Wait for bond funds to recover or sell at a loss and buy CDs

[Phroig]

Not even close.

Of course the yield’s close - it’s got to be. We’re talking index funds with expense ratios of 3 basis points. If you take the average yield on a pool of treasuries and deduct 0.03%, there’s no reason why you would get a number that’s not even close. Distribution rates or past returns could certainly be different.

 

[COcheesehead]

Of course the yield’s close - it’s got to be. We’re talking index funds with expense ratios of 3 basis points. If you take the average yield on a pool of treasuries and deduct 0.03%, there’s no reason why you would get a number that’s not even close. Distribution rates or past returns could certainly be different.

I posted current yields in my post - not even close. Keep in mind the OPs question - sell or not - to achieve current yields.

 

[Phroig]

Wait for bond funds to recover or sell at a loss and buy CD's

I posted current yields in my post - not even close. Keep in mind the OPs question - sell or not - to achieve current yields.

Yes! Current yields on index funds of treasuries are (must be) close to current yields on treasuries.

 

[COcheesehead]

Yes! Current yields on index funds of treasuries are (must be) close to current yields on treasuries.

The yields on the funds owned by the OP are behind current rates, by a lot. You are misunderstanding.

 

[Phroig]

Nope. FUMBX, e.g., distributes about 1.5%, but that is just because the fund presumably holds discounted bonds that were purchased when coupons were lower. However, 1.5% is not the current yield on FUMBX.
I appreciate that your point of view is different, so I’ll stop now. Apologies to OP for the derailment.

 

[COcheesehead]

We have a failure to communicate.

 

[tominboise]

So, digging some more, I found the 30 day yields for the funds:

FIPDX = 5.54%
FUMBX = 4.66%
FUAMX = 4.05%
VCSH = 5.44%
VCIT = 5.37%

So in the ballpark with SPAXX and others.

 

[COcheesehead]

So, digging some more, I found the 30 day yields for the funds:

FIPDX = 5.54%
FUMBX = 4.66%
FUAMX = 4.05%
VCSH = 5.44%
VCIT = 5.37%

So in the ballpark with SPAXX and others.

SEC yields or current distribution yields? They are different.

 

[tominboise]

SEC yields or current distribution yields? They are different.

These are SEC yields.

 

[Montecfo]

I hope what this reveals is you can't decide what to do based on trailing 12 month yields alone or maybe not at all.

In fact, it starts with thess questions, in my view:

Why do I own this fund?

Depending on that answer, is the reason still valid?

If so, is there a better way to achieve that same goal, be it via a different fund, ETF, individual bonds, etc?

That I think is the analysis.

Fund losses are in the past and occurred largely due to a historic rise in interest rates which affected all bonds. At this point that is not particularly relevant.

 

[COcheesehead]

These are SEC yields.

Look at current distribution yields. It’s a better reflection of reality, than compare that to today’s individual bond yields.

 

[tominboise]

I hope what this reveals is you can't decide what to do based on trailing 12 month yields alone or maybe not at all.

In fact, it starts with thess questions, in my view:

Why do I own this fund?

Depending on that answer, is the reason still valid?

If so, is there a better way to achieve that same goal, be it via a different fund, ETF, individual bonds, etc?

That I think is the analysis.

Fund losses are in the past and occurred largely due to a historic rise in interest rates which affected all bonds. At this point that is not particularly relevant.

Good questions and food for thought. The bond funds were purchased in 2019 as part of our retirement AA in our IRA's. They were & are the safe harbor component. I have about 7 years before I need to access these IRAs, hopefully. Is a bond fund still considered as a safe harbor, when compared to other forms of assets like CD's and Treasuries?

 

[COcheesehead]

Is a bond fund still considered as a safe harbor, when compared to other forms of assets like CD's and Treasuries?

Individual bonds short of default will return to a par value, the original cost so they are excellent for wealth preservation while paying you interest along the way.
Most bond funds except for target date funds, have no par value and have many factors that can erode the original investment or NAV.

 

[Montecfo]

Good questions and food for thought. The bond funds were purchased in 2019 as part of our retirement AA in our IRA's. They were & are the safe harbor component. I have about 7 years before I need to access these IRAs, hopefully. Is a bond fund still considered as a safe harbor, when compared to other forms of assets like CD's and Treasuries?

Never heard the words safe harbor in that context.

Funds are usually safer in terms of diversification than individual bonds (excluding treasuries). But still subject to interest rate risk, etc.

 

[mickeyd]

In my IRA, I am sitting on 5 bond funds which of course are in a loss position.

Why did you invest in these funds? What purpose did they serve in your AA?

 

[mikes425]

Wow, can I relate to this question. I've been large in bond funds since before the 2022 worst year in bond history and that's with an hourly FA's 'blessing' and design... The key move was shortening duration to 100% ST bond funds.

It does have to do with context. If there's a long term horizon the rule of bonds is you will get your principal back so long as you don't sell.

Among top 10 positions in my "moderate" PF at age 65; VCSH, SCHO SHY, SCHP, and some foreign debt and domestic Floating Rate ETFs/Funds. and recently, BILS(1-3 month duration bond) added in the last 6 months.

All of course have sustained big NAV losses. However they're also generating rising dividend income with higher interest rates.

I talk to my FA 'as needed' and believe me I've raised the issue of why to stay in these, OFTEN, to which he's replied they fulfill their respective roles in my diversified AA and given my risk tolerance, and age. That said, they most definitely haven't felt at all like 'ballast' in the last couple of years...or acted like bond funds are 'supposed' to act - they've been my biggest losers, equally or MORE than equity funds. STILL, my FA has basically said, Hold, and that the difference in say, a percentage point or two by wholesale converting them all into say, a 5% MM isn't significant enough to bother with.

Frustrating? Hell yeah. I've second guessed this almost weekly. And then there's Preferreds/PFFD. Sucking as well. I have to simply try to ignore the near term i guess. What's my choice? For bond funds? The damage is done. BUT, does anybody see another "worst year ever" for bonds? I don't, but if somebody here has better insight let me know. I'm as curious as the OP. But at a certain point, I have to say, okay, I'm pulling a dividend income that's sufficient - estimated around 87k for 2023, with a 50/50 AA in about a 2.65m PF give or take 100k in a given month... and if I mess with these bond funds, that's gonna dent that. And is it worth messing with now?

Anyway to my point, the bond funds are there for a reason and I guess the message would be that it's sorta wasted effort trying to tweak performance "at the margins" for the relatively marginal impact that might have in the 'long run.'

 

[tominboise]

They are the counter to stock mutual funds in my AA.

 

[maestro]

So I got into 'bonds' thinking I had to balance appropriately at my retirement in 2019. So here I am sitting on a major loss in brokerage, IRA, and Roth account 'bond funds', because I followed the advice that said I should be 25 to 35 percent in bonds at my age. Well here I am holding the proverbial BAG. Call me an idiot, but I'm not happy that I should now somehow rationalize a major loss in my portfolio? I don't need the money for another 7-10 years, so really, do the experts that have endured this 'trend' and season over the last 10-20 years say, "Yes, you should bail now." ? Thanks for your wisdom.

 

[COcheesehead]

So I got into 'bonds' thinking I had to balance appropriately at my retirement in 2019. So here I am sitting on a major loss in brokerage, IRA, and Roth account 'bond funds', because I followed the advice that said I should be 25 to 35 percent in bonds at my age. Well here I am holding the proverbial BAG. Call me an idiot, but I'm not happy that I should now somehow rationalize a major loss in my portfolio? I don't need the money for another 7-10 years, so really, do the experts that have endured this 'trend' and season over the last 10-20 years say, "Yes, you should bail now." ? Thanks for your wisdom.

Funds or individual bonds? There is a difference.

 

[maestro]

Funds or individual bonds? There is a difference.

Yes, as I learned. Unfortunately, got into BND and FXNAX after retirement. But even getting into MUNI fund MUB to cut taxes in brokerage, has been nothing but pain. The mantra from here on in from 'the wise' should be AVOID BOND FUNDS.

 

[Montecfo]

Yes, as I learned. Unfortunately, got into BND and FXNAX after retirement. But even getting into MUNI fund MUB to cut taxes in brokerage, has been nothing but pain. The mantra from here on in from 'the wise' should be AVOID BOND FUNDS.

Perhaps that has been the mantra but it is false. Duration killed bonds and bond funds alike.

Duration was the real villain. Which is why I repositioned in 2020 and 2021 to reduce duration dramatically.

Bonds and bond funds are both tools with plusses and minuses. Whether a wrench is better than a screwdriver depends on the task. A wrench makes a poor screwdriver and vice versa.

 

[pb4uski]

Perhaps that has been the mantra but it is false....

I don't think it is false. Let's compare a bond fund with a rolling bond ladder of similar credit quality and average weighted maturity. I would agree that total return would be the same on a mark to market basis. We would also agree that any mark to market difference will decay to nothing if a bond in the portfolio is held to maturity.

But if I need cash flow, with an individual bonds portfolio I can just use an upcoming maturity which has recovered to par value but with a bond fund I am forced to redeem for cash at the weighted average market value or NAV which is lower than par value.

I prefer the added control of individual bonds. Besides, in many cases funds don't hold bonds to maturity and crystalize losses in the NAV by trading.

 

[Montecfo]

I don't think it is false. Let's compare a bond fund with a rolling bond ladder of similar credit quality and average weighted maturity. I would agree that total return would be the same on a mark to market basis. We would also agree that any mark to market difference will decay to nothing if a bond in the portfolio is held to maturity.

But if I need cash flow, with an individual bonds portfolio I can just use an upcoming maturity which has recovered to par value but with a bond fund I am forced to redeem for cash at the weighted average market value or NAV which is lower than par value.

I prefer the added control of individual bonds. Besides, in many cases funds don't hold bonds to maturity and crystalize losses in the NAV by trading.

I don't disagree with what you said. You prefer the screwdriver, which is fine.

But duration was the villain. Bond funds the whipping boy.

I use both of these tools without regret.

 

[all4j]

I don't need the money for another 7-10 years, so really, do the experts that have endured this 'trend' and season over the last 10-20 years say, "Yes, you should bail now." ?

Well, I don't qualify as an expert, but will comment anyway...

Part of the answer to your question is dependent upon the duration of your funds. Broadly speaking, if you reinvest distributions & hold for length of duration, your return would approximate the yield. So, in your case, you'd want funds with duration no more than 7 years. But that ignores other advantages and disadvantages during that period. Also ignores the 'sleep at night' component driven by monitoring nav in the meantime

Looking back over the last 10-20 years is the wrong thing to do in a way. That environment is very different from going forward. What worked then may likely not work now. Much can be focused on central bank intervention. Not to say whether right or wrong, but it was/is reality. The fed said they were in effect going to drive interest rates down to zero. Now, they have had a series of rate increases at fed funds level & also changed their buying of bonds (affecting the demand for bonds at other durations).

It is instructive to look at the yield curve & note where you are investing & how yield curve has looked historically. Todays yield curve will tell you more about your future returns than what worked 5 years ago. The yield curve is inverted now & sharply so. Consider change since June 1. The 6 month treasury has gone up 0.11%, while the 10 year has gone down 0.60%.

I'm of the opinion the yield curve will revert back to a more normal shape as the market shapes it more than the central bank. Does that mean the low end will fall or the higher end rise? IDK. But clearly where you are on the yield curve is more important than whether you are in funds or holding individual bonds & creating your own fund of sorts

 

[Markola]

Wait for bond funds to recover or sell at a loss and buy CD's

Question to the group: The OP said he doesn’t need the money for 6-7 years. Assuming that’s roughly the duration of these bond funds collectively, might the bond funds be attractive in 6-7 years because they include today’s higher interest issues, and the past low interest ones will have cycled out, in which case he might be glad he did nothing now?