Long term bond fund question

[tominboise]

I have some $$ in VBLAX and have for years. It's about 10% of our after tax portfolio. It is now going negative ( I am now slightly in a capital loss position - $400). I am thinking of selling about half of the holding, to fund our expenses for the rest of the year. Is this a good idea, as opposed to holding it and selling something that is in a positive position?

If I sell, the $$ will sit in the Vanguard money market fund for the rest of the year, thus missing any dividend payments from the bond fund.

Our total AA (after tax, TIRA and Roth) is 60/40.

 

[SecondCor521]

It's good in the narrow and short term sense that (a) you need the money, and (b) it's at a lower tax cost than realizing CGs.

But I would look at the larger picture.

Cash flow: Are there other places to get the cash flow you need that are better? Get a job? Take a distribution from a retirement account? Sell something else? Reverse mortgage? Spend less?

Taxes: Can you use up the capital loss this year? Would you rather realize more income this year than less? Could those capital gains be in the 0% federal capital gains bracket? What are the AGI impacts on the rest of your tax situation (Idaho state income taxes, ACA subsidies, IRMAA, SS taxability, etc.)?

AA: Does your IPS call for less exposure to that kind of fund? Would you consider reallocating some funds to VBLAX in a retirement account to restore your AA? Is your AA appropriate for your overall situation now?

I'm suggesting the above questions as the kinds of things I would ask myself in your shoes - none of them are really intended as actual suggestions for you.

 

[njhowie]

AA: Does your IPS call for less exposure to that kind of fund? Would you consider reallocating some funds to VBLAX in a retirement account to restore your AA? Is your AA appropriate for your overall situation now?

Bingo!

Once again, folks freaking out because their bonds aren't going straight up any longer. "It's the ballast", "I'm comfortable with my AA"...3 months later "I'm thinking of selling my bonds".

 

[daylatedollarshort]

Most bond funds are going to lose money as long as interest rates are going up. Bond funds aren't stocks where you might lose out on the big jumps if you sell. In order to make a lot of money on bond funds these days rates would have to go negative. TIPS will likely go all positive before the year is out and then return inflation + 0 - 2%.

 

[SecondCor521]

Bingo!

Once again, folks freaking out because their bonds aren't going straight up any longer. "It's the ballast", "I'm comfortable with my AA"...3 months later "I'm thinking of selling my bonds".

It could also be loss aversion. Either (a) "I don't want to sell stocks when they're down 10% YTD", or (b) "I don't want to sell and create a tax liability which will make more of my money go away." Or both.

My bonds haven't been going straight up for a long while now.

 

[Montecfo]

Seems rational. Stocks have declined more so selling bonds at low/no cost probably does not upset your AA.

Duration remains toxic and this is unlikely to change until end of rate rise cycle is in view
Accordingly, new debt investments should be in low or no duration securities.

 

[tominboise]

I am not really freaking out that the bonds aren't going straight up - they haven't for some time. I've had bond funds as part of my AA since 1990. But if the prospects are dim for the long term bond fund to recover, I may want to sell some of them now, since we will need the money at some point this year and it will allow me to do that without any LTCG tax liability. The small loss would let me do a bit more Roth conversion later this year, perhaps.

 

[Graybeard]

I hold the Vanguard Intermediate Term Tax Exempt Bond Fund in my taxable account. I started to put money into it 18 months ago when my Ally CDs were maturing and offered low rates compared to the bond fund which had a dividend about 2.6% at the time. I was putting extra money into it every month. I stopped that several months ago.

Every single purchase I made plus all the reinvested dividends are under water and have a nav that is going down each month and not 1 single purchase over the 18 months is positive. I liked this fund as it was tax exempt (cap gains are taxable) despite being in the 12 and 15% brackets over that time.

It is pretty disheartening to see the value of the fund drop $2k+ every month. It is basically cash that I put there vs an Ally online saving account at 50 bp or a CD at 55 bp but those wouldn't lose value like this but then there is loss to inflation which is also hitting the bond fund as it decreases. I wanted to get my AA more conservative from 55/45 to 40/60 but bond funds are a losing proposition forcing you to hold highly volatile equities at a higher AA than I want.

To add insult to injury, I hold the Vanguard Ultra Short Term Bond Fund in my rollover IRA and it loses $500- $600 a month also. I hold the Short Term Investment Grade Bond Fund in my rollover IRA and it is losing $2k+ a month also.

I am pretty frustrated with this, holding bond funds is going broke slowly. I fully understand duration and that bond funds are for ballast not making big gains but when your equity funds are tanking and your fixed income funds are going down thousands a month and this is the 1st year I have to take an RMD, well I'm pulling money from a loser no matter what fund I select in the rollover IRA.

To the OP, long term bond funds will really take a hit in a rising interest rate environment due to their high duration, personally I would not be in those.

 

[Out-to-Lunch]

I am not really freaking out that the bonds aren't going straight up - they haven't for some time. I've had bond funds as part of my AA since 1990. But if the prospects are dim for the long term bond fund to recover, I may want to sell some of them now, since we will need the money at some point this year and it will allow me to do that without any LTCG tax liability. The small loss would let me do a bit more Roth conversion later this year, perhaps.

I think a good question to ask is: What do you envision is the role of long-term bonds in your portfolio? Did you buy the bonds to match some far-in-the-future liability? I personally don't think that long-term bonds belong in an individual's portfolio, because an individual rarely has liabilities that match that time scale.

HOWEVER, another possible role for long-term bonds is the (historical) tendency of long-term bonds to be anticorrelated with stocks. Is this why you purchased that bond fund?

So, bottom line, I think you should evaluate what role that fund is meant to play in your portfolio, and either keep it or sell it on that basis, not based on what you think will happen to the returns of that fund in the near term.

 

[Katoslake]

I hold the Vanguard Intermediate Term Tax Exempt Bond Fund in my taxable account. I started to put money into it 18 months ago when my Ally CDs were maturing and offered low rates compared to the bond fund which had a dividend about 2.6% at the time. I was putting extra money into it every month. I stopped that several months ago.

Every single purchase I made plus all the reinvested dividends are under water and have a nav that is going down each month and not 1 single purchase over the 18 months is positive. I liked this fund as it was tax exempt (cap gains are taxable) despite being in the 12 and 15% brackets over that time.

It is pretty disheartening to see the value of the fund drop $2k+ every month. It is basically cash that I put there vs an Ally online saving account at 50 bp or a CD at 55 bp but those wouldn't lose value like this but then there is loss to inflation which is also hitting the bond fund as it decreases. I wanted to get my AA more conservative from 55/45 to 40/60 but bond funds are a losing proposition forcing you to hold highly volatile equities at a higher AA than I want.

To add insult to injury, I hold the Vanguard Ultra Short Term Bond Fund in my rollover IRA and it loses $500- $600 a month also. I hold the Short Term Investment Grade Bond Fund in my rollover IRA and it is losing $2k+ a month also.

I am pretty frustrated with this, holding bond funds is going broke slowly. I fully understand duration and that bond funds are for ballast not making big gains but when your equity funds are tanking and your fixed income funds are going down thousands a month and this is the 1st year I have to take an RMD, well I'm pulling money from a loser no matter what fund I select in the rollover IRA.

To the OP, long term bond funds will really take a hit in a rising interest rate environment due to their high duration, personally I would not be in those.

I’m in the same situation. Haven’t taken any distributions for 14 months and am down over 7% in Fidelity managed bond portfolio. I must be dense, but why is a losing bond portfolio better than cash ?

 

[daylatedollarshort]

These days we have a TIPS ladder, stable value, CDs and cash for fixed income. I've been buying TIPS with 2 years or less to maturity on the secondary market when I see good deals. A negative -2.5% yield with the current inflation factor will likely have a higher total return than most other choices out there, at least for purchases this month. The ladder, excluding the current 2024 maturity purchases, is returning 7.9 - over 9% right now.

 

[Graybeard]

I’m in the same situation. Haven’t taken any distributions for 14 months and am down over 7% in Fidelity managed bond portfolio. I must be dense, but why is a losing bond portfolio better than cash ?

I'm not sure it is and I am not sure which is worse!

Both are losing to inflation. The bond fund typically will typically have a higher yield per month than an online saving account at 50 bp or a CD at 60 or 65 bp but it's nav is dropping pennies a day, by month end that adds up on thousands of shares.

I have read if you don't sell any shares and reinvest all the dividends from a bond fund during increasing rate period you will break even at the time of the duration. So after 2.5 or 3 years you break even while that money sat there making nothing, that's something to look forward to!