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What's so bad about buying short term bonds right now?
Old 07-11-2020, 08:29 AM   #1
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What's so bad about buying short term bonds right now?

I've been looking at VFSUX lately (to get some 401k funds moved out of a money market) and I'm not seeing much risk there. What is the down-side of high quality short term bonds right now? I feel like everyone knows something I don't know.
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Old 07-11-2020, 09:17 AM   #2
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I'll be interested in hearing what bond folks think.
I've not have much experience buying bonds, but my guess is the risk is simply that companies are going to go bankrupt, and this fund holds about 97% of it's money in company bonds. But with over 2300 bonds, maybe there is safety in numbers
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Old 07-11-2020, 09:32 AM   #3
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There's nothing inherently wrong with short term bond funds. Logic would indicate it's going to be the place to be that will limit volatility. Just understand that while your downside is limited, so too will be your upside. Further, in the short term, it's very possible you will see your fund position go down in value if for some reason there is a spike in interest rates. The amount the fund goes down could well be in excess of the interest/dividends received.

I don't believe you need to be much concerned with defaults, as you point out it is a high-quality bond fund. Those bonds which are high quality are backed by companies that are (relatively) strong, and with a short term maturity, if necessary, they are in a position to refinance with new debt to pay off whatever is coming due.
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Old 07-11-2020, 10:46 AM   #4
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I've been looking at VFSUX lately (to get some 401k funds moved out of a money market) and I'm not seeing much risk there. What is the down-side of high quality short term bonds right now? I feel like everyone knows something I don't know.
The upside is you earn a whopping 1.45% yield. The downside is that a market plunge will cause a fund like this to drop 6-7% or more as investors dump to raise liquidity. Bonds are overpriced now. Diversification that a bond fund provides can actually hurt performance. Many sectors such as retail, leisure, airlines, restaurants, some financials, and energy are going to get wiped out. I would not hold bonds in those sectors. You need to "look under the hood" of these funds and see what they are holding before buying. I would wait for the next market plunge and buy up quality individual bonds/notes of strong companies in the technology and pharma space that can survive an economic downturn.
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Old 07-11-2020, 11:00 AM   #5
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You might want to look at Ultra-short-term Bond (VUSFX) as a holding pen. Pays about a quarter point lower, but with about 1/3 the volatility risk of VFSUX (i.e., unlikely to go down more than ~2% in a bond market crash).
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Old 07-11-2020, 02:37 PM   #6
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Generally, people who move money out of money markets, CDs, and savings accounts don't want to lose any of their money. If one looks at a Morningstar.com "growth of" chart for VFSUX, then one sees that VFSUX readily lost 6% in a couple weeks back in March:



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Old 07-11-2020, 03:28 PM   #7
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Equities are expensive. The only thing more expensive is bonds.
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Old 07-11-2020, 04:40 PM   #8
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I think VFSUX is a decent holding now. The Fed is backstopping investment grade bonds (and other types of bonds) and has made it clear it intends to hold down rates for a year (or is it 2?). The bottom of that decline chart LOL! posted was before the Fed announcement.

So the risks are pretty low. I have a decent helping of VFSUX and VFIDX intermediate IG bonds.

My feeling is that investors that have not done so already will feel compelled to buy more stocks. Not the same beast though. At some point value stocks with good dividends will move up but right now it is all growth stock investing. VVIAX for example has a 3% dividend average. A stock like Pfizer pays a 4.5% dividend.
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Old 07-14-2020, 08:34 AM   #9
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I've been looking at VFSUX lately (to get some 401k funds moved out of a money market) and I'm not seeing much risk there. What is the down-side of high quality short term bonds right now? I feel like everyone knows something I don't know.
Danger is Fed Printing Press. Equities have ability to deal with inflation. If they sense it, they will run up even higher compared to cash/short term bonds.

Maybe they are already sensing it down the road. Ray Dalio's explanation of Long/Short term Debt Cycle may help to understand this. We are at the end of Long Term Debt cycle that started in 1940's.
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