Too early now but are intermediate term bond funds the way to go when Fed is cutting?

[Graybeard]

I really don't like having CDs or treasuries that are 2-5 years out in maturity and T bills and CDs have been a great option over the past year. When the Fed pauses and then starts to cut the FOMC rate each meeting, perhaps a year or 18 months from now, would buying an intermediate term bond fund be a good option since decreasing rates would mean nav appreciation and T bills would have much lower yields?

I know many here want longer term fixed income and if I was in my 50's or mid 60's I would too, but I like the ability for short turn over (no more than 1 year) or the flexibility to sell shares of a bond fund vs having a large sum of money tied up for years because I buy to hold to maturity. I have learned that bond funds are poorly managed and the yield they claim to have are erroneous. So I am not a fan of bond funds any longer but might they be a good option say if the FOMC rate goes from 4.75% or 5% or 5.25% down to say 2.5% or 3% assuming this will happen over the next 2 or so years?

The great rates are not over yet but it seems if T bills rates are not adjusting already, they will be sometime this year or next.

 

[pb4uski]

I really don't like having CDs or treasuries that are 2-5 years out in maturity and T bills and CDs have been a great option over the past year. When the Fed pauses and then starts to cut the FOMC rate each meeting, perhaps a year or 18 months from now, would buying an intermediate term bond fund be a good option since decreasing rates would mean nav appreciation and T bills would have much lower yields?



I know many here want longer term fixed income and if I was in my 50's or mid 60's I would too, but I like the ability for short turn over (no more than 1 year) or the flexibility to sell shares of a bond fund vs having a large sum of money tied up for years because I buy to hold to maturity. I have learned that bond funds are poorly managed and the yield they claim to have are erroneous. So I am not a fan of bond funds any longer but might they be a good option say if the FOMC rate goes from 4.75% or 5% or 5.25% down to say 2.5% or 3% assuming this will happen over the next 2 or so years?



The great rates are not over yet but it seems if T bills rates are not adjusting already, they will be sometime this year or next.

I think you need to refine what it is that you want. Vanguard's intermediate term bond fund is 7.2 years and most intermediate term bond funds have 3-10 year bonds.

So at the same time that you are considering investing in an intermediate term bond fund you are not keen on investing in 2-5 year CDs? It seems that you don't have a good idea of what you want.

Just because you intend to hold individual bonds until maturity doesn't mean that you have to hold them to maturity... you can change your mind and sell some or all of your bonds at any time.

If you have a bond ladder of 3-10 year bonds you would have your own intermediate term bond fund but you'll have more control than if you owned an intermediate term bond fund. If rates decline and the value of your bonds increases then you can sell them the same as you can sell an intermediate term bond fund.

 

[copyright1997reloaded]

I really don't like having CDs or treasuries that are 2-5 years out in maturity and T bills and CDs have been a great option over the past year. When the Fed pauses and then starts to cut the FOMC rate each meeting, perhaps a year or 18 months from now, would buying an intermediate term bond fund be a good option since decreasing rates would mean nav appreciation and T bills would have much lower yields?

I know many here want longer term fixed income and if I was in my 50's or mid 60's I would too, but I like the ability for short turn over (no more than 1 year) or the flexibility to sell shares of a bond fund vs having a large sum of money tied up for years because I buy to hold to maturity. I have learned that bond funds are poorly managed and the yield they claim to have are erroneous. So I am not a fan of bond funds any longer but might they be a good option say if the FOMC rate goes from 4.75% or 5% or 5.25% down to say 2.5% or 3% assuming this will happen over the next 2 or so years?

The great rates are not over yet but it seems if T bills rates are not adjusting already, they will be sometime this year or next.

There are fixed term bond funds out there. (I don't own any.)

This might be an approach to get diversification and "professional" management w/o inflow and outflow fund risks. There is a cost (of course) in that the fund will have a management fee.

 

[pb4uski]

Also referred to as target maturity bond funds. There are different flavors (munis, corporates, etc) and the ETF represents a proportional interest in a portfolio that matures in a stated year. You can easily ladder those to.

The portfolio matures over the course of the target year and the a terminal distribution is made in December.

I have owned some in the past.

 

[GravitySucks]

There are fixed term bond funds out there. (I don't own any.)



This might be an approach to get diversification and "professional" management w/o inflow and outflow fund risks. There is a cost (of course) in that the fund will have a management fee.

I have one target maturity date fund left in my ladder. This month I sold the Dec 2023 and Dec 2024 funds and moved the money to a treasury and CD. Same duration and better credit risk and almost doubled the yield.

The target date fund ladder wasn’t my best investment but not my worst. They’ve not looked like good investments for the last few years.

To the OP, why go Intermediate if you think rates are falling, why not long term?

 

[Graybeard]

Thanks.

I know I could sell treasuries or CDs, I would prefer to hold to maturity and that isn't so hard as they would be 1 year or less. Long term bond funds scares me, durations or 17 or 18 years can be dangerous to your fiscal health... just ask SVB! I'm not trying to match a bond fund duration to a need, just looking for a place to get some better return when treasuries and CDs are in the 2.X or low 3% range. The thing is you only get higher yields with higher risk and that is something I have learned is not something I want to engage in. I guess avoiding bond funds even in a decreasing rate environment is my better option.

 

[Freedom56]

We are now living in a time when savers can actually earn reasonable income from CDs. Imagine earning $54,000 for every million invested with zero risk. At $10 million invested in CDs, it would be $540,000 of income. The more capital you have, the more compelling the reason to stay conservative. Think of the peace of mind and certainty of your income stream completely under your control. No more market risk. No more selling securities to cover living expenses.

 

[Exchme]

Yes, obviously when interest rates decline, the mark-to-market feature of a bond fund will cause the NAV to go up, the reverse of what we saw in 2022.

For instance, I have one account that is 100% Vanguard Total Bond Market. It is up 7.8% since mid October (re-investing dividends, but no new money).

Since markets don't whisper any secrets to you about the future that they aren't also telling your neighbors, Wall Street, etc., there is never an "all clear" or "Beware" signal given to you that lets you get a jump on everyone else. So hopping around, hoping to outguess everyone usually costs you money.

 

[COcheesehead]

We are now living in a time when savers can actually earn reasonable income from CDs. Imagine earning $54,000 for every million invested with zero risk. At $10 million invested in CDs, it would be $540,000 of income. The more capital you have, the more compelling the reason to stay conservative. Think of the peace of mind and certainty of your income stream completely under your control. No more market risk. No more selling securities to cover living expenses.

I have over 75% of our assets in bonds and yes, there is a time when equities do not need to be a part or at least a big part of the equation. When fixed income can cover your lifestyle with a buffer, it is a nice place to be.
I keep some money in equities just to allow myself to feel some anxiety when I miss it.

 

[VanWinkle]

Another bond fund vs CDs and individual bonds. Bond funds are not poorly managed any more than an individual can poorly manage a bond ladder or CD ladder. The truth is that all of the fixed income investments are currently losing to inflation as is often the case. There is no magic solution to any of the difficulties in beating inflation without taking considerably more risk. I respect those that want to set up ladders and manage them. I also respect those that can weather the changes in bond fund NAVs due to a timeline when they may actually withdraw from the fund.

 

[COcheesehead]

Another bond fund vs CDs and individual bonds. Bond funds are not poorly managed any more than an individual can poorly manage a bond ladder or CD ladder. The truth is that all of the fixed income investments are currently losing to inflation as is often the case. There is no magic solution to any of the difficulties in beating inflation without taking considerably more risk. I respect those that want to set up ladders and manage them. I also respect those that can weather the changes in bond fund NAVs due to a timeline when they may actually withdraw from the fund.

An individual doesn’t have a directive to buy. A fund manager, however does. Big difference.

 

[VanWinkle]

An individual doesn’t have a directive to buy. A fund manager, however does. Big difference.

To keep buying is a good thing, I recently read a book with the title "Just keep buying". As the NAV lowers, to continue buying is a good thing for the mutual fund holder with a horizon longer than the duration of the bond fund.

 

[COcheesehead]

To keep buying is a good thing, I recently read a book with the title "Just keep buying". As the NAV lowers, to continue buying is a good thing for the mutual fund holder with a horizon longer than the duration of the bond fund.

My point was a fund manager has to keep buying based on the fund’s objective even when yields were negative. An individual isn’t likely to do that.

 

[VanWinkle]

My point was a fund manager has to keep buying based on the fund’s objective even when yields were negative. An individual isn’t likely to do that.

They were never negative in an intermediate total bond fund unless you were in Europe that I am aware of.

 

[COcheesehead]

They were never negative in an intermediate total bond fund unless you were in Europe that I am aware of.

.625% then. You get my point.

 

[pb4uski]

.625% then. You get my point.

I get your point. When rates were low the bond fund manager had to buy low yielding bonds, he had no choice, that was the mission. An individual like me had the flexibility to just sit in an online savings account or MM or whatever and wait patiently for the next credit union special and not put that money into play at low yields.

 

[Graybeard]

I have over 75% of our assets in bonds and yes, there is a time when equities do not need to be a part or at least a big part of the equation. When fixed income can cover your lifestyle with a buffer, it is a nice place to be.
I keep some money in equities just to allow myself to feel some anxiety when I miss it.

I have 50% of my assets in fixed income (T bills, CDs, VMFXX) and if I was 100% in fixed income I would certainly more than cover my current living expenses just from my pension and SS. The problem I have with that is you are not keeping up with inflation. Now if you have $10M or more maybe that really isn't a problem unless you are a big spender.

 

[VanWinkle]

I get your point. When rates were low the bond fund manager had to buy low yielding bonds, he had no choice, that was the mission. An individual like me had the flexibility to just sit in an online savings account or MM or whatever and wait patiently for the next credit union special and not put that money into play at low yields.

Low yielding bond funds were paying .5% higher than your money market or savings account at that time. Of course you must have known that rates were going to change before it even happened. I was not that informed to know exactly when to get out and then wait to get back in. Looking back now, it would have been ok to make the move, but then I would probably try to time the stock market after being so successful with the bond market. I'm better off to wait it out at this point.

 

[COcheesehead]

I have 50% of my assets in fixed income (T bills, CDs, VMFXX) and if I was 100% in fixed income I would certainly more than cover my current living expenses just from my pension and SS. The problem I have with that is you are not keeping up with inflation. Now if you have $10M or more maybe that really isn't a problem unless you are a big spender.

I overfund my ladders by about 30%. That is one of my inflation fighters. Earn more than you need.
As you age, you need to time to recover. Equities are not pulling their weight and may not for years. So there’s that. Time frame matters too. I retired in 2020. Equities are doing nothing to keep up with inflation. My ladders are throwing off over 5% - most of which is tax free.

 

[foxfirev5]

I overfund my ladders by about 30%. That is one of my inflation fighters. Earn more than you need.
As you age, you need to time to recover. Equities are not pulling their weight and may not for years. So there’s that. Time frame matters too. I retired in 2020. Equities are doing nothing to keep up with inflation. My ladders are throwing off over 5% - most of which is tax free.

FWIW, "overfunding" is not keeping up with inflation. Somewhat along the same lines as the personal rate of inflation. "If I substitute less items or buy less my rate of inflation is less". In either case the inflation is still there.

 

[COcheesehead]

FWIW, "overfunding" is not keeping up with inflation. Somewhat along the same lines as the personal rate of inflation. "If I substitute less items or buy less my rate of inflation is less". In either case the inflation is still there.

It’s not going to cure inflation. That’s not my point. It’s a way I can manage it. Having more money than you need is a pretty simple way to deal with rising costs.

 

[pb4uski]

Low yielding bond funds were paying .5% higher than your money market or savings account at that time. Of course you must have known that rates were going to change before it even happened. I was not that informed to know exactly when to get out and then wait to get back in. Looking back now, it would have been ok to make the move, but then I would probably try to time the stock market after being so successful with the bond market. I'm better off to wait it out at this point.

Out of curiosity, I went back to March 2018... 5 years ago. At the time about 1/2 of my fixed income allocation was in a PenFed 3% 5-year CD and the other half was in 4 different Bulletshare target maturity corporate bond ETFs maturing in 2019-2022 that based on the March 2018 income distributions yielded 2.45%. Combined, interest and dividends for the month divided by the beginning of the month balances were an annualized yield of 2.74%.

Meanwhile BND's March 2018 dividend yield (March distribution divided by 2/28/2018 NAV) was 2.74%.

As of 2/28/2018, the 5 and 10 year Treasury were yielding 2.65% and 2.87%, respectively.

Interesting coincidence, eh? Same yield, much lower interest rate risk (which was why I was out of VBLTX), more control

 

[foxfirev5]

It’s not going to cure inflation. That’s not my point. It’s a way I can manage it. Having more money than you need is a pretty simple way to deal with rising costs.

Obviously. Should go without saying.

 

[pb4uski]

I overfund my ladders by about 30%. That is one of my inflation fighters. Earn more than you need.
As you age, you need to time to recover. Equities are not pulling their weight and may not for years. So there’s that. Time frame matters too. I retired in 2020. Equities are doing nothing to keep up with inflation. My ladders are throwing off over 5% - most of which is tax free.

FWIW, "overfunding" is not keeping up with inflation. Somewhat along the same lines as the personal rate of inflation. "If I substitute less items or buy less my rate of inflation is less". In either case the inflation is still there.

Interestingly, only a very modest real return is needed to provide for inflation if one is using the 4% rule and a time horizon of 30 years (age 95 less age 65 retirement). You only need to have a real return of 0.63% to 1.22% in order to make inflation adjusted withdrawals for 30 years without running out of money. So if TIPs have real yields in that range then that would be a pretty bullet-proof way of funding retirement withdrawals and there is really no need for equities.

	Withdrawal	Balance		Cash flows
Inflation	3.00%
Nominal return		4.05%		4.05%
0		100.00		100.00
1	4.00	100.05		(4.00)
2	4.12	99.97		(4.12)
3	4.24	99.77		(4.24)
4	4.37	99.44		(4.37)
5	4.50	98.96		(4.50)
6	4.64	98.33		(4.64)
7	4.78	97.53		(4.78)
8	4.92	96.56		(4.92)
9	5.07	95.40		(5.07)
10	5.22	94.04		(5.22)
11	5.38	92.47		(5.38)
12	5.54	90.67		(5.54)
13	5.70	88.63		(5.70)
14	5.87	86.35		(5.87)
15	6.05	83.79		(6.05)
16	6.23	80.95		(6.23)
17	6.42	77.80		(6.42)
18	6.61	74.34		(6.61)
19	6.81	70.54		(6.81)
20	7.01	66.38		(7.01)
21	7.22	61.84		(7.22)
22	7.44	56.90		(7.44)
23	7.66	51.54		(7.66)
24	7.89	45.73		(7.89)
25	8.13	39.45		(8.13)
26	8.38	32.67		(8.38)
27	8.63	25.36		(8.63)
28	8.89	17.50		(8.89)
29	9.15	9.06		(9.15)
30	9.43	(0.00)		(9.43)

	inv return	real return
inflation	4.05%
10.00%	10.63%	0.63%
8.00%	8.75%	0.75%
6.00%	6.87%	0.87%
4.00%	4.99%	0.99%
2.00%	3.10%	1.10%
0.00%	1.22%	1.22%

 

[Chuckanut]

You only need to have a real return of 0.63% to 1.22% in order to make inflation adjusted withdrawals for 30 years without running out of money. So if TIPs have real yields in that range then that would be a pretty bullet-proof way of funding retirement withdrawals and there is really no need for equities.

I find it interesting that the current Ibond fixed rate is getting dangerously near that 0.63% bottom level mentioned above.