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

[brewer12345]

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.

Just off the top of my head, I don't know GE/GE Capital has made it to junk yet, but their bonds have taken the chute rather than the ladder when it comes to ratings.

 

[COcheesehead]

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?

Sorry I didn’t take it as negative. I just didn’t want to get into the weeds of other quality grades. I know how these threads can go and some interject but, but, but, so I kept at a high level.

Not sure what happened prior to 1981. I know that project specific bonds have more risk then general obligation GO bonds.

 

[COcheesehead]

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?

If you hold the bond to maturity, it doesn’t matter if it gets downgraded. As long as it does not default you get paid par at maturity.

The same is not true of having a bond fund. There is no par and no maturity date.

 

[JP.mpls]

Tominboise,
I'm in the same boat as you. I want my bond mutual funds to be the conservative stable part of my allocation, but they don't act like that.

My amateurish vision of this problem: (hopefully someone will set me straight or confirm this.)
I was told the reason for observing losses in bond mutual funds is:
- A bond mutual fund is a large group of bonds owned by many people.
- If interest rates go up, and a bunch of fund owners decide to sell off their bond mutual funds, it forces the people running that mutual fund to sell the bonds off at a loss, instead of letting them mature.

I think the answer is to buy actual individual bonds, and just hold them to maturity. Unfortunately I don't know how to go about doing that.

Take care, JP

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]

Tominboise,
I'm in the same boat as you. I want my bond mutual funds to be the conservative stable part of my allocation, but they don't act like that.

My amateurish vision of this problem: (hopefully someone will set me straight or confirm this.)
I was told the reason for observing losses in bond mutual funds is:
- A bond mutual fund is a large group of bonds owned by many people.
- If interest rates go up, and a bunch of fund owners decide to sell off their bond mutual funds, it forces the people running that mutual fund to sell the bonds off at a loss, instead of letting them mature.

I think the answer is to buy actual individual bonds, and just hold them to maturity. Unfortunately I don't know how to go about doing that.

Take care, JP

Even worse...let's say interest rates do not go up....but a lot of people sell their holdings in their bond fund (e.g. to "buy the dip" or "to have more cash at the bank" or "to buy some food" or "to buy guns and ammo" or ...). The bond fund MUST sell those bonds to make up for redemption. However, since the market is in free fall: A lot of the folks (institutions) who might have bid for the bond are no longer providing a bid, or people are widening their spread (what they will bid to buy vs what they ask to sell) due to the increased risk and volatility.

So even if the underlying companies don't have increased risk of default (which unfortunately they do), the bonds go down due to the increased risk spread.

It is just the way it is in frantic times.

The best thing that could happen is that the market settles down. No down crazy, no up crazy. Time is needed for proper analysis and price discovery, and things have been happening so fast that it is impossible to keep up.

One more thought - the virus is now rampaging through lower New York and Long Island. This is the very same area where a lot of the traders (both equity and bonds) live. So on top of the financial craziness they are also living through and fearful of what will happen to them personally. This too makes the market less efficient and prone to wild swings. Will a person, given the craziness, take on more risk? What are the risk departments doing?

ETA: I'm not saying there aren't possibly good buys here - in reality I have no idea, and it is times of craziness where you might find the really good buys.

 

[COcheesehead]

Tominboise,
I'm in the same boat as you. I want my bond mutual funds to be the conservative stable part of my allocation, but they don't act like that.

My amateurish vision of this problem: (hopefully someone will set me straight or confirm this.)
I was told the reason for observing losses in bond mutual funds is:
- A bond mutual fund is a large group of bonds owned by many people.
- If interest rates go up, and a bunch of fund owners decide to sell off their bond mutual funds, it forces the people running that mutual fund to sell the bonds off at a loss, instead of letting them mature.

I think the answer is to buy actual individual bonds, and just hold them to maturity. Unfortunately I don't know how to go about doing that.

Take care, JP

Here is a good place to start. https://www.fidelity.com/fixed-income-bonds/individual-bonds/overview

Fidelity has great tools for buying and managing a bond ladder. Others may as well, I am just not familiar with how the other brokers do it.

Fidelity will also, at no charge, build a ladder for you.

 

[OldShooter]

... I think the answer is to buy actual individual bonds, and just hold them to maturity. Unfortunately I don't know how to go about doing that. ...

Well, at Schwab it is very easy to buy individual issues. The guys on the bond desk (not commissioned) are very helpful in discussing and explaining. You can also buy on the web site but I like talking to a person. IIRC there is a small fee for meat-based ordering but typically they waive it for me. I ran a brokercheck on one of the guys I was talking to and he had 17 years in the business. They are not clerks, for sure. Probably Fido has similar support. Other houses I don't know.

The hard part is dealing with diversification. With govvies it is not an issue because you don't have to worry about defaults. With munis and corporates I'd guess you would have to have fifty issues or more, chosen to avoid concentrations in any particular sector, to be well diversified. Contrary to popular opinion, I do think that the ratings mean something but any purchase, stock, bond, or fund should be researched carefully. I think it would be hard for any individual investor to really be diversified, so extra care in selecting bonds is needed.

We buy only govvies and brokered CDs. Others with broader experience will probably jump in here.

 

[enjoyinglife102]

I continue to not know when or in what direction the economy, stock or bond markets will move. Therefore my ignorance keeps me predominantly in Wellesley Income heeding Jack Bogle's advice that the more you move your money around the less your returns are likely to be.

 

[Truckinalong]

Clearly I subscribe to no market timing like most here. That said as I look at my muni fund currently down 8.9% and probably 11% tomorrow the way this is going can't help but think to lock in loss at least for tax purposes.

I have no crystal ball and can't see Muni's suddenly rising and can just buy it back at same level or lower in a month or more. Meantime lock in $3,000 a year in loss carryforward for many years to come.

 

[bobandsherry]

Clearly I subscribe to no market timing like most here. That said as I look at my muni fund currently down 8.9% and probably 11% tomorrow the way this is going can't help but think to lock in loss at least for tax purposes.

I have no crystal ball and can't see Muni's suddenly rising and can just buy it back at same level or lower in a month or more. Meantime lock in $3,000 a year in loss carryforward for many years to come.

Make lemonade out of all the lemons

 

[statsman]

Alternatives to bond funds? Sell off the funds for cash, make a pile, and set it on fire. You might still come out ahead.

I am not in a positive mood this morning. Between our politicians, the FED, and the younger crowd ignoring COVID-19, we are destined to collapse even further, by a lot, and soon.

 

[audreyh1]

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

Sorry, need a little levity.

Yeah, excuse the phonetic? spelling. Google actually had it spelled that way.

 

[copyright1997reloaded]

Even worse...let's say interest rates do not go up....but a lot of people sell their holdings in their bond fund (e.g. to "buy the dip" or "to have more cash at the bank" or "to buy some food" or "to buy guns and ammo" or ...). The bond fund MUST sell those bonds to make up for redemption. However, since the market is in free fall: A lot of the folks (institutions) who might have bid for the bond are no longer providing a bid, or people are widening their spread (what they will bid to buy vs what they ask to sell) due to the increased risk and volatility.

So even if the underlying companies don't have increased risk of default (which unfortunately they do), the bonds go down due to the increased risk spread.

It is just the way it is in frantic times.

The best thing that could happen is that the market settles down. No down crazy, no up crazy. Time is needed for proper analysis and price discovery, and things have been happening so fast that it is impossible to keep up.

One more thought - the virus is now rampaging through lower New York and Long Island. This is the very same area where a lot of the traders (both equity and bonds) live. So on top of the financial craziness they are also living through and fearful of what will happen to them personally. This too makes the market less efficient and prone to wild swings. Will a person, given the craziness, take on more risk? What are the risk departments doing?

ETA: I'm not saying there aren't possibly good buys here - in reality I have no idea, and it is times of craziness where you might find the really good buys.

Quoting my own post. This morning the Fed announced new no-limit Qualitative Easing (QE) which includes the ability to purchase corporate bonds. (This power is not native to the Fed, the Treasury had to approve this.) They also now can buy Agency Commercial Mortgage Backed Securities (MBS) in unlimited size. (For example - hotel properties, malls, etc.)

Here's the announcement: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

So it looks like we will have some bidders (us, via the Fed) for bonds.

But, I will leave this with one thought - when money is unlimited, what is it worth?

 

[audreyh1]

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.

I was simply responding to the comments that AAA bonds 0 defaults since 1981 which omits the important information that AAA bonds can still be downgraded to something lower that does have a higher chance of default.

 

[Montecfo]

CDs

The CDs many of us were buying last year have played out well. Especially add-on CDs.

Of course now cash is the most coveted asset class.

 

[jazz4cash]

If you hold the bond to maturity, it doesn’t matter if it gets downgraded. As long as it does not default you get paid par at maturity.



The same is not true of having a bond fund. There is no par and no maturity date.

It matters to me because if the bond gets downgraded I don’t get compensated for the additional risk represented by the downgrade unless I sell and repurchase the bond at the lower price. If I had wanted riskier bonds I would have chosen them in the first place.
Or am I missing something?

 

[Rianne]

+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".

We are 20% I bonds, EE bonds and CD's, with 2 yrs cash set aside (not considered part of portfolio). That's where we've been for the last 5 years. If we can weather this storm, hopefully the VG index fund portfolio will come back.
Still relying on SS and pension to keep level of spending we hoped for.

 

[jazz4cash]

The CDs many of us were buying last year have played out well. Especially add-on CDs.



Of course now cash is the most coveted asset class.

Those add-on and also no-penalty CDs are still available at somewhat lower rates. I don’t expect they will be around much longer.
I started using CDs in lieu of bonds many years ago and it feels great now but there were many periods when the bonds were valued higher but you can only realize that value if you sell. As long as your bonds dampen equity volatility I’d say stay the course and start planning for the next cycle.

 

[OldShooter]

It matters to me because if the bond gets downgraded I don’t get compensated for the additional risk represented by the downgrade unless I sell and repurchase the bond at the lower price. If I had wanted riskier bonds I would have chosen them in the first place.
Or am I missing something?

Yes. You're missing something. If you think about these ideas IMO you will conclude that they are a little bit crazy.

When you bought this theoretical bond, you made a risk/reward decision, accepting all future risks including downgrades, defaults, acts of god, etc. There is no one who "owes" you when a negative event occurs. Turn the coin over, would you expect to be writing a check to someone if a positive event occurred? I don't think so.

Re buy and sell, that is certainly feasible. You will sell at the current bid price and buy at the current asked price. So you will go backwards to the extent of the spread plus to the extent of any transaction costs you may have. Do you really want to do that? Again, I don't think so.

 

[jazz4cash]

I never meant to imply anyone “owes” me anything extraordinary. Simple fact: my coupon no longer reflects the risk I am taking because of a downgrade. That matters to me.

 

[brewer12345]

When you bought this theoretical bond, you made a risk/reward decision, accepting all future risks including downgrades, defaults, acts of god, etc.

The hell I did! I buy a bond and I don't like the way the credit profile is going, I hit the bid. It ain't rocket science.

 

[OldShooter]

The hell I did!

With respect, sir, you did. When you buy a security, you are buying 100% of that security's future right up until the day you sell it. You might study the issue thoroughly and determine that a downgrade is not a risk or you might naively assume the same. But regardless of the process, you have decided that the security is of more value to you than the money you will spend to buy it. IOW, the cost/benefit evaluation is favorable to buying. An economist would say that you are getting "acquisition utility" from the transaction.

I buy a bond and I don't like the way the credit profile is going, I hit the bid.

We always have that option. Almost always anyway. If you sell you are simply saying that the cost/benefit evaluation, as you see it now, is unfavorable to holding the security. IOW you would rather have the cash. Again, an economist would say that you are getting "acquisition utility" from the transaction.

For every transaction there is exactly one optimist and exactly one pessimist.

It ain't rocket science.

True enough; I used to have rocket scientists at JPL and NASA as spacecraft electronics customers, so I have some familiarity with the subject. In fact one of the interesting things to me in investing is the fact the degree to which investors ignore science -- the analytical and statistical facts that pertain.