Anyone Else still holding Bond Funds?

[COcheesehead]

Yup. Holding an individual bond to duration that is paying less than current bonds is the same as holding a bond fund. Just looks better in the short run.

That’s why you ladder them. It mitigates interest rate risk. A fund has no par, no precise duration, redemptions, expenses….

 

[bloom2708]

I am keeping my Intermediate-Term Treasury Index fund in our Rollover IRAs. Over the long term, I hope things even out earning higher rates.

I won't know if it is a mistake until "later".

 

[Freedom56]

No reason to hold bond funds, too much drag: expenses, redemptions, management decisions.
I buy individual bonds, ladder them and hold to maturity. Haven’t lost a penny yet.

People have been brainwashed by Wall Street into thinking that individual bonds are too complex and too risky to hold. "So let the experts buy those bonds from those risky companies like Pfizer, Microsoft, Verizon, Federal Express, and others all for a fee and forget about return of capital and just keep sending us more money."

 

[COcheesehead]

The argument that bonds don’t keep up with inflation is like saying why don’t cars fly? That is not their intent. I buy bonds for income first, capital preservation second. If you are buying bonds thinking they are an inflation hedge…
I have other parts of my assets in inflation hedges and they are doing very well these days.

 

[corn18]

That’s why you ladder them. It mitigates interest rate risk. A fund has no par, no precise duration, redemptions, expenses….

Absolutely. You build your own bond fund. Works a treat, esepecially in a rising rate environment.

The argument that bonds don’t keep up with inflation is like saying why don’t cars fly? That is not their intent. I buy bonds for income first, capital preservation second. If you are buying bonds thinking they are an inflation hedge…
I have other parts of my assets in inflation hedges and they are doing very well these days.

Might not be the intent of bonds, but over long periods, the real return of total bond has consistently been greater than 0%. The yellow line is the 30 year rolling average real return of total bond.

 

[mathjak107]

I am keeping my Intermediate-Term Treasury Index fund in our Rollover IRAs. Over the long term, I hope things even out earning higher rates.

I won't know if it is a mistake until "later".

I run a few different model portfolios.

In one I use an equal weighting on the fixed income side of long term treasuries and t bills …that forms a barbel with about the same duration as an intermediate term bond fund but with better characteristics….

The other on the bond side is a mix of a short term treasury fund , a total bond fund and a go anywhere bond fund .

They both also have about 25% equities .


My last model is a 100% equities ….it has the smallest amount of money compared to the other two

 

[Freedom56]

Bond are for income. However Wall Street has managed to con investors into a believing that they are ballasts for their equity allocation. Just keep plenty of dry powder for the last quarter of this year as we enter tax loss selling season. The March 2022 moment is coming but turbo-charged. Those clueless passive bond fund managers will be dumping investment grade bonds at steep losses while individual bond holders and active fund manager lock up 10% plus yields.

 

[mathjak107]

High quality bonds and bond funds provide deflation protection …

When rates are reversed to avoid a Japan style deflationary spiral , bonds can do very well in recessions and depression, especially treasuries .

Japan made the mistake of trying to raise rates at the same time they were trying to slow their real estate and markets down and ended up sending themselves in to a terrible deflationary spiral.

Long term treasuries trade like stocks in the sense they are moved big time by fear , greed and perception of future inflation .

They can have stock like , very powerful moves , both up and down.

In one of my models my long term treasuries are to fly fighter cover over the portfolio as we can have a flight to safety at any point.

If predicting stocks is hard , predicting rates is almost impossible as they can shift in a heart beat with investor sentiment

 

[mathjak107]

Interesting enough is anytime the last 40 years the fed raised interest rates more than 1% in a year , intermediate term bonds went up in value , not down .

Only 1994 was the exception .


The left is the fed increase and the right the total return on bonds

 

[Freedom56]

I don't know if people are paying attention to the markets now, but things are starting to get ugly. I just initiated another large transfer of cash from my money market account to my brokerage account. We might get a March 2020 moment soon and I have to be ready.

 

[corn18]

I don't know if people are paying attention to the markets now, but things are starting to get ugly. I just initiated another large transfer of cash from my money market account to my brokerage account. We might get a March 2020 moment soon and I have to be ready.

Total stock -25.06%
Total international stock -23.90%
Nasdaq -33.63%
S&P 500 -23.70%
Total bond -17.61%

Yikes!

 

[daylatedollarshort]

Just read this from Yahoo - Bond Market Losses Just Beginning as Fed Sets Path to 4% Yields - https://finance.yahoo.com/news/bond-market-losses-just-beginning-000000384.html. "It’s very clear the Fed will do whatever it takes to forcefully reduce inflation and the terminal rate is going to be closer to 4% and maybe even go higher,” said Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management. “The Fed is on a path to higher rates and even as Powell tried to downplay another 75 basis points hike next month, he said rates are still extremely low.”

 

[Koolau]

^^^^^

Glad my bond fund is very short term. Now, I guess we'll see if Pssst! Wellesley can finesse the pressure on the bond portion of their fund. YMMV

 

[Bergamo]

Total stock -25.06%
Total international stock -23.90%
Nasdaq -33.63%
S&P 500 -23.70%
Total bond -17.61%

Yikes!

What is the starting date on those percentages?

 

[Bergamo]

Interesting enough is anytime the last 40 years the fed raised interest rates more than 1% in a year , intermediate term bonds went up in value , not down .

Only 1994 was the exception .


The left is the fed increase and the right the total return on bonds

So why is TBM at -11.77%?

 

[Magus]

What is the starting date on those percentages?

Appears to be YTD numbers

 

[Bergamo]

Bond are for income. However Wall Street has managed to con investors into a believing that they are ballasts for their equity allocation. Just keep plenty of dry powder for the last quarter of this year as we enter tax loss selling season. The March 2022 moment is coming but turbo-charged. Those clueless passive bond fund managers will be dumping investment grade bonds at steep losses while individual bond holders and active fund manager lock up 10% plus yields.

Not just Wall Street. Bonds are ballast is the one of the fundamental principles of the Bogleheads. I'm not saying they are wrong.

 

[Bergamo]

Explain how you lose money buying a one year corporate note with a YTM of 6.7%. The alternative is to park cash at .75%. Those who manage their own finance know how to manage expenses in an inflationary environment.
Those who ladder short term notes can make a healthy return while rates rise. Those who buy CDs or treasuries will not suffer capital losses if they hold to maturity. Bond fund distribution yields are far too low relative to treasuries, CDs, and short term corporate notes. Many are holding too much debt with coupons as low as 0.5%. While the prices of those bonds have fallen to compensate for rising yields, the coupons are still 0.5% so distribution yields won't change until they sell those notes at a steep loss and replace them higher coupon notes. However they can only do that they have fund inflows. As I have stated many times, passive bond funds are dangerous to hold. They are not bonds. There is no return of capital. Bond funds do not protect you from market risk. Buying a bond fund that invests in treasuries is one of the dumbest moves you can make. You are taking products that have no capital risk and creating one that does for a fee.

This is a really good explanation of the situation bond funds are in now.

They can still sell the 0.5% coupon bonds even if they have no fund inflows. Is that not correct? Are they not selling those low coupon bonds to meet redemptions as it is?

Your last point about Treasury funds really made me think. What would your advice be to those who hold TBM at present? No one can predict rates going forward and with TBM at -11.77% YTD how does one move to a better situation? Especially for those in retirement already and not buying TBM regularly.

 

[Bergamo]

In real return even individual bonds lose money .

As an example ,Getting paid back 1k in 10 years is a loss is a loss is a loss when it buys less then it did..

Bond funds increase over time in rising inflation while the nav adjusts downward so you come close to individual bond returns if held for the funds duration .


A treasury bond fund that sells for 10 bucks and pays 5% the day you bought and has a duration of 5 years is no different for the most part than a 5 year bond.


The bond fund will lose 5% in nav if rates rise a point but gain an extra 1% a year getting 6% instead of 5% ….at the end of the funds duration period you end up with the same 5% as the day you bought .

No different then a 5 year bond paying 5% .

In both case though you got only 5% in a 6% world so both are behind the curve,

staying at least the funds duration and using a high quality bond fund with little credit risk will give you a total return similar to an individual bond .

both will lose money if sold before its maturity or duration if rates went up . both will see similar returns if held , less expenses in the bond fund .

however bond fund managers can do things an individual likely wont , like riding the bond curve .

so that can off set expenses

https://www.kitces.com/blog/how-bon...ve-help-defend-against-rising-interest-rates/

In a rising rate environment you are looking at (2 * duration) -1. So for TBM, 12.4 years to maybe break even. Look at the posts at Bogleheads for the analysis. 12.4 years is an awfully long time for those in retirement.

 

[mathjak107]

In a rising rate environment you are looking at (2 * duration) -1. So for TBM, 12.4 years to maybe break even. Look at the posts at Bogleheads for the analysis. 12.4 years is an awfully long time for those in retirement.

I don’t come up with 12.4 years at all

It is much less from what I see…the duration on ftbfx is 6.3 years

 

[corn18]

What is the starting date on those percentages?

Oops, forgot that important bit of information. That data is from the all time high for each.

 

[lawman]

Interesting enough is anytime the last 40 years the fed raised interest rates more than 1% in a year , intermediate term bonds went up in value , not down .

Only 1994 was the exception .


The left is the fed increase and the right the total return on bonds

How can this be? I'm more confused than ever...

 

[mathjak107]

How can this be? I'm more confused than ever...

Rising short term rates slow us down and help squelch inflation ..bonds like that ….

But it has to look like the rates are actually working .we are not at that point yet

 

[Freedom56]

This is a really good explanation of the situation bond funds are in now.

They can still sell the 0.5% coupon bonds even if they have no fund inflows. Is that not correct? Are they not selling those low coupon bonds to meet redemptions as it is?

Your last point about Treasury funds really made me think. What would your advice be to those who hold TBM at present? No one can predict rates going forward and with TBM at -11.77% YTD how does one move to a better situation? Especially for those in retirement already and not buying TBM regularly.

The low coupon holding are sold first to meet redemptions and fund holders assume the loss. But to meet fund duration and balance rules (all silly), they sell the highest coupon holdings. This is when investors like me place low ball limit orders to buy notes at well above market yields. Don't expect a fund to buy the higher coupon debt until money starts flowing in.

I don't know anything about TBM (VBTLX) but looking at the details of this fund it invests mostly in government securities. I could do that on my own.

https://investor.vanguard.com/mutual-funds/profile/portfolio/vbtlx

The average coupon is only 2.6% and average effective maturity is 8.9 years. So it's not exactly something that I would ever consider buying. I personally would not put any new money into this when you could buy treasuries with shorter duration or CDs at higher yields without any risk of capital loss. I can't tell you what to do with your current holdings. That question should be directed to people who believe in these bond funds.

 

[Magus]

Rising short term rates slow us down and help squelch inflation ..bonds like that ….

But it has to look like the rates are actually working .we are not at that point yet

Yup, plus we were always in real positive rates on bonds then. We are huge negative real rates now.