Question re: some shifts in bond fund allocation

[mikes425]

Hi, Out of the roughly 50 percent of fixed income holdings in my taxable portfolio my biggest YTD losses in domestic positions (EM and Global being the biggest losers) my largest domestic bond fund positions in order of percentage, are : SCHO (ST Treasury), VCSH (ST Corporate) and VGIT (Intermediate Treas)
and of these VGIT is the biggest loser. -10%) with VCSH and SCHO -closer to the realm of -1.5 to 3% losses). I'm sensing that in the near term investment grade corporate may stand to perform better than treasury in the face of the near-term volatility. I'm weighing whether to downsize/take some loss in VGIT, and relocate some of that into VCSH (ST Corp). There is also the VCIT option, (VG intermediate treasury) to consider... SCHO is actually my biggest FI holding at abt. 15%. I'm not sure whether rolling out of some of that into IG Corp Bond might also make sense. Just mulling this over based on some current research from Schwab and others suggesting IG Corporate may well be a more rewarding FI choice than treasury for yield/return in this environment. I know it's subjective but just would be interested in whether anyone more in touch with this than I am might have some general suggestions on whether some reallocation in this particular direction could be a better strategy than to ride out potentially further NAV drawdowns in the ST and Intermediate Treasury bond funds vs allocating some of that portion of my FI in IG Corporate..be it ST or Int. term...

Thanks!

Mike

 

[Montecfo]

Hi, Out of the roughly 50 percent of fixed income holdings in my taxable portfolio my biggest YTD losses in domestic positions (EM and Global being the biggest losers) my largest domestic bond fund positions in order of percentage, are : SCHO (ST Treasury), VCSH (ST Corporate) and VGIT (Intermediate Treas)

and of these VGIT is the biggest loser. -10%) with VCSH and SCHO -closer to the realm of -1.5 to 3% losses). I'm sensing that in the near term investment grade corporate may stand to perform better than treasury in the face of the near-term volatility. I'm weighing whether to downsize/take some loss in VGIT, and relocate some of that into VCSH (ST Corp). There is also the VCIT option, (VG intermediate treasury) to consider... SCHO is actually my biggest FI holding at abt. 15%. I'm not sure whether rolling out of some of that into IG Corp Bond might also make sense. Just mulling this over based on some current research from Schwab and others suggesting IG Corporate may well be a more rewarding FI choice than treasury for yield/return in this environment. I know it's subjective but just would be interested in whether anyone more in touch with this than I am might have some general suggestions on whether some reallocation in this particular direction could be a better strategy than to ride out potentially further NAV drawdowns in the ST and Intermediate Treasury bond funds vs allocating some of that portion of my FI in IG Corporate..be it ST or Int. term...



Thanks!



Mike

I would keep duration to a minimum in funds. The market has shown puzzlement or disbelief in the Fed's words. The Fed had not helped matters being inconsistent.

As this week has shown, I expect more bloodletting intermediate rates in particular. I would not own those securities yet. Short term treasuries are all I have bought this year.

 

[DrRoy]

Even though you are looking at bond funds, you are still considering a form of market timing, which rarely works.

 

[Montecfo]

Even though you are looking at bond funds, you are still considering a form of market timing, which rarely works.

Oh it does indeed work for bonds. We know rates are going higher and that the market does not reflect it.

We knew this last fall, this spring and now this summer.

This is not like equities where anything can happen.

 

[Dash man]

Have you considered buying individual bonds instead of the funds? Then you have the choice of holding to maturity. Seems to me bond funds are a losing bet right now.

 

[pb4uski]

+1 In a rising rate environment, bond funds are not a good place to be due to interest rate risk. Return free risk in the short term particularly. I've long ago jettisoned all bond funds and bond ETFs in favor of individual bonds and CDs. If you want bond ETFs then the target maturity bond ETFs can be used to manage interest rate risk.

 

[daylatedollarshort]

Oh it does indeed work for bonds. We know rates are going higher and that the market does not reflect it.

We knew this last fall, this spring and now this summer.

This is not like equities where anything can happen.

Linking to a previous thread and well written Forbes article on how stock funds mimic buying individual stocks, but bond funds do not mimic individual bonds, how we are now in a significant rising rate environment for the first time since the 80s, etc. - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309. As Freedom56 has pointed out in other threads, bond funds without maturity dates introduce an element of market risk into an asset class that normally has none. And that 1 month Treasuries currently have higher yields than most bond funds and without any risk of principal.

 

[pb4uski]

+1 Total Bond's portfolio YTM is 3.4% but duration is 6.7 years. Meanwhile, you can buy a one-year UST that yields 3.5%.

So why would anyone in their right mind continue to hold Total Bond for a lower yield given the interest rate risk associated with a 6.7 duration?

Given the high likelihood of higher interest rates it seems to me that Total Bond is what Buffett refers to as return-free risk.

 

[Montecfo]

+1 In a rising rate environment, bond funds are not a good place to be due to interest rate risk. Return free risk in the short term particularly. I've long ago jettisoned all bond funds and bond ETFs in favor of individual bonds and CDs. If you want bond ETFs then the target maturity bond ETFs can be used to manage interest rate risk.

I would steer clear of bond ETF's also, as liquidity can be an issue in selloffs. The ETF can trade below NAV, just when you want to sell to rebalance for example.

 

[FiveDriver]

I was looking at various Bond ETF's yesterday, and found that the iShares TIP Etf has a pretty good yield compared to AGG, HYG and TLT. I realize there's a boost by investing in TIPS......is there anything else about this Bond ETF that we should know about ??

 

[daylatedollarshort]

I was looking at various Bond ETF's yesterday, and found that the iShares TIP Etf has a pretty good yield compared to AGG, HYG and TLT. I realize there's a boost by investing in TIPS......is there anything else about this Bond ETF that we should know about ??

TIPS bond funds may be doing better than nominal bond funds now because they are pegged to inflation, which is still high. However, they still do not mimic a TIPS ladder of individual bonds if the fund lacks a lack a maturity date. If we have a recession in the next year or two, which is likely, followed by deflation fears, TIPS yields will shoot up because they are not a great deflation hedge. It will be a great time to buy TIPS for the long term and not so great time to own most TIPS funds. TIPS yields also have been rising, even now, as nominal yields are rising to compete with them, as the Fed continues to raise interest rates.

It you own a TIPS fund, you are paying someone to buy and manage Treasuries for you, which you can do yourself at no cost, no risk to principal and no default risk, unless the U.S. government defaults on their debt.

 

[Lsbcal]

TIPS have been going nicely up in the last few weeks. I bought about 1/3 of my intended position on Thursday at 0.83% for the 5yr TIPS, e.g. inflation + 0.83% yield to maturity. I intend to keep my bond position at 50% inflation adjusted (iBonds and individual TIPS) as we have for several years now. I sold the bond funds in early January (lucky on timing there) and now have the nominals in 2 month Treasuries. Eventually I will pull the trigger and buy short term investment grade (VFSUX).

If you do not know how to buy individual bonds or are shy about the process, have your broker do it. At Vanguard you can do this generally for free by calling the bond desk at (800) 669.0514

P.S. I don't want to give the impression that I know it all. Just relating what I've done.