Time to buy bond funds or keep waiting?

[soupcxan]

I just got some money from cashing in my EE savings bonds and need to decide where to put it. Bonds seem to have taken a slide lately...is it time to start putting money back into intermediate term bond funds (yielding 4.2% tax free with VTIWX) or just sit tight in a high-yield savings account at 4.5% (taxable)?

 

[brewer12345]

If you are a dirty market timer, you'll have to keep your own conscience. If you are an allocator, its not unreasonable to average into a diversified bond fund that tracks the Lehman agg. The fed is going to stop raising rates on of these months, and when they do it may be because they realize they have gone too far (again) and need to start chopping. Just don't get too high up on the duration benchmark.

 

[audreyh1]

Since the shortest term money is paying about the same as anything longer, there is no reason to accept duration risk.

If you are getting 4.5% for cash - that's pretty good.  Bond funds are hardly paying any more (and some even less!).  Why accept any duration risk for such a teeny spread?

VWITX is currently saying 3.81% for 30-day yield.   Tax-free money market is paying around 3%.  That's a better spread!   3.8% corresponds to a tax equivalent yield of 5.9% or so if you are in a top tax bracket.  Duration 5 years.

Audrey

 

[brewer12345]

Since the shortest term money is paying about the same as anything longer, there is no reason to accept duration risk.

Au contraire! What if rates start sliding down again? Those who stuck with short term stuff might be sorry. Remember, bonds can and sometimes do deliver attractive capital gains. Ask any shareholder of the big Pimco bond fund how they felt through the nasty equity bear market of 2001 to 2003.

 

[soupcxan]

Yahoo finance shows VWITX at 3.8%, but if you add up the last twelve monthly dividends and divide by the price, you get a yield of about 4.2%. So it looks like they are only counting the last 11 dividends to get the 3.8% yield. Can anyone explain why they're only using 11? For example, if I bought the fund on Jan 15th 2005 and held for exactly 12 months until Jan 15 2006, I would have received 12 payments or a yield of 4.2%. Indeed, Vanguard's website lists the "distribution yield" at 4.19% but the "yield" at 3.81%. So which number should I be looking at to make an investment decision?

Brewer's point about capital gains if rates start to decline again is an interesting one. Is the economy cooling off? Will Bernake be forced to start lowering rates?

VWITX is currently saying 3.81% for 30-day yield.   Tax-free money market is paying around 3%.  That's a better spread!   3.8% corresponds to a tax equivalent yield of 5.9% or so if you are in a top tax bracket.  Duration 5 years.

Audrey

 

[audreyh1]

You are right.  That is a market timing assumption on my part.

It could play out in many ways.

Audrey

 

[audreyh1]

Yahoo finance shows VWITX at 3.8%, but if you add up the last twelve monthly dividends and divide by the price, you get a yield of about 4.2%. So it looks like they are only counting the last 11 dividends to get the 3.8% yield.

3.8% is the 30-day equivalent SEC yield. It's really the only way I know to compare different fixed income investments.

Will the economy slow down? Will Bernanke start lower rates?

Who knows. The economy will slow down eventually. Bernanke will lower rates at some point. But he could raise rates for a while longer before lowering rates. And he could wait a good long time between stopping raising rates and lowering them again. And who knows what the longer-term interest rates will do - they have a mind of their own. Bernanke doesn't control those.

My best guess is that he raises for at least a little while longer. Then he waits a while. There might be a big "oops!" as the economy stalls. But the economy might not stall either.

We just don't know! Neither does Bernanke!!!

Audrey

 

[cute fuzzy bunny]

Au contraire! What if rates start sliding down again? Those who stuck with short term stuff might be sorry. Remember, bonds can and sometimes do deliver attractive capital gains. Ask any shareholder of the big Pimco bond fund how they felt through the nasty equity bear market of 2001 to 2003.

That would be the conventional wisdom.

A lot of people ran away from bonds with their heads on fire 2-3 years ago because the navs were going to drop through the floor when the fed started raising rates.

I dont think that actually happened, did it?

 

[soupcxan]

I agree, there is a market timing issue that is implicit in my original question. However, Brewer has 100,000 posts, so he must know what he's talking about!* Of course, maybe I'm confusing quantity with quality again...

* Yes, I realize that brewer doesnt really have 100,000 posts.

 

[brewer12345]

That would be the conventional wisdom.

A lot of people ran away from bonds with their heads on fire 2-3 years ago because the navs were going to drop through the floor when the fed started raising rates.

I dont think that actually happened, did it?

Mmm, treasuries have had minimal returns in the last couple of years because coupons have just outpaced capital losses. If you are looking at a fund with a duration of 4 and a 4+% coupon, it takes a big rate move to actually go negative. But it can happen. Staying on the short side has been a winner in the past couple years.

 

[brewer12345]

I agree, there is a market timing issue that is implicit in my original question. However, Brewer has 100,000 posts, so he must know what he's talking about!* Of course, maybe I'm confusing quantity with quality again...

* Yes, I realize that brewer doesnt really have 100,000 posts.

soup, you will note that I declined to forecast interest rates. I think that's actually tougher than forecasting the equity market.

IIRC, you have lots of short duration stuff already, right? If so, tiptoeing gradually into the Lehman Agg isn't likely to upset the boat.

 

[cute fuzzy bunny]

Mmm, treasuries have had minimal returns in the last couple of years because coupons have just outpaced capital losses. If you are looking at a fund with a duration of 4 and a 4+% coupon, it takes a big rate move to actually go negative. But it can happen. Staying on the short side has been a winner in the past couple years.

I agree, but wasnt conventional wisdom that intermediate bonds would lose 20-30% of their capital value when the fed went from 1%-4%+? And I dont think that happened.

 

[brewer12345]

I agree, but wasnt conventional wisdom that intermediate bonds would lose 20-30% of their capital value when the fed went from 1%-4%+?  And I dont think that happened.

No, but only because the yield curve compressed/inverted, which is weird and illustrates how hard it is to forecast rates. I still think we will either see 1) ST rates dropping, or 2) LT rates rising a couple percent. Can't stay flat/inverted forever.

 

[cute fuzzy bunny]

Probably.

 

[mathjak107]

the decision to buy bonds is a question that relates more to specualting on interest rates than an investment.in an asset allocation plan there is no right or wrong time to buy an asset.all the assets in a well balanced plan should work together and complement and balance each other.a well balanced plan will both protect and or profit in any of the major economic climates we have...bonds=recession , gold=inflation ,stocks or stocks and bonds when the business cycle is good and money markets for times when no catagory is pulling ahead.....if your putting a plan together than yes its time to buy bonds right now..if we slow down to much you will profit when rates come down to try to pull us out......anyone of those catagories bought without the other and your speculating as to where a particulsr catagory is headed and you better be right...planning for un-certainty is alot better and less stressful than trying to rule it out......

 

[haha]

Relative to the recent past at least, 5 and 10 year TIPs offer good real coupons right now. 2.24% for the five, 2.34% for the ten year. That 10 year rate has increased 44bp in the last 10 weeks! I suppose it may get better, but these are much higher than a couple of years ago.

Personally, I think >= 10 year maturity straight Ts are a bad bet from any POV other than pure speculation. (For me they would stink as speculations also.)

If you are going to speculate, why not do it in an area where if you are right can get a big payoff?

Ha

 

[Nords]

Relative to the recent past at least, 5 and 10 year TIPs offer good real coupons right now. 2.24% for the five, 2.34% for the ten year. That 10 year rate has increased 44bp in the last 10 weeks! I suppose it may get better, but these are much higher than a couple of years ago.

Larry Swedroe's been buying them whenever they go up another 10 bp. He seems to think it's a good deal.

 

[Gone4Good]

Relative to the recent past at least, 5 and 10 year TIPs offer good real coupons right now. 2.24% for the five, 2.34% for the ten year. That 10 year rate has increased 44bp in the last 10 weeks! I suppose it may get better, but these are much higher than a couple of years ago.

A "real yield" of 2.25% is starting to look attractive. I'll load the boat at 3%+ as that rate will lock in my inflation adjusted withdrawl on the fixed income portion of the portfolio.

 

[Craig]

EmigrantDirect is at 4.50% ...

I've just got a visceral problem with bond funds right now ... more of a concern about the dollar than just interest rates. I just wonder if the near term of bond funds is more subject to the fed's moves, or the market / value of the dollar ... I lean towards the latter.

But I've tended to have too little optimism in the past regarding our economy. Hope I'm wrong. In the meantime, my wife finally thinks I wasn't completely brain dead for investing in Vanguard's Precious Metals and Mining Fund / VGPMX, and that doesn't give me warm and fuzzies about dollar-denominated bond funds in an increasing rate environment ...

 

[haha]

In the meantime, my wife finally thinks I wasn't completely brain dead for investing in Vanguard's Precious Metals and Mining Fund / VGPMX, and that doesn't give me warm and fuzzies about dollar-denominated bond funds in an increasing rate environment ...

I try to understand posts; but yours is beyond me. What does it mean?

Ha

 

[Craig]

I don't believe CPI is a true indication of what's happening to the dollar, and I think gold (real estate, commodities, etc.) is a better indicator, albeit not perfect.  Thus, I tend to think bond funds are performing worse than they appear.

Two headwinds ... rising interest rates, dropping dollar value.

Help?  Different perspective?

If someone has an interest in bonds, why wouldn't individual bond issues at least be a better choice?  Honest question ... I am not an experienced bond investor.

 

[brewer12345]

If someone has an interest in bonds, why wouldn't individual bond issues at least be a better choice?  Honest question ... I am not an experienced bond investor.

If you are looking for a low risk proposition to reduce portfolio volatility, it is tough to get enough diversification as a retail investor in bonds. You also have the issue of the bond market being nowhere near as liquid or low cost as the equity market, so as a retail guy you get skinned by the brokers on every trade.

Now, if you are inclined to treat risky individual bonds as just another equity, then you can do some analysis and buy and sell for coupons plus (hopefully) cap gains. But that is a very different game than what most people here want out of bonds.

 

[Gone4Good]

I don't believe CPI is a true indication of what's happening to the dollar, and I think gold (real estate, commodities, etc.) is a better indicator, albeit not perfect. 

Why so much concern over the dollar? If you live in the U.S. your cost of living is denominated in dollars. If the dollar falls, so what? Now if you say that you are worried about higher inflation due to a falling dollar, that is a legitimate concern. But CPI indexed bonds are a good hedge against that risk. Commodities might be a good hedge, but they might not be if global economic weakness brought on by a falling dollar reduces demand for commodities. Remember China and India are exporting to the U.S., if we sneeze, they catch bird flu.

 

[Craig]

Empires rise, and fall.  Just feels like a wise time to put a larger allocation into investments that can do well even if the dollar continues to decline.  My home debt is in dollars, and we create more buying power for retirement if we ignore the concept that

If you live in the U.S. your cost of living is denominated in dollars.  If the dollar falls, so what?

So what ... may translate into much higher prices in the U.S.  CPI is running at 3.99% in 1/06 ...  highest since 1991 ... if one has confidence in CPI, and comparability to prior years (if not, perhaps true CPI is really much higher).  Yes, we have concerns about inflation.  The I-Bonds seem to currently have a very small real return.

To each his own.  Perhaps ignorance on my part, but to the extent I want to hold cash, bonds just don't seem a likely better investment than CD's in, say, Pentagon FCU.  I may be overly concerned, but ... I don't see much harm in the hedge.

 

[TromboneAl]

How low can rates go?