Making a case for bond allocation

[brewer12345]

Simple. Short end of the yield curve rose and the funds are amortizing down the premium to par on the underlying bonds as they approach maturity. That eats into total return as offered by the interest payments. That is the world of bonds.

 

[MRG]

Simple. Short end of the yield curve rose and the funds are amortizing down the premium to par on the underlying bonds as they approach maturity. That eats into total return as offered by the interest payments. That is the world of bonds.

Brewer do you intend to just hold to termination?

 

[Lsbcal]

Recently I've been increasing my allocation to short term investment grade. Did a study of short term IG versus intermediate IG which looked at the rising rate environment of the 1950's and 1960's. This convinced me that ST IG is a decent complement to IT IG.

Current FI allocations:
1% cash
13% Ibonds
35% short term investment grade
50% intermediate term investment grade

I might show some charts in another thread comparing ST IG to IT IG.

 

[OldShooter]

... 13% Ibonds ...

We have six figures in TIPS, bought around 2005. At that time, TIPS seemed much more attractive than Ibonds. So, just curious, do you see an Ibond advantage currently? Maybe things have changed?

 

[Lsbcal]

We have six figures in TIPS, bought around 2005. At that time, TIPS seemed much more attractive than Ibonds. So, just curious, do you see an Ibond advantage currently? Maybe things have changed?

Our Ibonds are from 2001 at 3.4% fixed. Those won't retire until 2031. But I have not kept up with the current Ibond situation as the yields sunk into the mud. Currently TIPS are behind historical real yields so not really tempted at present.

 

[OldShooter]

Our Ibonds are from 2001 at 3.4% fixed. Those won't retire until 2031. But I have not kept up with the current Ibond situation as the yields sunk into the mud. Currently TIPS are behind historical real yields so not really tempted at present.

Thanks. I look at TIPS more as an insurance policy against high inflation than as simply a fixed income security. We are pretty bulletproof against anything but a period of inflation like it was around 1980, so any yield loss I may have by buying TIPS is like a payment to keep the insurance intact.

 

[Lsbcal]

Thanks. I look at TIPS more as an insurance policy against high inflation than as simply a fixed income security. We are pretty bulletproof against anything but a period of inflation like it was around 1980, so any yield loss I may have by buying TIPS is like a payment to keep the insurance intact.

My (unexpected) inflation insurance choice right now is short term investment grade (VFSUX). You might take a look at the data I posted in this new thread: http://www.early-retirement.org/for...ds-to-complement-intermediate-term-89924.html

I would be interested in any critiques of this choice.

 

[Montecfo]

My (unexpected) inflation insurance choice right now is short term investment grade (VFSUX). You might take a look at the data I posted in this new thread: http://www.early-retirement.org/for...ds-to-complement-intermediate-term-89924.html

I would be interested in any critiques of this choice.

I applaud adding ST bonds, and i think you have found a great choice.
I would compare two lower duration (and somewhat lower credit quality) funds:

MWCRX and RPHIX

 

[brewer12345]

Brewer do you intend to just hold to termination?

I will probably jump off this particular horse a year or so prior to maturity because as bonds mature in the last year of the trust they will be reinvested in low yielding short term instruments.

There really is no good place to be in fixed income that I can see. The shorter end of the curve has been getting beaten up, the longer end is starting to rise, spreads for corporates are awfully thin, and I would not touch MBS with your ten foot pole. I was thinking about one of the floating rate bond etfs (FLRN or FLOT), but even there you have to stomach the skinny credit spreads and spread widening could cause pain even though the fund is insulated from interest rate moves by virtue of being floating. Floating rate treasuries, anyone?

 

[OldShooter]

My (unexpected) inflation insurance choice right now is short term investment grade (VFSUX). You might take a look at the data I posted in this new thread: http://www.early-retirement.org/for...ds-to-complement-intermediate-term-89924.html

I would be interested in any critiques of this choice.

Well, you are a much more nuanced bond guy than I am. What I am insuring against is inflation that verges on being one of Taleb's black swans. So not predicted by the yield curve.

For example, consider the case where the dollar is at least partially replaced as the world's reserve currency. There are plenty of people who would like to see this happen simply for political reasons but also so we can no longer use our banking system to bludgeon people we don't like. We are also standing in our own toilet and risk pulling the handle by our profligate approach to sovereign borrowing. Here is an article I saw recently: https://qz.com/1150533/the-dollars-days-as-the-worlds-most-important-currency-are-numbered/ I don't know that there is anything special about it but it does include some interesting thoughts.

The consequence of this black swan is that the dollar dives in value, causing import prices to rise proportionately and commodity prices to rise too. This is inflation that is completely outside the Fed's power to control. A 20% drop in the dollar means that tv set or that tee shirt or that barrel of oil now costs 25% more. And actually, I'm not sure Taleb will admit it as a black swan since by his definition black swans are totally unforeseen.

So, now what happens to TIPS? First, Treasury stops issuing them in order to avoid pouring gasoline on the fire. At the same time, panic-stricken buyers in the secondary market bid them up to negative yields far beyond what simple math would suggest. At that point we are not happy about gasoline prices but we are very happy with what our TIPS are doing. We already own all the electronics and clothes we'll need for a while, so that doesn't bother much.

Critique? I wouldn't presume. There are those who wear copper bracelets to ward off arthritis. Maybe that is all we are doing with our TIPS strategy. Only time will tell.

 

[brewer12345]

I hedge inflation in part by having a 30 year fixed rate mortgage outstanding (25 years left...).

 

[MRG]

Thanks Brewer!

 

[Golden sunsets]

Boy, I dunno. Your post prompted me to take a hard look at mine and am disappointed as well. In both cases of BCSK (Guggenheim) and IBDC (BlackRock), the current value is higher than what I have invested... so that should be good. However, the inception to date returns have been disappointing... 1.5-2.0% range while at least by memory I was expecting 2.0-2.5% at purchase.

Luckily, not losses and not a huge part of the portfolio, but time to keep an eye on it and reassess. Makes me appreciate my 3% PenFed CDs.... that is for sure.

FWIW, I would think that the terminal value of your BSCH would be pretty close to the NAV of $22.63.... I can't see how it could be much different.

IIRC Brewer owns some of these so I PMed him to see if he has any insights.

Hmmm. Well I purchased both BSCH and BSJH. I have a $295 loss on the BSCH(original purchase price of $25,000) as of yesterday. I have a $1,006 dollar loss on BSJH on a purchase price of $15,000. The NAV on BSJH is 25.70 and my cost was 27.55, so I assume then that the loss will be permanent. I'm also assuming that there was not this big discrepancy between cost per share and NAV at the time purchase. Total loss on the two bonds is about 3.25% of the purchase price. What I don't understand is, did I make up for this with additional income during the holding period, as I would if I bought a bond at a premium? Or was there a partial loss on one of these high yield holdings in the BSJH.

All of my other bullet shares, which mature between 2020 and 2024 have gains, of $7,000 on underlying investments of $238,000, roughly a 2.95% gain. Am I wrong or can I assume that those NAV's won't change unless there is some sort of loss in an underlying investment.

I really wish I understood these better.

 

[pb4uski]

Boy, I dunno. Your post prompted me to take a hard look at mine and am disappointed as well. In both cases of BCSK (Guggenheim) and IBDC (BlackRock), the current value is higher than what I have invested... so that should be good. However, the inception to date returns have been disappointing... 1.5-2.0% range while at least by memory I was expecting 2.0-2.5% at purchase.

Luckily, not losses and not a huge part of the portfolio, but time to keep an eye on it and reassess. Makes me appreciate my 3% PenFed CDs.... that is for sure.

FWIW, I would think that the terminal value of your BSCH would be pretty close to the NAV of $22.63.... I can't see how it could be much different.

IIRC Brewer owns some of these so I PMed him to see if he has any insights.

Well... I looked into the details of the returns on my holdings in BSCK and IBDC.

Do you remember the old saying... garbage in, garbage out? Well that is what I had.

Last spring I had issues with my Quicken file and had to create a new file from scratch. In doing so, when I imported my transactions from Vanguard I apparently missed some of the older dividends from 2014-2015 so when I ran an investment performance report by security going back that far it gave me an understated return since it was missing 12-18 months of dividends.

This morning I had even imported the data from Quicken to Excel and calculated the XIRR and got returns similar to what Quicken showed but it wasn't until tonight when I dove into it that I found that the data was missing significant distributions.

After adding the missing distributions, the total return on those two issues I get XIRRs of 2.57% and 2.83% for BSCK and IBDC, respectively, which is in the range with what I would have thought the yields would be when I bought those issues. Whew!

And I still appreciate my 3% Penfed CDs.

 

[pb4uski]

Hmmm. Well I purchased both BSCH and BSJH. I have a $295 loss on the BSCH(original purchase price of $25,000) as of yesterday. I have a $1,006 dollar loss on BSJH on a purchase price of $15,000. The NAV on BSJH is 25.70 and my cost was 27.55, so I assume then that the loss will be permanent. I'm also assuming that there was not this big discrepancy between cost per share and NAV at the time purchase. Total loss on the two bonds is about 3.25% of the purchase price. What I don't understand is, did I make up for this with additional income during the holding period, as I would if I bought a bond at a premium? Or was there a partial loss on one of these high yield holdings in the BSJH.

All of my other bullet shares, which mature between 2020 and 2024 have gains, of $7,000 on underlying investments of $238,000, roughly a 2.95% gain. Am I wrong or can I assume that those NAV's won't change unless there is some sort of loss in an underlying investment.

I really wish I understood these better.

Have you calculated the return for each issue? If you have good data in Quicken (unlike me... see above) you can run a portfolio performance report on that security for all dates. Alternatively, you can download all transactions and do a XIRR calculation.

Link to returns from the Guggenheim site

I have held BSCK for about 3 years and my XIRR is 2.57%... pretty close to the 3 year return in the table above. I also own BSJK for about a year and the return is pretty close to the table from the above link (5.48% vs 5.74%)

 

[Golden sunsets]

Have you calculated the return for each issue? If you have good data in Quicken (unlike me... see above) you can run a portfolio performance report on that security for all dates. Alternatively, you can download all transactions and do a XIRR calculation.

Link to returns from the Guggenheim site

I have held BSCK for about 3 years and my XIRR is 2.57%... pretty close to the 3 year return in the table above. I also own BSJK for about a year and the return is pretty close to the table from the above link (5.48% vs 5.74%)

I don't use quicken but assume I could obtain the record of dividends. I am familiar with XIRR, so would I start by using my cost, then itemize all dividends and end by inserting redemption value?


Sent from my iPad using Early Retirement Forum

PS -I envy your Penfed 3% CD's. I did manage to snag a NWFCU 3% the following year though.

 

[pb4uski]

Yes, ideally in rows you would have dates and cash flows.... negatives for outflow for purchases and positive cashflows for distributions received, sales and the current value (as if it was sold). Then you do a XIRR on the cash flows.

You might be able to access the transactions from your broker and either copy and paste or import the data .... thought with Vanguard once I paste it into a spreadsheet I have to edit it a bit to get the data to be dates or numbers.