Why are bond prices and bond fund navs doing this?

[NW-Bound]

Anyway, I missed out on locking in that unfathomable high rate. I even missed the I bond in 2000 that paid 3.6% above inflation.

Not saying what is the chance of the above happening again, but if they do, damn if I miss them next time.

And having missed the stupendous rates, I never bothered with bonds and spent more time looking at stocks once I decided to be more active in investing.

But again, if opportunity knocks... I've got a 7-figure cash holding to move to bonds. Well, less than 7-figure after all the put options that got assigned last Friday and will get assigned this Friday.

 

[daylatedollarshort]

Yeah, this is pretty much what I've been doing. Those who have sold because the bond markets have dropped seem to have locked in a loss - or am I thinking wrong?

Just the opposite. People who sold their bond funds at the beginning of the year and switched to short term Treasuries have been up +2% or so with rising rates, while the bond index fund we used to hold is down -11% so far with only 2 out of the 6 - 7 Fed planned rate increases implemented. Which means there are likely steeper losses coming in the bond funds before the Fed gets done raising interest rates. That is a 13% difference in return and the year is not even half over. If you have a six figure, seven figure or even larger bond portfolio that is a lot of money to lose.

The short term Treasury switchers can always switch back to the bond funds at the end of the year, or whenever the Fed says they plan to stop raising interest rates, and make the same yields going forward as the nonswitchers, while having avoided some pretty big losses in the interim.

For example, assume two investors had $1M in January, 2022. One switched to short term Treasuries and made $20k this year, 2%. The other keeps his bond fund and loses 20%. He has $800K at the end of the year. The switcher goes back to the bond funds when rates levels off. The switcher has $1.02M in the bond fund and the nonswitcher has $800K. They both make the same returns going forward. The switcher has $220K more in the bond fund going forward.

 

[Bergamo]

Just the opposite. People who sold their bond funds at the beginning of the year and switched to short term Treasuries have been up +2% or so with rising rates, while the bond index fund we used to hold is down -11% so far with only 2 out of the 6 - 7 Fed planned rate increases implemented. Which means there are likely steeper losses coming in the bond funds before the Fed gets done raising interest rates. That is a 13% difference in return and the year is not even half over. If you have a six, seven or even larger bond portfolio that is a lot of money to lose.

The short term Treasury switchers can always switch back to the bond funds at the end of the year, or whenever the Fed says they plan to stop raising interest rates, and make the same yields going forward as the nonswitchers, while having avoided some pretty big losses in the interim.

For example, assume two investors had $1M in January, 2022. One switched to short term Treasuries and made $20k this year, 2%. The other keeps his bond fund and loses 20%, He has $800K at the end of the year. The switcher goes back to the bond funds when rates levels off. The switcher has $1.02M in the bond fund and the nonswitcher has $800K. They both make the same returns going forward. The switcher has $220K more in the bond fund going forward.

I wish I had switched to ST Treasuries.

I don't understand why the Bogleheads continue to say continue to hold TBM.

When you say ST Treasuries do you mean 12 month T bills?

Since I did not switch do you think it is worth switching now? At 3% rates if they hold I will make up the loss in 4 years. Given that the Fed intends additional rate increases, it is not clear to me that TBM will make up that loss unless rates fall again sharply and the share price movement makes up the loss.

An expensive lesson.

 

[DrRoy]

The effect of interest rates on bond prices is stronger than demand. The NAV of the bond has to fall to make the coupon match the market rate.

 

[Koolau]

Just the opposite. People who sold their bond funds at the beginning of the year and switched to short term Treasuries have been up +2% or so with rising rates, while the bond index fund we used to hold is down -11% so far with only 2 out of the 6 - 7 Fed planned rate increases implemented. Which means there are likely steeper losses coming in the bond funds before the Fed gets done raising interest rates. That is a 13% difference in return and the year is not even half over. If you have a six figure, seven figure or even larger bond portfolio that is a lot of money to lose.

The short term Treasury switchers can always switch back to the bond funds at the end of the year, or whenever the Fed says they plan to stop raising interest rates, and make the same yields going forward as the nonswitchers, while having avoided some pretty big losses in the interim.

For example, assume two investors had $1M in January, 2022. One switched to short term Treasuries and made $20k this year, 2%. The other keeps his bond fund and loses 20%. He has $800K at the end of the year. The switcher goes back to the bond funds when rates levels off. The switcher has $1.02M in the bond fund and the nonswitcher has $800K. They both make the same returns going forward. The switcher has $220K more in the bond fund going forward.

Yeah, I wasn't talking about folks with the foresight (or luck) to sell at year's beginning. I was talking about folks who just now are selling their depressed bond funds. That locks in the loss I believe. Holding the fund until it comes back (hopefully) is sort of a non-event if you come out the other side.

I'm just thinking that if there is ever a reason to hold bonds, that reason doesn't go away just because bonds are depressed in price - just like folks always want to be in equities, even when markets are falling. In theory, the balancing of a portfolio should still go on, even as both bonds and equities are falling in value - or did I miss something.

Now, switching bond funds for Treasuries is probably a good idea - if you know that bond funds are going to drop in value. I think you could make a case that we "knew" bond funds would fall beginning of the year, so going to Treasuries may well have been wise. Of course, we'll not even know that for a year or two (if we're lucky). Let us hope this mess is over in a year or two - but I wouldn't count on it.

 

[GTFan]

I'm just thinking that if there is ever a reason to hold bonds, that reason doesn't go away just because bonds are depressed in price - just like folks always want to be in equities, even when markets are falling. In theory, the balancing of a portfolio should still go on, even as both bonds and equities are falling in value - or did I miss something.

No, you didn't miss anything.

 

[ejman]

I have had a 50/45/5 split pretty much since I ER'd 22 years ago with wide band rebalancing. I'm down about 12% YTD vs 22% for S&P 500, more than 30% for Nasdaq so I think the bond fund portion is doing just what it is supposed to do by reducing volatility. Of course it would be better if bond funds returns YTD were positive but since I got to enjoy many years of positive returns due to declining rates, I get to give some of it back in exchange for nice sleep thru everything for 22 years. Fair trade I think.



I've learned thru several small failed experiments that my ability to time the markets is about zilch. I've come to realize I'm part of the herd and what I thought was independent thinking was just my listening to particularly persuasive gurus that in the long run didn't know any more than anyone else. Saint Jack being the exception so far.

 

[daylatedollarshort]

I wish I had switched to ST Treasuries.

I don't understand why the Bogleheads continue to say continue to hold TBM.

When you say ST Treasuries do you mean 12 month T bills?

Since I did not switch do you think it is worth switching now? At 3% rates if they hold I will make up the loss in 4 years. Given that the Fed intends additional rate increases, it is not clear to me that TBM will make up that loss unless rates fall again sharply and the share price movement makes up the loss.

An expensive lesson.

I made a Treasury ladder with durations up to a year. As the rungs mature we are going to start dollar cost averaging TIPS with at least some of the the money, since those are yielding inflation + .55 to over 1% now, more than I bonds. A 1.3% real yield on TIPS provides a 4% safe withdrawal rate over 30 years with the safety of Treasuries.

The more the Fed actually implements some rate increases and the more the market anticipates the next increases, it makes what action to take on bond fund holdings not as crystal clear as the beginning of the year. But as of the Fed's May meeting minutes, it seems like the market still had not priced bonds to the extent of what the Fed has said they plan to do: "Fed minutes point to more rate hikes that go further than the market anticipates - Federal Reserve officials earlier this month stressed the need to raise interest rates quickly and possibly more than markets anticipate to tackle a burgeoning inflation problem, minutes from their meeting released Wednesday showed. Not only did policymakers see the need to increase benchmark borrowing rates by 50 points, but they also said similar hikes likely would be necessary at the next several meetings." - Fed minutes: May 2022 - Monetary policy may move into restrictive territory (cnbc.com)

Not sure about the Boglehead forum, but their strategy seems to be based on what has worked on historical models. Bill Bengen of the 4% rule fame says his models have never seen conditions like we have now, so he is recommending retirees cut both bond and stock holdings and move more to cash. From a recent interview:

THINKADVISOR: Is there anything that alarms you about the way retirement planning is done today?

BILL BENGEN: My biggest concern are buy-and-hold advisors who don’t modify their allocation in response to market risk.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

This is a pretty good interview to read in its entirety if you are a retiree on the fence about what to do going forward.

 

[Sunset]

Yeah, I wasn't talking about folks with the foresight (or luck) to sell at year's beginning. I was talking about folks who just now are selling their depressed bond funds. That locks in the loss I believe. Holding the fund until it comes back (hopefully) is sort of a non-event if you come out the other side.

I'm just thinking that if there is ever a reason to hold bonds, that reason doesn't go away just because bonds are depressed in price - just like folks always want to be in equities, even when markets are falling. In theory, the balancing of a portfolio should still go on, even as both bonds and equities are falling in value - or did I miss something.

Now, switching bond funds for Treasuries is probably a good idea - if you know that bond funds are going to drop in value. I think you could make a case that we "knew" bond funds would fall beginning of the year, so going to Treasuries may well have been wise. Of course, we'll not even know that for a year or two (if we're lucky). Let us hope this mess is over in a year or two - but I wouldn't count on it.

I was a large believer in the hold bond fund so I didn't sell at the beginning of the year.
However even though I was locking in my loss I sold the 3rd week in April...
Glad I did as the BND has fallen ~4% since then.
Literally ~$3 per share.

I'm not buying back into BND right now as I think it will go down further as I think interest rates will rise more. I've seen them at 15% or more before, so right now rates are very low.

People would not think what I did is bad if I called it re-balancing, selling my less loosing BND (-10.7%) fund to buy shares that have fallen 20%.

I have to wonder, if people sell the bond fund now are they locking in losses or preventing further losses...

 

[Bergamo]

I made a Treasury ladder with durations up to a year. As the rungs mature we are going to start dollar cost averaging TIPS with at least some of the the money, since those are yielding inflation + .55 to over 1% now, more than I bonds. A 1.3% real yield on TIPS provides a 4% safe withdrawal rate over 30 years with the safety of Treasuries.

The more the Fed actually implements some rate increases and the more the market anticipates the next increases, it makes what action to take on bond fund holdings not as crystal clear as the beginning of the year. But as of the Fed's May meeting minutes, it seems like the market still had not priced bonds to the extent of what the Fed has said they plan to do: "Fed minutes point to more rate hikes that go further than the market anticipates - Federal Reserve officials earlier this month stressed the need to raise interest rates quickly and possibly more than markets anticipate to tackle a burgeoning inflation problem, minutes from their meeting released Wednesday showed. Not only did policymakers see the need to increase benchmark borrowing rates by 50 points, but they also said similar hikes likely would be necessary at the next several meetings." - Fed minutes: May 2022 - Monetary policy may move into restrictive territory (cnbc.com)

Not sure about the Boglehead forum, but their strategy seems to be based on what has worked on historical models. Bill Bengen of the 4% rule fame says his models have never seen conditions like we have now, so he is recommending retirees cut both bond and stock holdings and move more to cash. From a recent interview:

THINKADVISOR: Is there anything that alarms you about the way retirement planning is done today?

BILL BENGEN: My biggest concern are buy-and-hold advisors who don’t modify their allocation in response to market risk.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

This is a pretty good interview to read in its entirety if you are a retiree on the fence about what to do going forward.

It is a good interview with Bill Bengen though he doesn't really talk about TBM versus Treasuries or other bonds.

The issue I have with the Bogleheads is they always say TBM has never had a year with a negative return. TBM is down 12% and we are not done with rate increases. The other issue is the duration of TBM has increased over the past decade and is now 6.7 years. So increasing yields will help TBM recover but that could take 2D-1 so more than 12 years! And that's once rates stop increasing.

We may well be back in the 1970s despite people saying the situation is not the same. With what Yellen and others have said so far it hard to have any faith in their ability to make this situation better.

 

[Bergamo]

I was a large believer in the hold bond fund so I didn't sell at the beginning of the year.
However even though I was locking in my loss I sold the 3rd week in April...
Glad I did as the BND has fallen ~4% since then.
Literally ~$3 per share.

I'm not buying back into BND right now as I think it will go down further as I think interest rates will rise more. I've seen them at 15% or more before, so right now rates are very low.

People would not think what I did is bad if I called it re-balancing, selling my less loosing BND (-10.7%) fund to buy shares that have fallen 20%.

I have to wonder, if people sell the bond fund now are they locking in losses or preventing further losses...

I would say, preventing further losses. What did you move to from TBM/BND?

 

[Bergamo]

Yeah, I wasn't talking about folks with the foresight (or luck) to sell at year's beginning. I was talking about folks who just now are selling their depressed bond funds. That locks in the loss I believe. Holding the fund until it comes back (hopefully) is sort of a non-event if you come out the other side.

I'm just thinking that if there is ever a reason to hold bonds, that reason doesn't go away just because bonds are depressed in price - just like folks always want to be in equities, even when markets are falling. In theory, the balancing of a portfolio should still go on, even as both bonds and equities are falling in value - or did I miss something.

Now, switching bond funds for Treasuries is probably a good idea - if you know that bond funds are going to drop in value. I think you could make a case that we "knew" bond funds would fall beginning of the year, so going to Treasuries may well have been wise. Of course, we'll not even know that for a year or two (if we're lucky). Let us hope this mess is over in a year or two - but I wouldn't count on it.

I agree that this mess is not going to be over in a year or two. Bond funds are going to take a very long time to recover e.g. TBM/BND.

 

[RunningBum]

The issue I have with the Bogleheads is they always say TBM has never had a year with a negative return.

Do you actually have some quotes of Bogleheads, or anyone, saying that? It's easily disputed since BND (I assume that's what you're talking about?) had a negative total return last year, a minuscule loss in 2018 and a loss in 2013. And you say people are always claiming that?

 

[daylatedollarshort]

It is a good interview with Bill Bengen though he doesn't really talk about TBM versus Treasuries or other bonds.

The issue I have with the Bogleheads is they always say TBM has never had a year with a negative return. TBM is down 12% and we are not done with rate increases. The other issue is the duration of TBM has increased over the past decade and is now 6.7 years. So increasing yields will help TBM recover but that could take 2D-1 so more than 12 years! And that's once rates stop increasing.

We may well be back in the 1970s despite people saying the situation is not the same. With what Yellen and others have said so far it hard to have any faith in their ability to make this situation better.

I think short term Treasuries are usually considered a cash equivalent. But otherwise, right, he doesn't really get into the the bond vs. bond fund issue, which I think does help address the issues he brought up because of the ability to redeem at par (or par plus inflation in the case of TIPS and I bonds), which has been discussed in threads and linked articles more in depth on our forum here.

 

[Kook]

Just the opposite. People who sold their bond funds at the beginning of the year and switched to short term Treasuries have been up +2% or so with rising rates, while the bond index fund we used to hold is down -11% so far with only 2 out of the 6 - 7 Fed planned rate increases implemented. Which means there are likely steeper losses coming in the bond funds before the Fed gets done raising interest rates. That is a 13% difference in return and the year is not even half over. If you have a six figure, seven figure or even larger bond portfolio that is a lot of money to lose.

The short term Treasury switchers can always switch back to the bond funds at the end of the year, or whenever the Fed says they plan to stop raising interest rates, and make the same yields going forward as the nonswitchers, while having avoided some pretty big losses in the interim.

For example, assume two investors had $1M in January, 2022. One switched to short term Treasuries and made $20k this year, 2%. The other keeps his bond fund and loses 20%. He has $800K at the end of the year. The switcher goes back to the bond funds when rates levels off. The switcher has $1.02M in the bond fund and the nonswitcher has $800K. They both make the same returns going forward. The switcher has $220K more in the bond fund going forward.

This ^^^^ is what has me questioning my current buy and hold strategy for my bond funds (my bold).

 

[Out-to-Lunch]

I am confused you have posted in the muni thread about individual bonds you bought.

I think that is a different Graybeard. I believe you may be thinkinig of Mr._Graybeard.

 

[Sunset]

I would say, preventing further losses. What did you move to from TBM/BND?

We didn't have a lot, and still have some other bond funds besides the BND we got out of.

We did put $95K into I-bonds this year, and are looking at buying treasuries but have to learn how

 

[Dtail]

Always hard to predict movement, but with known Fed increases, bond funds had to decrease in the short run.
With this movement up in yields, MYGA's/CD's and Stable Value for me for the "bond" allocation.

 

[Koolau]

People would not think what I did is bad if I called it re-balancing, selling my less loosing BND (-10.7%) fund to buy shares that have fallen 20%.

Heh, heh, I'll believe it if you will.

 

[mikes425]

Have held bond funds for the entire lifespan of my portfolio which would be roughly 30 years. The longest duration one would be VGIT but am confounded by the performance of TIPS and floating rate which make up a sizable portion of my FI. I'm about 49% equity. Down close to 13% YTD as of today. Occasional advisor doesn't seem to think i should be making any changes. I assume those with 60+% equity AA and a basically B&H approach are doing worse than 10% on average this year. FWIW my AA is supposed to be moderate-conservative so i don't know if my loss percentage is higher than most others with a similar risk profile.

 

[Graybeard]

I am confused you have posted in the muni thread about individual bonds you bought.

I have posted in several threads about bonds. If the thread was about munis what I was referring to was the Intermediate Term Tax Exempt Bond Fund in my taxable account. In my Rollover IRA I had (sold it all) corporate bond funds - Short Term Investment Grade and Ultra Short Term Bond Fund. All 3 funds were/are Admiral shares. I did buy some T bills in both my taxable and Rollover IRA, 13 and 26 week bills. These were the 1st bonds I ever bought and it was recent. I hope that clears up the confusion.

 

[COcheesehead]

I have posted in several threads about bonds. If the thread was about munis what I was referring to was the Intermediate Term Tax Exempt Bond Fund in my taxable account. In my Rollover IRA I had (sold it all) corporate bond funds - Short Term Investment Grade and Ultra Short Term Bond Fund. All 3 funds were/are Admiral shares. I did buy some T bills in both my taxable and Rollover IRA, 13 and 26 week bills. These were the 1st bonds I ever bought and it was recent. I hope that clears up the confusion.

I think I had you and Mr_Graybeard confused. My bad.

 

[daylatedollarshort]

Have held bond funds for the entire lifespan of my portfolio which would be roughly 30 years. The longest duration one would be VGIT but am confounded by the performance of TIPS and floating rate which make up a sizable portion of my FI.

If you have a TIPS fund that is going to go down in price as TIPS real returns rise. TIPS real returns went from negative on the 5 years to .64 as of today, in a pretty short period of time.

Floating rate bonds tend to be from higher credit risk companies, so investors may be selling them on recession fears.

 

[Bergamo]

Do you actually have some quotes of Bogleheads, or anyone, saying that? It's easily disputed since BND (I assume that's what you're talking about?) had a negative total return last year, a minuscule loss in 2018 and a loss in 2013. And you say people are always claiming that?

I should have been more careful in how I said this. Let me expand a little. Look at the first post at this link. I have great respect for the Bogleheads but I think they tend not to mention the real risks of rising rates.

https://www.bogleheads.org/forum/viewtopic.php?t=254674

And this statement:

"The Aggregate Bond Index had only three negative years (all small) reflecting very low risk."

TBM year to date is -12.68%. We all know that the rates increases are just starting given the public statement from the Fed. I'm sorry but this does not reflect low risk.

And they are not the only ones. Vanguard has soothing papers on rising rates which I think are very misleading.

https://investor.vanguard.com/inves...he-dynamics-of-bond-duration-and-rising-rates

This kind of performance has real issues for those needing to do RMDs and even rebalancing as others have pointed out on the thread.

I have not seen a thread on the Bogleheads saying given the situation let's discuss alternatives.

 

[sengsational]

I had an early lesson in bond fund avoidance in 1987. Natively, I believed the "stocks zig, bonds zag" line. That was after my BIL warned me away from bond funds and urged short individual issues! But the impact was smaller back then as it was not as many years of saving. Unfortunately, the tax law based accounts I'm stuck with don't have the ability to buy individual bonds. One has a stable value fund, and everything in that account is in the SVF, but that leaves more to be allocated to bonds. So even though I'd rather not own any bonds through a fund because bond funds are forced to sell at fire sale prices when the "wisdom of the investors" takes flight to cash, I'm still invested in a bond fund.

A question about the statistic about flight into money market funds. Does that track through to the final destination? I can imagine selling the long bond fund and buying a very short one. It seems like market timing (of the bond flavor) would be to twist the knob to short in situations when there's going to be rate increases and twist the other way, towards long, when the rates aren't going any higher.