The effect of rising rates on Bond Funds

[daylatedollarshort]

You have made multiple variations of this point and I agree with all of them and yes I fully understand the duration concept.

I was replying to a post that quoted one of my posts regarding investor A and B, not a post you made.

 

[Chuckanut]

Another interesting column by Jason Zweig in this weekend's WSJ.


https://www.wsj.com/articles/its-th...ews-11651849380?mod=Searchresults_pos1&page=1

The U.S. bond market has had positive returns, before inflation, in all but four years since 1976. Even in 1994, when the Federal Reserve raised interest rates six times for a total of 2.5 percentage points, bonds lost only 3% in the aggregate.

Almost never has the U.S. bond market lost as much money as in the first four months of 2022, according to Edward McQuarrie, an emeritus professor of business at Santa Clara University who studies asset returns over the centuries.
Long-term Treasury bonds lost more than 18% this year through April 30. That surpasses the previous record, a loss of 17% in the 12 months ending in March 1980, says Mr. McQuarrie. The broad bond market has performed worse so far in 2022, he says, than in any complete year since 1792 except one. That was all the way back in 1842, when a deep depression approached rock-bottom.

But....

It’s worth noting that, adjusted for inflation, at least nine past periods have been worse, says Bryan Taylor, chief economist at Global Financial Data, a research firm in San Juan Capistrano, Calif.

Yields on corporate bond indexes, she says, are brushing their highest levels in at least 11 years.
The recent rise in yields also means that shorter-term U.S. Treasury securities are likely to be more effective buffers against future declines in stocks.

Needless to say you have to read the entire article to get the full story.

 

[GTFan]

Yup, from that article:

Over the long run, the total return of bonds depends far more on their income than on changes in price. Since 1976, just over 90% of the average annual return of the U.S. bond market has come from interest and reinvesting it, according to Loomis, Sayles & Co., an investment manager in Boston.

If your recent losses make you feel like bailing out on bonds, remember why you own them. Bonds aren’t meant to make you rich; they keep you from becoming poor while paying you some income along the way.

“It’s important not to get too emotional about the recent returns we’ve seen,” says Ms. Wagandt. “There’s more income and more value now.”

Exactly. I'm not holding the US bond index for today's NAV, nor do I particularly care about this year's volatility. I'm not interested in market timing bonds, I want them to provide stready income that I reinvest and eventually WD over time, which is exactly what this article says when 90% of the value gained comes from that income.

For those that want to (try) to minmax, have at it. Doesn't mean that long-term holds are bad.

 

[Montecfo]

You have made multiple variations of this point and I agree with all of them and yes I fully understand the duration concept.

Yet a lot of folks seem to truly misunderstand durarion.

And are way too wedded to buy and hold. If all you have is a hammer, everything looks like a nail.

 

[daylatedollarshort]

Yet a lot of folks seem to truly misunderstand durarion.

And are way too wedded to buy and hold. If all you have is a hammer, everything looks like a nail.

The bond mutual fund companies, who make money from their fees and don't want to have to sell their bonds at big losses, want to convince people to hang on to their bond funds, which is why their articles and those of their surrogates, ignore mentioning alternatives with a very high probability of less risk and higher returns in the current rising rate environment.

 

[GTFan]

LOL, so anything that's written about holding funds is obviously a stooge? I get it.

Do you get that both sides can be right here, depending on your investment horizon and desired mix? It's not always about minmaxing your returns year-to-year.

 

[daylatedollarshort]

LOL, so anything that's written about holding funds is obviously a stooge? I get it.

Do you get that both sides can be right here, depending on your investment horizon and desired mix? It's not always about minmaxing your returns year-to-year.

I assume the OP posted the link to the Boglehead post in hopes of a lively discussion on the topic, not just to reinforce the same opinions of the author of the linked post. There have been a number of threads on this forum recently by posters who don't understand duration or why their bond funds have gone down, or what their alternative options might be. A number of them have changed their bond strategies based on these lively discussions. This is why we are getting so many recent posts on how to pick and buy individual bonds and Treasuries.

So if the buy and hold works for you, that's great, but some posters here reading the pros and cons of bond funds in the current environment and making different choices.

 

[lawman]

A number of them have changed their bond strategies based on these lively discussions. This is why we are getting so many recent posts on how to pick and buy individual bonds and Treasuries.

You can count me among them

 

[jazz4cash]

The bond mutual fund companies, who make money from their fees and don't want to have to sell their bonds at big losses, want to convince people to hang on to their bond funds, which is why their articles and those of their surrogates, ignore mentioning alternatives with a very high probability of less risk and higher returns in the current rising rate environment.

I’ll disagree. Since they’re making their money from fees, the losses go to the shareholders, not the fund companies. Who are the bond mutual fund companies? It seems likely they offer a variety of alternatives within the fund family. They may see some outflows but most folks seem to be moving their bond fund investment to money market type funds. I think the bond fund shareholders were surprised by the NAV behavior. The folks that really get hurt are the ones trying to hang on. It’s a game of chicken. I realized I preferred individual bonds over funds and so far so good except for not being diversified. I do jave a single state muni fund. The income is consistent even though the NAV has tanked so I’m OK with it.

 

[daylatedollarshort]

I’ll disagree. Since they’re making their money from fees, the losses go to the shareholders, not the fund companies. Who are the bond mutual fund companies? It seems likely they offer a variety of alternatives within the fund family. They may see some outflows but most folks seem to be moving their bond fund investment to money market type funds.

Are they going to make more admin and expense fees from a $10B fund or a $5B fund? Do they want to have to sell off bonds in a declining market? They don't make more money by telling people to move to Treasuries. Just things to keep in mind when you read articles from the funds, surrogates or publications dependent on their advertising dollars. They aren't neutral third parties writing objective articles on the pros and cons of funds when they have a vested interest in making more money by keeping people invested in their funds.

The fund articles usually focus on going positive eventually, and most people don't disagree with that. Interest rates will level off at some point and bond prices will stop declining. The question to ask for many of us, though apparently not all, is are there currently alternatives with less risk and higher returns until the Fed's planned rate increases level off.

 

[Montecfo]

The time to change strategy was Jan 2021 for me.

I've been talking about duration ever since.

It's not so much fund or no fund, it's duration in my view, though holding duration in a find is probably a worse plan because of redemptions. And the buy and hold will not recover the ground lost to duration (as a few folks have stated here using different words).