Why are my bonds down?

[slowsaver]

I just calculated the damage on my portfolio for the recent crash. Unsurprisingly, all my stocks are way down. This should be fine, because I've "diversified" my portfolio. Then why are my bonds down 8% too?

 

[LOL!]

I suspect that folks (i.e. the proverbial "markets") are in their minds questioning whether some companies will be able to pay the coupons for their bonds and/or whether some companies will be able to avoid bankruptcy.

That's today's New Reality.

And I didn't even mention the possibility of unexpected inflation. After all, you can't just print $1,500,000,000,000 of dollar bills out of thin air without some change in inflation.

Finally, don't forget that one might wish to look at total return averages and not just the "highwater mark" when examining gains and losses.

 

[NW-Bound]

Some diversified muni bond funds went down more than 12%. It looks like people in a panic or cash crunch sell them all. Most were trading way above par, and perhaps deserve to come down.

PS. I saw the inflation threat that LOL mentioned. Yes, that too.

 

[slowsaver]

I was gonna ask -- they think Muni's are going under too? 40% of my bond portfolio is VWIUX.

I've been nagging my husband to stop holding so much cash and CDs. Now he looks pretty smart to me.

 

[OldShooter]

I am not a bond fund guy but I continue trying to understand. Today's Reuters story: https://www.reuters.com/article/us-health-coronavirus-bonds-funds-graphi-idUSKBN21715M confuses me. They talk about out flows and they talk about NAV prices dropping.

In recent months I have read various articles discussing liquidity concerns for bond funds as many issues are small and thinly traded. A bond fund facing redemptions might find that their NAV was actually not what they thought as they tried to sell these small issues. I wonder if that is what is happening here -- NAV of funds even not facing redemptions are affected? Any bond fund experts out there?

 

[slowsaver]

I am not a bond fund guy but I continue trying to understand. Today's Reuters story: https://www.reuters.com/article/us-health-coronavirus-bonds-funds-graphi-idUSKBN21715M confuses me. They talk about out flows and they talk about NAV prices dropping.

From the article, "The director of IMF Monetary and Capital Markets warned this month that any sudden decision by investors to sell shares in credit-focused asset managers and exchange traded funds (ETFs)could pressure them to sell riskier assets quickly."

So prices only stay high as long as people don't sell. That sounds familiar... ponzi scheme?

 

[Montecfo]

People buy munis usually at issue and they are often held to maturity. Accordingly, many issues are thinly traded. They still may be high quality but if everyone tries to exit at once pricing will decline sharply. Supply and demand.

 

[ERD50]

What time frame? A diversified bond fund (BND) is holding up pretty well. Down 3.25% YTD. Total Return, not just NAV.


https://stockcharts.com/freecharts/perf.php?SPY,bnd


-ERD50

 

[slowsaver]

Down 3.25% is still down.

 

[statsman]

Probably a combination of factors. One that I haven't heard but may be a possibility is if some people are re-balancing their AAs, and they may not have the cash to do so (or may not have wanted to commit what cash they had in reserve). If the stock market drop were gradual over several months, the bond funds might not have been hit so hard. But this stock market has dropped quickly and consistently.

 

[OldShooter]

... may be a possibility is if some people are re-balancing their AAs, and they may not have the cash to do so (or may not have wanted to commit what cash they had in reserve). ...

Be careful with that one. I have noticed around here that we all are tempted to think small individual investors are important enough to affect the markets. With a couple of billion shares traded in a day, I strongly doubt it. Oh, and then there are those central banks and pension funds. ...

 

[sengsational]

I came to the realization about bond funds (less so, individual bonds) 30 years ago. I was told they zigged when the market zagged, but that didn't happen at all then, and hasn't really happened since. If I didn't have a nice stable value fund in my 401k, I'd be using individual bonds, not bond funds. Although, if I needed to trade an individual bond to raise cash, it might be depressed in price, same as the bond fund. But it's my choice to hold to maturity.

 

[scrabbler1]

I am not in bond funds to make a profit on selling shares. Instead, I am in bond funds for their monthly dividends, as I have been living off that in my 11 years of ER. What I will be interested in is what that monthly dividend (dividend per share) will be at the end of March (and beyond). Will that monthly DPS be fairly stable or will that take a hit, too?

 

[audreyh1]

I just calculated the damage on my portfolio for the recent crash. Unsurprisingly, all my stocks are way down. This should be fine, because I've "diversified" my portfolio. Then why are my bonds down 8% too?

Munis, especially high yield munis, corporate bonds, high yield bonds, and emerging market bonds have been hit pretty hard, so depending on how much of your fixed income is in those types of bonds, you might have been hit hard too.

My bond index fund is down 1.39% YTD, and my short-term bond index funds are positive YTD.

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

 

[youbet]

About 20% of my FIRE portfolio is in muni bond funds diversified across, short, mid and long term and even some highyield. Ouch! It's painful, as slowsaver has noted, to watch them go down along with my equities. OTOH, I'm not really worried, so far, about them being able to continue to pay monthly divs and it's unlikely I'll need to sell. So, just hold and wait I guess........ I've held one of them for over 30 years.

 

[copyright1997reloaded]

Bond funds (as well as individual bonds) are getting hit because:
1) Sell everything to raise cash
2) Potential long term inflation
but most importantly:
3) Many "investment" grade companies are now no longer investment grade, with their current revenues falling through the floor. This will eventually be reflected in downgrades on their safety. There are lots of investment grade bond funds (I'm looking at you Vanguard) who will be forced to sell bonds as they lose their investment grade rating.

I hold no investment grade Corporate bonds...almost all of my fixed allocation is in CD's, Inflation bonds (Tips, iBonds) and a bunch in "Stable Value" funds...and even with those there is now increased risk (but not much I can do about it). Actually there is, I could withdraw these from my 401K en mass and take the huge tax hit...so instead these sit with me assessing the risk is still low enough to not offset a huge tax hit on a 401k withdraw. (I believe the Fed and Treasury will do just about anything they can to prevent MM fund and things like stable value funds from breaking, and that they will err on the side of vastly inflationary policies if needed).

Honestly, the best we can hope for here in the market is that things get boring.

 

[audreyh1]

What time frame? A diversified bond fund (BND) is holding up pretty well. Down 3.25% YTD. Total Return, not just NAV.


https://stockcharts.com/freecharts/perf.php?SPY,bnd


-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/

 

[audreyh1]

About 20% of my FIRE portfolio is in muni bond funds diversified across, short, mid and long term and even some highyield. Ouch! It's painful, as slowsaver has noted, to watch them go down along with my equities. OTOH, I'm not really worried, so far, about them being able to continue to pay monthly divs and it's unlikely I'll need to sell. So, just hold and wait I guess........ I've held one of them for over 30 years.

The Fed is coming to your rescue.

 

[MichaelB]

About 20% of my FIRE portfolio is in muni bond funds diversified across, short, mid and long term and even some highyield. Ouch! It's painful, as slowsaver has noted, to watch them go down along with my equities. OTOH, I'm not really worried, so far, about them being able to continue to pay monthly divs and it's unlikely I'll need to sell. So, just hold and wait I guess........ I've held one of them for over 30 years.

Same here. Most of ours was shorter duration and still suffered badly.

The Fed is coming to your rescue.

Looks that way. Perhaps a good opportunity to lengthen duration a bit.

 

[COcheesehead]

There is a lot going on in bond land right now. These are things pressuring bonds right now.
Rates bounced off a bottom
Illiquidity of issues forces selling prices down - called spread widening
Inflation fears
Forced liquidation of some portfolios so people are selling - see illiquidity issue above

Opportunities
Yield on AAA quality muni’s are at prices I haven’t seen in years. Some selling below par.

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.

 

[NW-Bound]

In recent months I have read various articles discussing liquidity concerns for bond funds as many issues are small and thinly traded. A bond fund facing redemptions might find that their NAV was actually not what they thought as they tried to sell these small issues. I wonder if that is what is happening here -- NAV of funds even not facing redemptions are affected? Any bond fund experts out there?

Bonds are not as liquid as stocks, therefore market pricing can get affected by a few trades. It is hard to know what the fair value is.

I do not know much about bonds, but just ran across an article: https://www.etf.com/sections/features-and-news/why-many-bond-etfs-now-trading-discounts?nopaging=1

Some excerpts from the above article:

... there are only 3,500 listed stocks in the U.S., but tens of thousands of individual corporate bonds ...

... If you look at the top of the book of S&P 500 futures, and if you look at the Treasury futures, they're all abnormally wide and pretty thin. So I think there's less liquidity in the marketplace in general. That always happens in times of worldwide market stress. Liquidity just evaporates, because no one knows how best to price risk

When fixed income ETFs trade at a 4% or 5% discount, it's because you're seeing stale prices in the underlying bonds, where the marketplace has fair valued them. The ETFs are giving real-time price action, where the bonds are actually trading. ETFs act as a forecast tool; they're based on some static benchmark, but trading at a discount in real time. That's also consistent for mutual funds—there's no free lunch.

 

[RetiredAt55.5]

And I didn't even mention the possibility of unexpected inflation. After all, you can't just print $1,500,000,000,000 of dollar bills out of thin air without some change in inflation.

Hmmm, maybe time to move some money into VIPSX (inflation protected securities fund)? I used to have some of that in my 401K until that fund was removed from our 401K plan.

 

[audreyh1]

Probably a combination of factors. One that I haven't heard but may be a possibility is if some people are re-balancing their AAs, and they may not have the cash to do so (or may not have wanted to commit what cash they had in reserve). If the stock market drop were gradual over several months, the bond funds might not have been hit so hard. But this stock market has dropped quickly and consistently.

If you have cash in reserve for some reason other than rebalancing, you don’t want to touch that.

Otherwise, you sell fixed income to rebalance into stocks. Even if it’s gone down a little, it’s still gone down way way less than stocks, so selling to rebalance still makes sense.

If someone is worried about their fixed income becoming too small in $$ terms, they can set a floor for how low they are willing to go when rebalancing.

 

[OldShooter]

... DO NOT buy bond funds. Buy the individual issues. ...

Well, yes but with a caveat.

Yes for sure with govvies, where full faith & credit of the US government means no default risk. I include FDIC insured CDs in this.

For corporates and munis it's a bit murkier. How many bonds is necessary to ensure diversification? Not being much of a bond guy I'm not sure what the number is. DW and I are on the investment committee for a nonprofit and, by policy, the investment advisor buys only individual issues. In one account, a couple $ million, we have approximately 200 positions, each roughly $10K. The portfolio is also carefully diversified across industries. But that kind of a portfolio is pretty tough for an individual to select and manage.

So, be careful out there. Buying just a few issues may create risk you don't want.

 

[OldShooter]

Hmmm, maybe time to move some money into VIPSX (inflation protected securities fund)? ...

Ack! A monkey could select TIPS and his fee is only peanuts. Why pay even peanuts?

Per COCheesehead, buy individual TIPS. One nice and unique thing about TIPS is that there is almost no yield curve because the classic yield curve guess, inflation, has been eliminated. So you can just buy based on what maturities suit your cash flow needs.