The Great Bond Party of 2019 Is Ending

[mickeyd]

Article says we were enjoying a party in 2019. Now we must accept lower yield or take more risk. Meanwhile, I just plod along using my tired 45/45/10 AA and sleeping quite well.

For income seekers willing to take on more risk, Mr. Pyle said, high-yield bonds are a reasonable way to generate more income, if you accept BlackRock’s outlook for moderate growth, without a recession, in the United States this year.
For example, the Vanguard High-Yield Corporate fund had a current yield of 4.2 percent in December, compared with 1.7 percent for the Vanguard Intermediate Treasury fund. BlackRock also recommends emerging-market bonds, which it says could do well at a time when the global economic outlook is solidifying. The TCW Emerging Markets Income fund has a 5 percent current yield.
But high yield is often called “junk,” because it comes with a risk. When stocks are falling, bonds that pay higher yields tend to experience sharp price declines that lead to negative total returns. During the last bear market, the Vanguard High-Yield Corporate fund lost 24 percent. TCW Emerging Markets Income lost 10 percent. Vanguard Intermediate Term Treasury delivered the ballast, gaining nearly 17 percent.

https://www.nytimes.com/2020/01/17/business/bond-market-investments.html




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[Markola]

Stick with your tired but balanced portfolio AA no matter what and in 20 years or so the party will come back to you, only everyone else will have the morning after headache. It turns out that “Not falling through the floor periodically” thanks to sufficient, boring bonds is just as important to asset growth over time as “Being the life of the party” by tilting to high yield junk or small stocks, etc.

 

[OldShooter]

I'm not much of a bond guy, but I was doing some research for a investment committee meeting and found a very nice page from William Bernstein. (Credit Risk) I especially like his three-dimensional graph though the data is not as up to date as I'd like.

My context is with a nonprofit portfolio where we hold about 100 x $10K positions in individual mostly BBB bonds and will hold all bonds to maturity. So we really don't care about ratings cuts or price declines. In the end we care only about defaults. But defaults are clustered, so five years without a default doesn't really let us predict no disasters in year six. The problem then becomes: How do we judge the manager?