Investing in 2023

[Montecfo]

You are missing an important point. Those that hold individual bonds would not lock a 10 year treasury note at 0.5% or a 30 year treasury bond at 1.5%. Bond funds bloated themselves with low coupon debt while fixed income investors either stayed in cash or shifted to the shortest durations. When bonds stop generating income, they are no longer viable investments. Those that manage bond funds appear to have forgotten that fact. I can't think of a single fixed income investor that bought negative yield bonds but many funds did just that. The vast majority of people that buy individual bonds and CDs market time. This is normal behavior that most Bogleheads just don't understand.

Yes, they would, if those were the best available yields for their time horizon and targeted risk tolerance.

The idea that we are all smarter than all fund managers is a bit silly.

If you notice, most bond funds have a specific objective, such as intermediate investment grade corprpate bonds or long-term treasuries. They don't just decide what term and flavor they wish to buy. Their purchases must be in line with published fund objectives. Which investors accept when they purchase them.

Your last sentence I agree with.

Did you want to tackle the actual pros snd cons of indexing, funds and direct ownership or just continue to flog the idea that fund managers are just dumber than we are?

 

[matjung]

Discussions about digital assets tend to become disrespectful on the Forum but I’m glad to chat in the DMs with you or anyone else who is genuinely interested to discuss them. Several of us compare notes and learn from each other there enjoyably and we haven’t had to block anyone yet.

I see. No thanks. Good Luck with your Coins.

 

[matjung]

The distribution yields, the NAV changes over times, individual bonds held to maturity not having market risk, etc. are all simply matters of fact, not opinions or name calling.

I never regretted to invest into individual bonds, but when the price went down from 140 to 90% within 6 months, I still feel like getting caught by market risk.

I bought the high yield Greece government bonds at 20% some 10+ years ago. Maturity is in 2037!
For the time being, I enjoy the coupon rate (4.3%).

 

[pb4uski]

From what Gumby posted in the IBond thread, it looks like IBond rate inflation components will drop significantly to 2% or so for the next reset in May 2023, in which case the IBond train will be derailed for me. I'll stick with IBonds as long as their yields are competitive with 2-5 year US Treasuries.

If the IBond train does derail I'll likely transfer the money to my taxable brokerage account and invest in 2-5 year CDs/USTs/GSEs.

One unintended consequence is when I do cash out that the interest income recognized will reduce my Roth conversions for the year dollar-for-dollar.

I am also in process of simiplfying the number of accounts that I have for estate administration reasons. I got rid of most credit union CDs in 2022, one to go in 2023.

If the I-Bond money in 5 different accounts (2 individual and 3 trusts) gets moved to a single joint taxable brokerage account over 2023-2025, I could end up with as few as 5 accounts (taxable joint, his tIRA, his Roth, his HSA, her HSA) by the beginning of 2025. DW has a small $$$ Roth credit union CD (4.5% of total retirement assets) maturing in early 2023 that I need to decide whether it is worth keeping and rolling into a Roth brokerage account or just withdrawing and having one less account to deal with. I'll probably keep it in the Roth.

By contrast at the beginning of 2022, we had 17 financial accounts and added 3 in 2022 so we had 20 before the purge started... so getting down to 5 or 6 accounts with 2 different brokerage houses will greatly simplify our finances and the administration of the estate for DW and DD if I get hit by a beer truck.

 

[Lsbcal]

Yes, have a simplified account structure is important. Too many moving parts can be confusing and unnecessary.

 

[Jerry1]

From what Gumby posted in the IBond thread, it looks like IBond rate inflation components will drop significantly to 2% or so for the next reset in May 2023, in which case the IBond train will be derailed for me. I'll stick with IBonds as long as their yields are competitive with 2-5 year US Treasuries.

If the IBond train does derail I'll likely transfer the money to my taxable brokerage account and invest in 2-5 year CDs/USTs/GSEs.

I think I’ll keep my money in treasury direct but if/when the I bonds are no longer attractive, I’ll just switch over to short term T bills. If those aren’t worth the trouble, then I’ll just cash them out as I need operating funds. I think treasuries will be good for awhile as I don’t see interest rates going down any time soon. Frankly, I hope they stay about where they are right now which seems like a reasonably normal rate structure.

 

[pb4uski]

I think I’ll keep my money in treasury direct but if/when the I bonds are no longer attractive, I’ll just switch over to short term T bills. If those aren’t worth the trouble, then I’ll just cash them out as I need operating funds. I think treasuries will be good for awhile as I don’t see interest rates going down any time soon. Frankly, I hope they stay about where they are right now which seems like a reasonably normal rate structure.

I considered that... leaving the money at TD and investing in UST but will probably move it to a taxable brokerage account since I can buy the same Treasuries at auction that I can buy at Treasury Direct, but can also buy secondary market issues, GSE bonds, etc... and doing so will also reduce 5 TD accounts to 1 taxable brokrage account. KISS.

 

[COcheesehead]

Yes, have a simplified account structure is important. Too many moving parts can be confusing and unnecessary.

Yes! We have everything consolidated in one brokerage. It’s heaven.

 

[pb4uski]

If it were just me I wouldn't mind numerous accounts... Quicken handles them very easily. But with an estate administration hat on thinking what DW and DD would have to do if I pass unexpectedly, I can see that simpler is easier.

Unlike most things in life, it's not all about me.

 

[audreyh1]

I think I’ll keep my money in treasury direct but if/when the I bonds are no longer attractive, I’ll just switch over to short term T bills. If those aren’t worth the trouble, then I’ll just cash them out as I need operating funds. I think treasuries will be good for awhile as I don’t see interest rates going down any time soon. Frankly, I hope they stay about where they are right now which seems like a reasonably normal rate structure.

FWIW They return your funds to your bank when you redeem an iBond.

 

[Jerry1]

FWIW They return your funds to your bank when you redeem an iBond.

Thanks. Good point. Once it’s out of TD, I’d probably move it to Fidelity where it is easier to buy bonds.

 

[copyright1997reloaded]

You are missing an important point. Those that hold individual bonds would not lock a 10 year treasury note at 0.5% or a 30 year treasury bond at 1.5%. Bond funds bloated themselves with low coupon debt while fixed income investors either stayed in cash or shifted to the shortest durations. When bonds stop generating income, they are no longer viable investments. Those that manage bond funds appear to have forgotten that fact. I can't think of a single fixed income investor that bought negative yield bonds but many funds did just that. The vast majority of people that buy individual bonds and CDs market time. This is normal behavior that most Bogleheads just don't understand.

I appreciate your insight and shared knowledge, and agree with many of your dislikes about bond fun management: but you really don't give the whole truth here.

If a bond fund has a bunch of 0.5% to 1.0% paper, those bonds (if actively traded) will ALREADY be discounted and their yield to maturity competitive with current offerings. We certainly see that every day in treasury bill/note/bond pricing in the secondary market.

Again, I agree regarding a number of issues:
1) They are managing your money, not theirs
2) They may have stale pricing on some issues
3) They are slaves to fund flows, and must sell if fund outflows are occurring and must buy if inflows are occurring, regardless of whether those bonds are good sales/buys.
But it is important to be fully truthful here regarding their YTM regardless of a current puny current distribution rates.

 

[Freedom56]

I appreciate your insight and shared knowledge, and agree with many of your dislikes about bond fun management: but you really don't give the whole truth here.

If a bond fund has a bunch of 0.5% to 1.0% paper, those bonds (if actively traded) will ALREADY be discounted and their yield to maturity competitive with current offerings. We certainly see that every day in treasury bill/note/bond pricing in the secondary market.

Again, I agree regarding a number of issues:
1) They are managing your money, not theirs
2) They may have stale pricing on some issues
3) They are slaves to fund flows, and must sell if fund outflows are occurring and must buy if inflows are occurring, regardless of whether those bonds are good sales/buys.
But it is important to be fully truthful here regarding their YTM regardless of a current puny current distribution rates.

YTM has no meaning for bond funds that maintain an average duration. Yes the price has been adjusted for a 0.5% coupon note, but one year from maturity, a bond fund will sell that note and if the current yield for for a one year not is higher than 0.5 like it is today, it will sell the holding at a loss. Holding low coupon debt means that I can never pay out more that .5% for that holding and will realize a loss when it sells. This is a fact. This is why distribution payments have not budged through seven rate hikes in 2022. A good example is a short duration (1-3 months) ETF like BIL that had the ability to turn over it's portfolio 4 times in 2022 and yet only pays 1.33% in distribution yield but claims to have a YTM of 3.98%. Explain to all of us how that happens? By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not. Money market fund yields have slowly inched up to 4.26% but the BIL ETF has barely budged. People who promote bond funds are the one's that need to be truthful and are the one's spreading misinformation. The low fees claimed by bond funds are a ruse masking the hidden trading fees that fund managers grift from investors. The BIL ETF is a good example of how bond funds scam investors.

https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-bloomberg-1-3-month-t-bill-etf-bil

 

[Montecfo]

YTM has no meaning for bond funds that maintain an average duration. Yes the price has been adjusted for a 0.5% coupon note, but one year from maturity, a bond fund will sell that note and if the current yield for for a one year not is higher than 0.5 like it is today, it will sell the holding at a loss. Holding low coupon debt means that I can never pay out more that .5% for that holding and will realize a loss when it sells. This is a fact. This is why distribution payments have not budged through seven rate hikes in 2022. A good example is a short duration (1-3 months) ETF like BIL that had the ability to turn over it's portfolio 4 times in 2022 and yet only pays 1.33% in distribution yield but claims to have a YTM of 3.98%. Explain to all of us how that happens? By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not. Money market fund yields have slowly inched up to 4.26% but the BIL ETF has barely budged. People who promote bond funds are the one's that need to be truthful and are the one's spreading misinformation. The low fees claimed by bond funds are a ruse masking the hidden trading fees that fund managers grift from investors. The BIL ETF is a good example of how bond funds scam investors.



https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-bloomberg-1-3-month-t-bill-etf-bil

I think you should focus on opportunities in individual bonds. You do that well and folks respect your views, myself included.

These recurring harangues about bond fund "scammers" are really not adding anything useful to the discussion, in my view.

Many folks find bond funds and ETFs useful for many reasons which you do not mention.

Not an apologist for bond funds and ETFs, just prefer a balanced view.

 

[VanWinkle]

YTM has no meaning for bond funds that maintain an average duration. Yes the price has been adjusted for a 0.5% coupon note, but one year from maturity, a bond fund will sell that note and if the current yield for for a one year not is higher than 0.5 like it is today, it will sell the holding at a loss. Holding low coupon debt means that I can never pay out more that .5% for that holding and will realize a loss when it sells. This is a fact. This is why distribution payments have not budged through seven rate hikes in 2022. A good example is a short duration (1-3 months) ETF like BIL that had the ability to turn over it's portfolio 4 times in 2022 and yet only pays 1.33% in distribution yield but claims to have a YTM of 3.98%. Explain to all of us how that happens? By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not. Money market fund yields have slowly inched up to 4.26% but the BIL ETF has barely budged. People who promote bond funds are the one's that need to be truthful and are the one's spreading misinformation. The low fees claimed by bond funds are a ruse masking the hidden trading fees that fund managers grift from investors. The BIL ETF is a good example of how bond funds scam investors.

https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-bloomberg-1-3-month-t-bill-etf-bil

I'm thinking the damage to bond funds(intermediate) going from 0% to 4.5% in interest rate increases is likely over. I doubt we see another 4.5% increase in a year. I can't change my mind based on SGOTI saying my funds are scams.

 

[daylatedollarshort]

YTM has no meaning for bond funds that maintain an average duration. Yes the price has been adjusted for a 0.5% coupon note, but one year from maturity, a bond fund will sell that note and if the current yield for for a one year not is higher than 0.5 like it is today, it will sell the holding at a loss. Holding low coupon debt means that I can never pay out more that .5% for that holding and will realize a loss when it sells. This is a fact. This is why distribution payments have not budged through seven rate hikes in 2022. A good example is a short duration (1-3 months) ETF like BIL that had the ability to turn over it's portfolio 4 times in 2022 and yet only pays 1.33% in distribution yield but claims to have a YTM of 3.98%. Explain to all of us how that happens? By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not. Money market fund yields have slowly inched up to 4.26% but the BIL ETF has barely budged. People who promote bond funds are the one's that need to be truthful and are the one's spreading misinformation. The low fees claimed by bond funds are a ruse masking the hidden trading fees that fund managers grift from investors. The BIL ETF is a good example of how bond funds scam investors.

https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-bloomberg-1-3-month-t-bill-etf-bil

The performance stats support what you have posted. You can't pay your rent with the YTM number, only what you get from actual distributions. The chart on distributions from BND is here. One can look at the 1 month, 6 month and 1 year distribution numbers - https://seekingalpha.com/symbol/BND/dividends/yield

For those of you who disagree with Freedom56, then what are your alternate explanations for why the actual distribution yields remained so low throughout 2022, lower than money markets? If the NAVs were really reset to market rates when prices dropped, then shouldn't the dividend yields also be at market rates currently? You can disagree with his opinion that bond funds are scams, but the performance stats are simply matters of facts. How do you explain the dividends still being so low?

Freedm56 has posted, "By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not." This is also my understanding about BH theory. Is this statement incorrect? If so, why?

 

[VanWinkle]

The performance stats support what you have posted. You can't pay your rent with the YTM number, only what you get from actual distributions. The chart on distributions from BND is here. One can look at the 1 month, 6 month and 1 year distribution numbers - https://seekingalpha.com/symbol/BND/dividends/yield

For those of you who disagree with Freedom56, then what are your alternate explanations for why the actual distribution yields remained so low throughout 2022, lower than money markets? If the NAVs were really reset to market rates when prices dropped, then shouldn't the dividend yields also be at market rates currently? You can disagree with his opinion that bond funds are scams, but the performance stats are simply matters of facts. How do you explain the dividends still being so low?

Freedm56 has posted, "By all Boglehead theories this ETF should be paying close to the 3.98% YTM minus claimed expenses by now, but it has not." This is also my understanding about BH theory. Is this statement incorrect? If so, why?

It won't matter, you have your way of investing with the work of individual bonds. I am not selling my bond funds at a loss. What is there still to prove.
I would sell them and tax loss harvest, but they are in my IRA so no advantage to that.

 

[daylatedollarshort]

It won't matter, you have your way of investing with the work of individual bonds. I am not selling my bond funds at a loss. What is there still to prove.
I would sell them and tax loss harvest, but they are in my IRA so no advantage to that.

Freedom56 is dealing in facts. Posters have indicated he is unfairly slamming bond funds and should stop. If what he has said is factually incorrect, then why not post what facts / performance stats he has wrong? If he is correct, then why should he stop posting? He has opened my eyes about more issues in bond funds than I was previously aware of. If you don't want to answer the questions in my post that is fine, but I am not sure why you even replied to my post then.

 

[braumeister]

Since the discussion has wandered so far afield from the OP, it has certainly run its course.

Thanks for the interesting discussion.