So what's the alternative to bonds, now in the new normal?

[tominboise]

So I've been around 60/30/10 allocation for years, always holding bond funds as the safer alternative to stocks. But now in the this downturn, bond funds are all over the place.

Where should one be parking their money to offset the stock market ups and downs?

FYI, we have lost 22.8% of our total investment portfolio since this began, so the diversification strategy has helped reduce the blood bath.

Was planning on a June, 2020 retirement but now will hang on for another year or two or three to see how this recession plays out.

 

[COcheesehead]

I am still an advocate of high quality individual muni bonds laddered.
The default rate on AAA muni bonds is 0. That could change, but that’s a pretty good track record. And it just so happens many are “on sale” right now.
I am less confident in taxable bonds right now and don’t put muni’s into a deferred account. They will then become taxable.

 

[bobandsherry]

I am still an advocate of high quality individual muni bonds laddered.
The default rate on AAA muni bonds is 0. That could change, but that’s a pretty good track record. And it just so happens many are “on sale” right now.
I am less confident in taxable bonds right now and don’t put muni’s into a deferred account. They will then become taxable.

For what it's worth, default rate of other bond ratings.

 

[Fermion]

I am not so confident about default rates in these unprecedented times. I would probably edge toward short term CDs for the next couple of years to see how things play out.

 

[brewer12345]

For what it's worth, default rate of other bond ratings. View attachment 34270

Medicine man speak with forked tongue.

These are annual default rates over long periods of time. Default rates fluctuate with the economic cycle (hint: they will be higher than average in the next couple/few years). Default rates also do not tell the whole story. Investors suffer losses from downgrades as well as defaults, so any real understanding of the risks of bonds needs to look at rating transition matricies as well as defaults.

All that said, sufficiently high credit spreads compensate investors for the risk. I do not think we are there for junk and probably not for BBBs. A and better rated bonds are starting to look attractive, provided you do not go too far out on maturity. But all of this assumes we are headed for a sharp but short recession. If L shaped instead of V or U recovery, best to make sure you stay short until things are clearer.

 

[tominboise]

I just invest in bond mutual funds, like VBLAX and VBTLX, and I have quite a bit in Wellesly (VWIAX). And similar funds in Fido. Is it best to move away from these broad category funds and into something more specific?

 

[copyright1997reloaded]

I am not so confident about default rates in these unprecedented times. I would probably edge toward short term CDs for the next couple of years to see how things play out.

+1.
I have 20% of my overall net worth in CD's, TIPS, and iBonds. This isn't because I am a genius, but rather because I shifted out of long term bonds and especially corporate bonds as rates declined (just on a risk/reward basis). I also have a most of the rest of my fixed in "Stable Value" funds (in tax-deferred account). Given where we are, I am not 100% sanguine that they remain "Stable".

 

[Fermion]

Note that I don't really think munis will default because I think we are going to come out of this dip a lot faster than people are thinking/saying.

The world is generally moving forward technologically at a very fast rate. Soon we will have a web of satellites providing gigabit internet speeds anywhere. We are on the edge of astounding medical breakthroughs even during this time of virus.

Even if the virus kills 10 million people worldwide, it will be well below birth rates. 256 people are born every single minute worldwide. With a connected world, the economy can only boom.

We might see the markets set new records by 2022, maybe even earlier.

 

[COcheesehead]

For what it's worth, default rate of other bond ratings. View attachment 34270

I know muni’s have historically been safe almost across the board, but I wanted to point out the amazing track record of AAA which also happen to be a good buy right now.

According to Fidelity, a one year CD pays 1.15%. A one year AAA - tax free - yields 3.15%.

If you go to an AA level, you can get 3.50%

Maybe by tomorrow these will be even better.

 

[bobandsherry]

I know muni’s have historically been safe almost across the board, but I wanted to point out the amazing track record of AAA which also happen to be a good buy right now.



According to Fidelity, a one year CD pays 1.15%. A one year AAA - tax free - yields 3.15%.



If you go to an AA level, you can get 3.50%



Maybe by tomorrow these will be even better.

Yeah, wasn't trying to be negative, just that there are other grades to consider. Given rates you quoted, AA would yield more than AAA, even after figuring in the default rate. Just need to be sure diversified. And believe that default rates will continue to run at same levels. Who knows if that will happen. But if we see wholesale default of the well rated muni's we probably have lots of other economic concerns.

Interesting that the stat states rate has been 0% since 1981, do you know if something happen before that which resulted in defaults of AAA issues?

 

[GravitySucks]

I see AGG is down about 2% not God awful compared to equities.
Intermediate treasuries fund FUAMX is up around 5%.
I had moved a couple years expenses to FUAMX last year +, giving up yield for security.
I'm stay with a mix of bonds funds and adding in Beans, Rice, Toilet paper to round out my FI holdings.
My bonds aren't there to make money. They're there to get over the rough patches. Even with losing value due to inflation.


PS - Public shout-out to AudreyH for consistently pointing out what bond holdings are for.

 

[OldShooter]

Our bonds are all TIPS, held in tax-sheltered accounts. Today vs 1/1/20 they are down about 2%. I actually had expected them to go up a little/flight to safety and all that. But I have no complaints.

 

[Retireby45ish]

My question is the following.

If a bond fund of AAA and AAs doesn’t actually have any of the bonds default and we own that fund, will it go back to its previous value in 3-5 years assuming this whole thing blows over?

I own VWAHX and it’s lost some value (4-5%) and may lose more. But if I hold it will it rebound eventually (again assuming the world returns to normal in a few years). I also own a bunch of AA and B and lower (corporates and munis) that are down 20-30% or so. Same question but on another scale (if very few or none of the companies/municipalities default, will it rebound?). It’s amazing to me that even these middle of the road (B avg) funds have dropped 20-30% in a week.

Thanks.

I guess instead of these higher yield choices I should have then the safer BND or similars. So much for stress testing returns and correlations vs 2008 and dec 2018. It’s a new world.

 

[Mdlerth]

It's not growing absolutely, but it's skyrocketing relative to equity

For those with a Stable Value Fund in their 401k, do you consider that "fixed income" or "cash"? Last time I checked, mine pays about 3%, so I could argue either way.

 

[OldShooter]

... If a bond fund of AAA and AAs doesn’t actually have any of the bonds default and we own that fund, will it go back to its previous value in 3-5 years assuming this whole thing blows over? ...

It depends on what interest rates do vs what bonds the fund holds and is buying. That's the issue IMO with bond funds -- you can never be sure what you'll get back. With individual bonds held to maturity, barring defaults, you always know.

Bond funds' strengths IMO are convenience and diversification. Buying individual bonds is really not difficult though people seem to be afraid of it. Diversification for a small portfolio is a much bigger problem. DW and I are on the investment committed of a nonprofit where we hold about $2M in corporates, 200 different issues x about $10K each. The issues are analyzed to make sure there is no concentration in any sector, too. That's diversification but it's difficult for an individual to do.

 

[audreyh1]

For what it's worth, default rate of other bond ratings. View attachment 34270

The problem with investment grade bonds is that depending on the circumstances, AAA, can become AA, can become A, can become BBB, and BBB can become junk as they are gradually downgraded due to company outlook issues. So just because AAA bonds don’t default, doesn’t mean that they will stay AAA forever and are never downgraded. Capish?

 

[Fermion]

That is the big problem. It is the same with dividends. A company can be rock solid, having paid dividends for decades, then something like this comes along and bam, dividend is suspended.

IF this crisis continues long term, there is little point in looking back to 1981 or whenever and say X investment is safe because it has been in the past.

As I say though I think we come out of this like a rocket ship later this year.

 

[ESRwannabe]

So I've been around 60/30/10 allocation for years, always holding bond funds as the safer alternative to stocks. But now in the this downturn, bond funds are all over the place.

Where should one be parking their money to offset the stock market ups and downs?

FYI, we have lost 22.8% of our total investment portfolio since this began, so the diversification strategy has helped reduce the blood bath.

Was planning on a June, 2020 retirement but now will hang on for another year or two or three to see how this recession plays out.

Vanguard has an alternative assets and a market neutral fund that they use as bond replacements. Not sure if retail investors can buy into the alt asset one yet. They are both in Vanguard's Managed Payout fund (which is changing names soon).

 

[audreyh1]

I see AGG is down about 2% not God awful compared to equities.
Intermediate treasuries fund FUAMX is up around 5%.
I had moved a couple years expenses to FUAMX last year +, giving up yield for security.
I'm stay with a mix of bonds funds and adding in Beans, Rice, Toilet paper to round out my FI holdings.
My bonds aren't there to make money. They're there to get over the rough patches. Even with losing value due to inflation.


PS - Public shout-out to AudreyH for consistently pointing out what bond holdings are for.

Is the ETF AGG still trading at a discount? It was last week.

 

[ESRwannabe]

I am still an advocate of high quality individual muni bonds laddered.
The default rate on AAA muni bonds is 0. That could change, but that’s a pretty good track record. And it just so happens many are “on sale” right now.
I am less confident in taxable bonds right now and don’t put muni’s into a deferred account. They will then become taxable.

I also still like muni bonds and also preferred stocks. Also cash is a good bond substitute.

 

[Dtail]

I know muni’s have historically been safe almost across the board, but I wanted to point out the amazing track record of AAA which also happen to be a good buy right now.

According to Fidelity, a one year CD pays 1.15%. A one year AAA - tax free - yields 3.15%.

If you go to an AA level, you can get 3.50%

Maybe by tomorrow these will be even better.

True, but Fidelity's brokered CD's are not really competitive right now with bank/CU CD's.

 

[RetireAge50]

As I say though I think we come out of this like a rocket ship later this year.

Music to my ears, keep it playing...

 

[OldShooter]

The problem with investment grade bonds is that depending on the circumstances, AAA, can become AA, can become A, can become BBB, and BBB can become junk as they are gradually downgraded due to company outlook issues. So just because AAA bonds don’t default, doesn’t mean that they will stay AAA forever and are never downgraded. Capish?

None of that matters as long as there is no default and as long as the bond is held to maturity.

Can you cite an actual historical example of the AAA->AA->A->BBB->Junk progression you think people should worry about? I'd be curious to know if has ever actually happened.

 

[GravitySucks]

The problem with investment grade bonds is that depending on the circumstances, AAA, can become AA, can become A, can become BBB, and BBB can become junk as they are gradually downgraded due to company outlook issues. So just because AAA bonds don’t default, doesn’t mean that they will stay AAA forever and are never downgraded. Capish?

Are you trying to say capisce?
https://youtu.be/HYcAwfSL7_M

Sorry, need a little levity.

 

[GravitySucks]

Is the ETF AGG still trading at a discount? It was last week.

As of Friday.
Yes. 1.5%