Why are my bonds down?

[audreyh1]

I don’t agree that the lesson is to avoid bond mutual funds. There may be a lesson is to avoid bond ETFs.

If you want to directly buy US government backed bonds, fine. You can also find bond funds that do the same for extremely low ERs.

For more diversified bond holdings, I still prefer a core bond index fund to individual issues. I’m not interested in owning munis directly, or corporate bonds directly. I want a lot of diversification.

I still like the liquidity of bond funds in spite of the mark-to-market nature of them. I will sell bond funds to buy stock funds when stock funds get hammered so I need the liquidity.

 

[slowsaver]

Lessons
DO NOT buy bond funds. Buy the individual issues. Funds have no maturity date and your NAV can erode.

Looking at my portfolio, I see I have over $700k in bonds and only $100k of that is iBonds I purchased from treasury direct (where I'm limited to $10k/yr purchase).

How can I educate myself on buying individual bonds? Your example makes no sense to me. It's very easy to go to vanguard and buy an index fund, but even vanguard for bonds is very hard for me to understand. I started here: https://investor.vanguard.com/cd-bond/ and it is not easy to know what to choose. How else do people buy individual bonds? Is there some recommended reading on buying individual bonds? I'm still in the accumulation phase, so I assume this also affects choices.

Don't worry, I'm not making big changes right now, but I'd like to do something smarter going forward. CDs seem a lot smarter than bonds to me right now.

 

[statsman]

I don’t agree that the lesson is to avoid bond mutual funds. There may be a lesson is to avoid bond ETFs.

If you want to directly buy US government backed bonds, fine. You can also fund bond funds that do the same for extremely low ERs.

For more diversified bond holdings, I still prefer a core bond index fund to individual issues. I’m not interested in owning munis directly, or corporate bonds directly. I want a lot of diversification.

I still like the liquidity of bond funds in spite of the mark-to-market nature of them. I will sell bond funds to buy stock funds when stock funds get hammered so I need the liquidity.

Thank you. I needed that peace of mind. I don't have the knowledge or interest in owning individual bonds or TIPS. For better or for worse, we have very little in stocks, so the need to re-balance isn't there. The bond funds can remain untouched for at least 5 years before DW's RMD kicks in (mine will be 10 years from now).

But I've also determined we have about 20 years' worth of cash (probably more) after our CA house sale in late 2018 and subsequent purchase of a new TX house in June 2019. I suspect if there ever was a time for us to get back into the stock market, knowing we really don't need that much of a buffer, it might be soon. Even if it's only 20% of AA in stocks, that's a better hedge than what we've been doing.

 

[ERD50]

Is BND trading at a discount? The mutual funds equivalent VBMFX is only down 1.39% YTD.

I saw a high yield muni ETF trading at a huge discount to NAV a few days ago - like 5% or more. In this environment it seems like ETFs are getting sold at a discount.

I saw a headline somewhere about BND spread going to 6%. Here is something similar https://www.etfstream.com/news/10803_vanguards-biggest-bond-etf-sees-discount-widen-6/

Not sure if BND is at a discount or not. I've never paid much attention to that, though some people make a big deal of it for closed end funds. If it trades at a discount when you buy it, what about when you sell? I figure in the long run hat is a wash.

I don't actively trade it, it is just the 'fixed' part of my AA, so I never noticed the spread, but 6% sounds like a lot. I just took a snapshot, if yahoo can be trusted:

Bid 81.89 x 1000
Ask 81.91 x 1100

pennies out of $81.90?

edit/add: same at E*TRade
Bid x Size / Exch
81.72 x 100 P

Ask x Size / Exch
81.73 x 500 P

That ain't no 6%! (FURTHER EDIT: I guess you meant NAV/underlying spread, not the bid/ask spread. ]

-ERD50

 

[socca]

How can I educate myself on buying individual bonds?

There are some excellent books out there on bonds (warning: the good ones are very thick!) I don't have an immediate reference for you because it's been many years since I read any of them. Buying and selling individual bonds is a specialized skill if you want to do it right, which is why I've let the professional bond managers at Vanguard do it for me for years via bond funds. I've been satisfied with their performance so far (including during the 2008 financial crisis). Like anything, there are pros and cons to holding individual bonds vs bond funds - I'm sure that google can deliver some useful info for you if you're interested.

P.S. I've never invested in bond ETFs and thus don't have anything worthwhile to say about them. This being the internet, that usually doesn't stop anyone, but ...

 

[ERD50]

T ...
Lessons
DO NOT buy bond funds. Buy the individual issues. Funds have no maturity date and your NAV can erode.
Here’s an example.
You buy a fund with an NAV of $1000 (that would never happen, but work with me here)
You buy a bond with a par value of $1000 1 year maturity.

Markets like we have now affect both and they drop to $900.

In a year the fund may now have rebounded to $950, but the bond slowly goes back to par at $1000 over the same course of time. So in both cases I get yield, but only in one do I get my original money back.

Super simple example and other factors may apply like default, but if you stay high quality you mitigate that.

Not buying your lesson, because the example is too simple. I'll allow for it to be simple enough to ignore defaults (for the example only).

It ignores the fact that while you have a promise of full value at maturity with an individual bond, you are also stuck with it. When rates go down and a bond fund/etf goes down in NAV, they are also replacing maturing bonds with new ones at that higher rate. So your div will be increasing, instead of being stuck with the original issue.

And in the real world, you have to buy a LOT of bonds to get the protection against default that a broad fund/etf has. Do as you see fit, but I don't think the lesson is a good one in general.

-ERD50

 

[audreyh1]

Not sure if BND is at a discount or not. I've never paid much attention to that, though some people make a big deal of it for closed end funds. If it trades at a discount when you buy it, what about when you sell? I figure in the long run hat is a wash.

I don't actively trade it, it is just the 'fixed' part of my AA, so I never noticed the spread, but 6% sounds like a lot. I just took a snapshot, if yahoo can be trusted:

Bid 81.89 x 1000
Ask 81.91 x 1100

pennies out of $81.90?

edit/add: same at E*TRade
Bid x Size / Exch
81.72 x 100 P

Ask x Size / Exch
81.73 x 500 P

That ain't no 6%! (FURTHER EDIT: I guess you meant NAV/underlying spread, not the bid/ask spread. ]

-ERD50

That is today's spread.

The wider spread might have happened on another day. There have been some wacky days recently. I didn't refind that first article but I'm pretty sure it headlined 6% spread.

But from the link I found later and posted, that was referring to discount - trading price versus underlying NAV.

The scarce liquidity in the bond market showed up in Vanguard’s flagship $50bn Total Bond Market ETF (BND), one of the world’s largest ETFs, which was trading at a 6.2% discount to its net asset value (NAV) last week.

The discount, which is a price below an ETF’s fair value, came at the close of trading on 12 March as coronavirus fears swept through global markets. BND is currently trading at a 1.93% discount.

March 18 https://www.etfstream.com/news/10803_vanguards-biggest-bond-etf-sees-discount-widen-6/

Definite disconnect between ETF BND and mutual fund VBMFX.

 

[mijoy]

Not buying your lesson, because the example is too simple. I'll allow for it to be simple enough to ignore defaults (for the example only).

It ignores the fact that while you have a promise of full value at maturity with an individual bond, you are also stuck with it. When rates go down and a bond fund/etf goes down in NAV, they are also replacing maturing bonds with new ones at that higher rate. So your div will be increasing, instead of being stuck with the original issue.

And in the real world, you have to buy a LOT of bonds to get the protection against default that a broad fund/etf has. Do as you see fit, but I don't think the lesson is a good one in general.

-ERD50

But this is not happening, at least not in the later days of this crisis.
Seems to me, cash (while maybe not king) is by far the best choice. Especially if looking back 3-4 weeks. Cash would have been the way to go. Of course this goes dramatically against the conventional wisdom of holding throughout the downturn (do not attempt to time market).
However the old term "this time is different", seems to be holding true this one time! I don't see a good argument at all that we are near any sort of a bottom. Not until curves flatten with some degree of certitude that the curve will not head north again as soon we attempt an approach at normalcy.

To this I say, "this time is different". So glad I went to cash - just wish I did it sooner. Going to stay there.

 

[copyright1997reloaded]

That ain't no 6%! (FURTHER EDIT: I guess you meant NAV/underlying spread, not the bid/ask spread. ]

-ERD50

Glad you figured out the error.

Interesting article: https://www.etftrends.com/bond-etfs-not-mispricing-that-would-be-the-mutual-funds/

And discussing LQD ETF close on 3/17:

the 499,999 shares that crossed at 116.33, is a relatively logical number. Its almost half a percent below the previous trade, but that was for a single share (someone tape-painting), so the 116.33 is a much better bogie — after all, its the price at which $47 million worth of LQD will clear — a price the most sophisticated buyers and sellers in the market agree to trade, right at the close of the day. It’s the price of “a big bunch o trading.” The liquid price.

This is super important: this is the market. This is where buyers and sellers are meeting to decide at what price they will risk capital. They know every one of the 1,984 bonds the fund holds. They have access to the trading data on every single one of those bonds. And $47 million worth of investors put their money on the line for that piece.
...
So what’s the NAV of LQD on 3/17? Well, according to Blackrock, (or rather, Blackrock’s fund accountants who are probably their custodian, who is technically hired by the fund board, etc. etc.) – the NAV was 119.03.
...
The NAV is utterly disconnected from reality.

 

[Montecfo]

I don’t agree that the lesson is to avoid bond mutual funds. There may be a lesson is to avoid bond ETFs.

If you want to directly buy US government backed bonds, fine. You can also find bond funds that do the same for extremely low ERs.

For more diversified bond holdings, I still prefer a core bond index fund to individual issues. I’m not interested in owning munis directly, or corporate bonds directly. I want a lot of diversification.

I still like the liquidity of bond funds in spite of the mark-to-market nature of them. I will sell bond funds to buy stock funds when stock funds get hammered so I need the liquidity.

I agree with this. Funds and direct ownership have plusses and minuses. One is not always better than the other. I have avoided ETFs and I think recent market action suggests that is the right approach

 

[phil1ben]

Perhaps a good opportunity to lengthen duration a bit.

I also hold about 75 individual muni bonds. Over the past two years I have been unable to replace called bonds at a rate I deemed acceptable. I started buying today. Best yields I have seen in over 4 years. I have been buying in the 2033-2037 maturity (price between par and 101.5) normally with 4-5 years to the call. YTW about 4.5%.

 

[Jerry1]

So this has been a lesson in expectations versus reality. My expectation was that the "bonds" in my portfolio were essentially risk free. They were the safe part of my portfolio. Sure, I had knowledge that the funds were made up of a full range of bonds with the goal of increasing return. But, times were good and things were essentially forgotten. Now the market convulses and the learning begins. I went into my brokerage web site on a day the markets were up just a bit and my portfolio had gone down. Yep, the bonds took a hit.

Little investigation and recollection of what's really in those funds kicks in and it all makes sense. However, it's not what I want. So, I called my FA and I'm out of any funds that aren't predominantly treasury's or very high grade bonds. IMHO, the risk of default is now greater than the potential income that these funds can generate. I feel much better. Sure, a AAA bond can default, but the likelihood is much less that the "B" rated debt. I'm out of that crap. I knew what I signed up for with stocks, but I took more risk than I was fully aware of on the bonds. My fault. Lesson learned.

The lesson learned for me is that knowledge and expectations need to be understood fully. I knew what I was buying, but it did not fully mesh with my expectations. Hence the question, what happened to my bonds? Well they went down because I held bonds that were riskier that what I expected. I expected I would get results one would expect from a CD or Treasury bond (stability), but what I got was reality (some bonds are risky beyond just interest rate risk).

 

[ERD50]

That is today's spread.

The wider spread might have happened on another day. There have been some wacky days recently. I didn't refind that first article but I'm pretty sure it headlined 6% spread.

But from the link I found later and posted, that was referring to discount - trading price versus underlying NAV.
March 18 https://www.etfstream.com/news/10803_vanguards-biggest-bond-etf-sees-discount-widen-6/

Definite disconnect between ETF BND and mutual fund VBMFX.

OK, and it does show up clearly here:

https://stockcharts.com/freecharts/perf.php?BND,vBMFX

Since I only trade this to rebalance once in a blue moon, it seems unlikely to affect me. But what could I do on a day that I want to trade it? Is there another real-time pricing for broad-based bond portfolios that would tell me BND was out of whack?

I guess I'm also surprised this would not get arbitraged away. 6% is not chicken feed to high frequency traders.

-ERD50

 

[audreyh1]

OK, and it does show up clearly here:

https://stockcharts.com/freecharts/perf.php?BND,vBMFX

Since I only trade this to rebalance once in a blue moon, it seems unlikely to affect me. But what could I do on a day that I want to trade it? Is there another real-time pricing for broad-based bond portfolios that would tell me BND was out of whack?

I guess I'm also surprised this would not get arbitraged away. 6% is not chicken feed to high frequency traders.

-ERD50

Thanks for making that chart. Wow, that’s very dramatic!

The behavior I attribute mostly to severe market stress. To me the ETFs are kind of acting like closed end funds in this case. People were just dumping the ETF and didn’t care that they were selling at a discount. Where were the arbitrageurs? I guess they were too busy covering their asses on other trades.

Isn’t the discount shown during the day? I thought that info was real-time but I am by no means an ETF expert. I only own one ETF and don’t like dealing with the trading issues.

BTW I think I also saw some serious discounts on iShares AGG a few days ago and I was pretty shocked as I knew where the equivalent mutual funds were trading.

 

[audreyh1]

Why is my bond fund down?

My bond index fund is down 1.09% YTD, and my short-term bond index funds are positive YTD.

In contrast, my equity funds are down 25% to 45% YTD.

BTW, I expected that my main bond index fund FXNAX might be down a little in this environment. Why? Because I know it owns 23% in corporate investment grade bonds. Corporate bonds are being killed right now, even the highest rated ones. They were richly valued before and there has been an abrupt about face.

I knew of this possibility when I bought and held the fund. If I didn’t want to take that risk I would have owned a fund with US govt backed bonds only. The rest of the fund is in US govt backed securities and that is good enough for me over the long run. It was a personal risk tolerance judgement call.

And then there has been the wild ride of the 10 year rate YTD. We got down a bit, then suddenly dropped down to 0.4% -What Then suddenly popped up - and overshot getting as high as 1.27% before returning to around where we started the cycle 2 weeks ago. I have never seen 10 year behavior like that. Just crazy!

 

[ERD50]

So this has been a lesson in expectations versus reality. My expectation was that the "bonds" in my portfolio were essentially risk free. ....

Little investigation and recollection of what's really in those funds kicks in and it all makes sense. However, it's not what I want. [BS]o, I called my FA and I'm out of any funds that aren't predominantly treasury's or very high grade bonds. [/B] ... I knew what I was buying, but it did not fully mesh with my expectations. Hence the question, what happened to my bonds? Well they went down because I held bonds that were riskier that what I expected. I expected I would get results one would expect from a CD or Treasury bond (stability), but what I got was reality (some bonds are risky beyond just interest rate risk).

Well, if you look at history, these bond funds do have some volatility. They are not Money Market funds. It should not have been a surprise to you.

That may be the right decision for you, but remember, no free lunch. Seeing a few days of volatility in that fund, that you probably do not need to sell right now in any large quantity anyhow, means giving up decades of a bit higher divs, which do add up.

If you do need to sell some, it would only be a small portion, the rest is just a paper loss, and a pretty small one. You maybe are over-reacting?

It might help to take a look at the total return of those funds since you owned them. Maybe they are up overall? Both BND,VFISX are up over the past year.

-ERD50

 

[easysurfer]

Why are bonds down? Could that be because like in 2008-2009 we're hitting a point where everything is going down? I remember that sinking feeling ... nowhere to hide.

Still, I'm riding this one out .

 

[socca]

FWIW, this morning for the first time since the 2008 financial crisis I constructed a muni bond yield curve from Vanguard funds. Here it is:

• VG Muni Money Market: 1.68%
• VG Short-Term Tax-Exempt: 1.14%
• VG Limited-Term Tax-Exempt: 1.17%
• VG Intermediate-Term Tax-Exempt: 1.31%
• VG Long-Term Tax-Exempt: 1.67%
• VG High-Yield Tax-Exempt: 2.10%

As you can see, something is clearly out-of-whack in the muni bond market: how can a money-market fund be yielding more than a long-term fund? This also happened during the 2008 financial crisis, but as I reported on another thread back in 2008/2009 the yield on VG Muni Money Market Fund briefly spiked over 5%, which left me scratching my head in puzzlement.

Another thing I did back in 2008/2009 was track the month-to-month change in VG muni fund assets to see if I could detect a surge in fund redemption requests. VG buries this info under many mouse clicks, but it's available if you're interested. I haven't bothered starting up this tracking (yet) for the 2020 financial crisis (are the talking heads on the news shows calling it a financial crisis yet? )

Why am I not losing any sleep over my VG bond fund investments? Well, my guess is that VG is large enough to raise money to meet bond fund redemption requests (if any) without selling bonds into a compromised bond market offering only peanuts for them. Of course, I'm only SGOTI and could be wrong.

 

[Markola]

Why are bonds down? Could that be because like in 2008-2009 we're hitting a point where everything is going down? I remember that sinking feeling ... nowhere to hide.

Still, I'm riding this one out .

+1. No one said bond fund prices don’t fall. There are periods when lots of people flee to cash. This is one. Add to that all the rebalancing from bonds to stocks and bond fund prices are going to fall some. Fund prices will come back and I’m staying put at 50/50.

 

[Jerry1]

Well, if you look at history, these bond funds do have some volatility. They are not Money Market funds. It should not have been a surprise to you.

That may be the right decision for you, but remember, no free lunch. Seeing a few days of volatility in that fund, that you probably do not need to sell right now in any large quantity anyhow, means giving up decades of a bit higher divs, which do add up.

If you do need to sell some, it would only be a small portion, the rest is just a paper loss, and a pretty small one. You maybe are over-reacting?

It might help to take a look at the total return of those funds since you owned them. Maybe they are up overall? Both BND,VFISX are up over the past year.

-ERD50

It was a surprise only because I let my guard down. Logically and intellectually I know they can be volatile. I certainly grasped the interest rate effect, but I had basically forgot about the credit risk.

Yes, it was only a small amount. I didn't go crazy, but there were a couple funds that had a little too much in the "B" range so I dumped them. Worth noting that even a fund like VBTLX has about 18% of Baa rated bonds. That's too high right now.

 

[Freedom56]

The Fed will need to buy corporate bonds to stabilize the market. Right now there are not enough bids to support the fund selling. This is causing spreads to widen and corporations cannot get credit at lower rates to fund near term expenses. Bond managers are dealing with outflows from funds well beyond demand. Many former members of the Federal Reserve are recommending that the Fed ask Congress to grant them permission to buy corporate bonds to stabilize the market. If rate spreads continue to widen, we will see irreparable damage to the equity and financial markets. The ECB already has this authorization.

 

[COcheesehead]

Looking at my portfolio, I see I have over $700k in bonds and only $100k of that is iBonds I purchased from treasury direct (where I'm limited to $10k/yr purchase).

How can I educate myself on buying individual bonds? Your example makes no sense to me. It's very easy to go to vanguard and buy an index fund, but even vanguard for bonds is very hard for me to understand. I started here: https://investor.vanguard.com/cd-bond/ and it is not easy to know what to choose. How else do people buy individual bonds? Is there some recommended reading on buying individual bonds? I'm still in the accumulation phase, so I assume this also affects choices.

Don't worry, I'm not making big changes right now, but I'd like to do something smarter going forward. CDs seem a lot smarter than bonds to me right now.

I use Fidelity for bonds. I have 100+.
They have tools to build a ladder and manage it.
Funds are fraught with risk. A bond returns to par, it’s original value. A fund returns to whatever the market is at the time you redeem. There is no maturity date, no end date and that is the risk.
https://www.fidelity.com/fixed-income-bonds/fixed-income-tools-services/overview

 

[ERD50]

....
Yes, it was only a small amount. I didn't go crazy, but there were a couple funds that had a little too much in the "B" range so I dumped them. Worth noting that even a fund like VBTLX has about 18% of Baa rated bonds. That's too high right now.

I think the best way to look at this is, if is too high "right now", then it was always too high for you. Trying to change things mid course is what creates problems and complexity.

Don't make too much of this, but learn from it and adjust going forward so you are prepared for the next dip, which will be different (might send Baa bonds sailing, and you'll be wishing you owned more! ).

-ERD50

 

[scrabbler1]

I saved a WSJ article from 11/28/2008 about the topic of sagging muni bond prices. The article simply mentioned a sharply declining demand as the cause, to the point that municipalities were delaying new issues of muni debt due to lack of investor interest.

 

[Freedom56]

Bonds should see some support today from the announced actions from the Fed to support corporate, municipal, and mortgage back securities.