield over 6% is a better option.

Freedom56, I wish I had a close friend who I trusted who could coach me with the knowledge you have. I have always felt like I "should" do more individual bonds, but have been unwilling / untrusting / unpaying to hire a professional to build a bond ladder, and I feel I am inexperienced enough in individual bonds, that I would make some serious mistakes.

Like you, I worry about holding intermediate / long term index based funds because I feel I could get crushed by a major market shift.

Right now the only ladder I have is a CD ladder (the rest is in shorter term funds etc), but thinking strongly about building a TIPS ladder....

You trade alot it seems. How do you feel active trading in bonds is fundamentally different and easier to beat the market than active trading in stocks?

 

[njhowie]

Freedom56, I wish I had a close friend who I trusted who could coach me with the knowledge you have. I have always felt like I "should" do more individual bonds, but have been unwilling / untrusting / unpaying to hire a professional to build a bond ladder, and I feel I am inexperienced enough in individual bonds, that I would make some serious mistakes.

Like you, I worry about holding intermediate / long term index based funds because I feel I could get crushed by a major market shift.

Right now the only ladder I have is a CD ladder (the rest is in shorter term funds etc), but thinking strongly about building a TIPS ladder....

You trade alot it seems. How do you feel active trading in bonds is fundamentally different and easier to beat the market than active trading in stocks?

You should take the opportunity to do some work/learning/research and become more knowledgeable. It is not rocket science and what you learn will save you on the fees which bond managers charge for buying their funds, or using their services to manage your portfolio.

I, like Freedom56, OldShooter and a few others live to manage my own bond portfolio. I get to determine the level of risk, the specific maturities that I'm looking for, and the types of bonds. These days, because of what is happening with rates, the bond (index) funds are holding more garbage. I would never buy a bond fund because I don't trust the bond portfolio managers. Their personal objectives and fund strategies do not align with my personal objectives as a bond investor. They structure their portfolios in a way that I would not manage mine and so I wouldn't give any of them any of my funds.

Invest in a few cheap used books on bonds from Amazon and you'll get up to speed in a short time. Believe me - it is definitely worth the time and effort. Every bond maturity is a small victory and you'll get personal satisfaction out of the experience.

 

[OldShooter]

... How do you feel active trading in bonds is fundamentally different and easier to beat the market than active trading in stocks?

This might be a good question to ask Bill Gross, lauded as a bond genius until he left PIMCO and fell flat on his face running other bond funds. He was a very lucky guy for a long time, but his run of luck ended. He has now retired.

Here's are a couple of funny quotations: "Mr. Gross, an Ohio native, was a gambler before he became an investor." "Pimco thrived on Mr. Gross's record as a fixed-income whiz, a feat aided by an historic bond bull market that began in the early 1980s when interest rates began a prolonged decline." from this article: https://www.investmentnews.com/arti...oss-retires-after-four-decade-career-in-bonds

 

[Freedom56]

Freedom56, I wish I had a close friend who I trusted who could coach me with the knowledge you have. I have always felt like I "should" do more individual bonds, but have been unwilling / untrusting / unpaying to hire a professional to build a bond ladder, and I feel I am inexperienced enough in individual bonds, that I would make some serious mistakes.

Like you, I worry about holding intermediate / long term index based funds because I feel I could get crushed by a major market shift.

Right now the only ladder I have is a CD ladder (the rest is in shorter term funds etc), but thinking strongly about building a TIPS ladder....

You trade alot it seems. How do you feel active trading in bonds is fundamentally different and easier to beat the market than active trading in stocks?

Before learning about bonds, take some time to learn some financial accounting. You need to understand income statements, balance sheets, free cash flow, before you start buying bonds of individual companies. You would be surprised at how many so called Certified Financial Planners don't understand basic financial accounting. You also have to ask yourself how will this company continue earn income and service their debt.
There are a lot of training materials available online with respect to fixed income trading. Buying corporate bonds is really not too different from buying a brokered CD. Fidelity and others make a lot of money from fixed income trading, not from the commissions, but from the bid/ask spread. This is where you need to be careful when buying individual bonds. This is also why I prefer to buy bonds/notes when funds are liquidating. I place low limit orders and wait for them to fill. If they do great. If they don't I move on.

 

[Marc]

I'm looking for some help with the bond portion of my portfolio. I now have $1.5M primarily in Fidelity Total Bond with a small portion in Fidelity Corporate Bond; both funds have been good for me. However, I am now looking at reducing cost (and risk to principal) by slowly transitioning to owning actual bonds. I am considering taking $100K from my bond funds and buying $50K in corporate bonds and $50K in treasuries with plan to keep until maturity. I will then look at transitioning another $100K next fall and the next transitioning $1M over the next ten years.

Some questions:

Corporate bonds seem straightforward as I plan to keep until maturity. I am looking at call protected bonds with five to ten years until maturity. I am planning on five bonds over a variety of industrial companies (no financials) and just investment grade. YTM seems to be closely related to quality so should be relatively easy to make apples to apples comparisons; is this true?

The treasury portion seems harder. I can't figure out why I would invest in treasuries if FDIC insured CDs are returning a higher rate. I know only principal and not interest is FDIC insured but that seems to be a small risk. What am I missing? One problem I do have is that this money is in a rollover IRA at Fidelity. Doesn't seem that the best CD rates can be found at Fidelity; in fact, I looked at Sallie Mae CD which was significantly better at Sallie Mae than at Fidelity. Can I open an IRA at Synchrony or NFCU and easily move funds from my Fidelity IRA? Of course, if I am shopping rates every year that could be a lot of IRA accounts.

Or, am I over thinking this and I should just stay with my current funds (or switch to FXNAX)?

thanks,

Marc

 

[Spock]

....

Additionally, I have high quality corp bonds embedded in Vanguard Wellesley and STAR funds.

You are probably already aware, but 18-19% of Wellesley's bond allocation is down at BBB ratings. Given the complicity of the rating agencies + the number of bonds that will be down rated during the next great "recession" and that 18% seems like a lot to me.

 

[gwraigty]

I'm looking for some help with the bond portion of my portfolio. I now have $1.5M primarily in Fidelity Total Bond with a small portion in Fidelity Corporate Bond; both funds have been good for me. However, I am now looking at reducing cost (and risk to principal) by slowly transitioning to owning actual bonds. I am considering taking $100K from my bond funds and buying $50K in corporate bonds and $50K in treasuries with plan to keep until maturity. I will then look at transitioning another $100K next fall and the next transitioning $1M over the next ten years.

Some questions:

Corporate bonds seem straightforward as I plan to keep until maturity. I am looking at call protected bonds with five to ten years until maturity. I am planning on five bonds over a variety of industrial companies (no financials) and just investment grade. YTM seems to be closely related to quality so should be relatively easy to make apples to apples comparisons; is this true?

The treasury portion seems harder. I can't figure out why I would invest in treasuries if FDIC insured CDs are returning a higher rate. I know only principal and not interest is FDIC insured but that seems to be a small risk. What am I missing? One problem I do have is that this money is in a rollover IRA at Fidelity. Doesn't seem that the best CD rates can be found at Fidelity; in fact, I looked at Sallie Mae CD which was significantly better at Sallie Mae than at Fidelity. Can I open an IRA at Synchrony or NFCU and easily move funds from my Fidelity IRA? Of course, if I am shopping rates every year that could be a lot of IRA accounts.

Or, am I over thinking this and I should just stay with my current funds (or switch to FXNAX)?

thanks,

Marc

I'm actually doing the opposite. I invested in individual corporate and municipal bonds for over 15 years. I'm now transitioning to ETFs. If you want to deal with the tax complexity of individual corporate bonds (deduct accrued interest paid/amortizable bond premiums, add accrued market discounts, on Schedule B), and deal with the continued research needed to regularly buy corporate bonds, and deal with the eventual frustration when you see the same old tired issuers over and over again (without sacrificing too much in yield), then be my guest.

With muni bonds, you may be dealing with manually computing the amount of interest paid to you from bonds in the other 49 states, to add that total to your state tax return. Your 1099 will not have that figure all wrapped up nice and neat for you. You may also see the same old issuers again and again, when trying to find a place to put new money.

As far as risk, overall, I've either been quite astute, or quite lucky. Only recently has one of my corporate bond issuers filed for bankruptcy. At worst, there goes $10K. However, I did own some Detroit and PR muni bonds. I voluntarily took some small losses to get out of those. Recently, I sold a PR muni at a nice profit. I generally avoided more GO muni bonds. Losses in an individual bond are definitely realized, not just on paper, as with a fund.

Often when a sector is out of favor, that sector dominates the individual offerings available. This can make it more difficult to be diversified. During the financial crisis, my individual bond portfolio was top heavy with financial companies. The same can happen in the muni market. Munis also get called frequently.

I bought Treasuries years ago, but none now. A reason for buying a Treasury over a CD might be if the rate was so close, that it makes sense to be able to deduct the Treasury interest on your state taxes.

Don't worry about over thinking. It's good that you're exploring options.

But what is your primary goal? Income? Growth? Stability?

I'm not overly concerned with the price fluctuations in my ETFs, even though there is no maturity date when I'd get my money back. I prefer to keep my bond types separate. For corporate bond, I'm using IGLB, SEC yield of 3.67%. I'm also using a few high yield bond ETFs, a preferred stock ETF, and a couple of high yield stock ETFs. I wouldn't consider CDs right now, with rates so low.

 

[foxfirev5]

I'm looking for some help with the bond portion of my portfolio. I now have $1.5M primarily in Fidelity Total Bond with a small portion in Fidelity Corporate Bond; both funds have been good for me. However, I am now looking at reducing cost (and risk to principal) by slowly transitioning to owning actual bonds. I am considering taking $100K from my bond funds and buying $50K in corporate bonds and $50K in treasuries with plan to keep until maturity. I will then look at transitioning another $100K next fall and the next transitioning $1M over the next ten years.

Some questions:

Corporate bonds seem straightforward as I plan to keep until maturity. I am looking at call protected bonds with five to ten years until maturity. I am planning on five bonds over a variety of industrial companies (no financials) and just investment grade. YTM seems to be closely related to quality so should be relatively easy to make apples to apples comparisons; is this true?

The treasury portion seems harder. I can't figure out why I would invest in treasuries if FDIC insured CDs are returning a higher rate. I know only principal and not interest is FDIC insured but that seems to be a small risk. What am I missing? One problem I do have is that this money is in a rollover IRA at Fidelity. Doesn't seem that the best CD rates can be found at Fidelity; in fact, I looked at Sallie Mae CD which was significantly better at Sallie Mae than at Fidelity. Can I open an IRA at Synchrony or NFCU and easily move funds from my Fidelity IRA? Of course, if I am shopping rates every year that could be a lot of IRA accounts.

Or, am I over thinking this and I should just stay with my current funds (or switch to FXNAX)?

thanks,

Marc

I mimic FTBFX w/ CDs in lieu of treasuries and a small allocation to Vanguard high yield and EM bond funds. Much lower cost and higher yield.

 

[gcgang]

Their management fee of 0.4% is actually a little cheaper than DODIX. Not sure of your other funds, but it's certainly reasonable for a managed portfolio.

At today's rates, any management fee is going to take a pretty good chunk of your yield.

Personally, I ladder CDs, and do the occasional flyer on some CEFs when the discounts are significantly above average. All in my IRA, of course.

 

[audreyh1]

Core bond index fund ERs are 0.03% or less for comparison. Considerably lower than actively managed bond funds.

FTBFX is not an index fund FWIW.

 

[bolt]

Below are two columns: U.S. inflation and Vanguard Total Bond Market introduced in 1986: Fido has a similar NO FEE's bond fund.

YEAR..INFLATION....RETURN
1986-------1.1%--------15.2%
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9 (Inflation increased 5.0% -- TBM average return 9.86%)

1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.7)
1995-------2.5----------18.5
1996-------3.3-----------3.6

1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6 (Inflation increased 1.7% --TBM average return 7.3%)

2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4 (Inflation increased 1.8% -- TBM average return 5.9%)

2006-------2.5-----------4.3
2007-------4.1-----------7.0

2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7 (Inflation increased 2.9% -- TBM average return 6.3%)

2012-------1.7-----------4.3
2013-------1.5---------(-2.0)
2014-------0.8-----------6.0
2015-------0.7-----------0.5
2016-------2.1-----------2.5

* During ALL four periods of rising inflation since 1986, Total Bond Market enjoyed positive returns.

* During the 2008 bear market when the Vanguard S&P 500 index fund plunged -37%, Vanguard Total Bond Market gained +5%. Investors were very pleased to hold Total Bond Market Index Fund or its or benchmark.

If you're looking to maintain your purchasing power consider these facts above.
Granted the dates are cherry picked but they're true.

Many ETFs are available commission free.
Research it.
It's simply a TBM index.

Good luck!

 

[Marc]

Thanks for all the great advice; maybe I will stay in funds. I will research FXNAX (again) and IGLB.

Again, thanks,

Marc