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

[VanWinkle]

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.

Thank you for being the voice of reason on this subject.

VW

 

[VanWinkle]

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?

I agree!!

 

[COcheesehead]

It’s a few features in funds vs individual bonds that make the difference.
With a ladder I have no redemption drag, no management fees and the biggie: a par value to return to.
Yes duration drops the value on both funds and individual bonds, but I have an IOU in a par value with a bond. With a fund, it’s a hope and a guess.
I will leave it there with further comments. We repeat ourselves here too much without changing any views. It gets tiring for all.

 

[Phroig]

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.

This was especially true when interest rates rose significantly. However, going forward, whether NAVs are better or worse when one redeems will depend on the nature of future interest rate changes.
Bond funds will sometimes realize their losses, but from an economic point of view, a realized loss is no different from an unrealized one. The problem arises when funds are forced to realize losses during market crises when securities are mispriced.
Individual bonds certainly give one more control, and more certainty of principal for those of us who can afford to hold the bonds to maturity. (Maturities can be timed, yes, but only for needs that we can predict.)
What we get with funds is hands-off investing and convenience, diversification, access to expert research teams, and access to certain bonds.

 

[Jerry1]

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

That’s what I always believed but 2022 showed us that isn’t true. Like the OP, I ended up holding my funds, suffering a loss, and now wonder how best to go forward. I wish I could see something that tends to balance my portfolio but it seems like things all go in the same direction. Heck, even gold, in the face of a huge spike in inflation didn’t really move up as I would have expected.

I’m about to review my entire portfolio for the coming year and thinking my AA should just be a total market fund and CD’s.

 

[tominboise]

Sounds like Maestro, Jerry1 and I are all in the same boat. I sold the bond funds in my taxable brokerage account when the ship started to sink. In retrospect, I should have done the same in my IRA when i had the chance. But there is always a lot of advice to "not time the market". So I didn't.

 

[Exchme]

I suggest folks read the Bogleheads wiki on the subject that discusses the differences and the similarities between bonds and bond funds. While brief, it might help folks understand the trade-offs.

https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

The questions for the OP are - Are the credit quality, duration, inflation protection, tax efficiency, fees and complexity of your holdings in line with what your needs are? Even if you like what you have, can you create tax losses by selling and replacing with something similar?

 

[Chuckanut]

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.'

There's no law against selling some of your bond funds, say 50%, taking the loss on your taxes and reinvesting the money into a bond ladder going out to 5 years more or less.

 

[tominboise]

I suggest folks read the Bogleheads wiki on the subject that discusses the differences and the similarities between bonds and bond funds. While brief, it might help folks understand the trade-offs.

https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

The questions for the OP are - Are the credit quality, duration, inflation protection, tax efficiency, fees and complexity of your holdings in line with what your needs are? Even if you like what you have, can you create tax losses by selling and replacing with something similar?

These funds are held in my IRA, so no tax loss harvesting available for them.

 

[Jerry1]

These funds are held in my IRA, so no tax loss harvesting available for them.

Same here.

 

[Montecfo]

It’s a few features in funds vs individual bonds that make the difference.
With a ladder I have no redemption drag, no management fees and the biggie: a par value to return to.
Yes duration drops the value on both funds and individual bonds, but I have an IOU in a par value with a bond. With a fund, it’s a hope and a guess.
I will leave it there with further comments. We repeat ourselves here too much without changing any views. It gets tiring for all.

I respect your views as you know.

You understand this stuff and individual bonds best meet your needs. No issue there.

I am simply drawing a contrast with the message that we all heard once upon a time that bond funds are always to be avoided. To me this was and is a false message.

But in another contrast, I am not trying to persuade anyone to always choose individual bonds or to always choose funds.

Neither message is useful or wise in my opinion.

But spending time to truly understand each "tool" is in fact time well spent in my view.

And that is directed at folks who heard and believed bond funds are to be avoided, not to more experienced investors (e.g., yourself, PB4 and others) who already understand this.

 

[Rianne]

OP, unfortunately, you did not see this thread:

We are entering a "Golden Period" for fixed income investing

The thread alerted many of us to the rising treasury and CD rates. I noticed bond fund losses starting to mount in April 2022. They were in the tIRA. I sold all of them and created a ladder as many suggested here. IMO, take stock of your losses and try to calculate what gains will provide going forward. As of now, with a rolling ladder and the financial community in the news, the rates will remain solid for at least a year. As soon as a good portion of my ladder matures this year, I'm going long-term with treasuries and CDs (only my strategy). I will keep capital and have an income with higher coupon rates. Since we turned 65 this year, it gives us room to Roth convert as the ladder matures and interest drops into the settlement account.

 

[Markola]

I agree!!

Alternatively, what if the Fed’s historic rate hikes finally break something or we otherwise have sudden recession? If the Fed cuts rates in response and bond fund prices soar, won’t the OP wish he’d held?

 

[tominboise]

Alternatively, what if the Fed’s historic rate hikes finally break something or we otherwise have sudden recession? If the Fed cuts rates in response and bond fund prices soar, won’t the OP wish he’d held?

So far I haven't sold anything....

 

[Quattro73]

Alternatively, what if the Fed’s historic rate hikes finally break something or we otherwise have sudden recession? If the Fed cuts rates in response and bond fund prices soar, won’t the OP wish he’d held?

I’m not recommending he do anything. But if he did move from funds to a ladder of individual bonds, they get the same NAV jump if rates get cut.

A lot depends on the purpose of bonds in the portfolio. If you need or desire income, that seems to be one decision set. If you are looking for a potentially non-correlated asset to act as a possible off-set that is another decision set. Liability matching becomes yet another decision set potentially.

 

[Quattro73]

I’m about to review my entire portfolio for the coming year and thinking my AA should just be a total market fund and CD’s.

I’m pretty much thinking some equity, a slug of i-bonds and treasury/cds. I would maybe consider some TIPS to build a DIY pension, if i could figure them out. The tax implications are a showstopper thus far since I don’t have tax deferred space. I wish they’d just up I-Bond limits. I’d be willing to accept the lower fixed rates, for the simple to understand variable rate inflation protection, principal protection, and tax deferment. Then I probably would not worry about TIPS.

 

[Markola]

So far I haven't sold anything....

OP, obviously, “You do you.” I appreciate this informed discussion as a way to reconcile the long and short term disappointment of my own 50% bond index fund allocation with Vanguard’s continued advice to stay the course.

 

[pb4uski]

... I’m about to review my entire portfolio for the coming year and thinking my AA should just be a total market fund and CD’s.

I'm currently all fixed income... mostly bonds, CDs and money market funds and a sprinkling of preferred stocks. Equity valuations are too rich for my taste.

 

[all4j]

if he did move from funds to a ladder of individual bonds, they get the same NAV jump if rates get cut.

It depends on a variety of factors, but it is unlikely. I’ll come back later to whether the size of the difference is important. Imho, there is too little discussion of risk (which may partially explain how we got here). Won’t try to be comprehensive, but consider…

1st, so a ladder is constructed to match the fund. The next day it no longer matches. The space between rungs of the ladder comes into play here. The fund is more fluid than the ladder. ‘Most’ funds will attempt to maintain roughly the same duration (although there are target date funds, etc), while the ladder changes some. I don’t recall seeing convexity mentioned in threads on this board, but that affects also.

2nd, how are coupon payments/distributions handled? ‘Most’ funds distribute monthly & can be reinvested immediately. This compounds the return, but also from a portfolio view changes the holdings further from the ladder. Bonds held in a ladder will pay every 6 months, but size of ladder may determine if they can be used to purchase new bonds and rarely would it exactly match.

Are these sizable differences? That is a matter of opinion, although I’d suggest they are likely more sizable than other things that are often mentioned. Also, depends on how much time one spends building the ladder to offset the expense of the fund. To be honest, I think for most investors “will be fine” either way. I know many that are more interested in minimizing risk than maximizing return. Yet, much of the back & forth is on opinion & slight differences in return. Yet, I personally would hate to misrepresent the facts & lead someone to be caught off guard later.

 

[G-Man]

I'm currently all fixed income... mostly bonds, CDs and money market funds and a sprinkling of preferred stocks. Equity valuations are too rich for my taste.

So you are getting around a 5% rate of return at the moment. If I was retired, I would be happy with a consistent 5% rate of return each year during retirement. That's all I need.

I would be curious to know exactly what your holdings are if you are willing to share. I won't be disappointed if you are not willing to share.

 

[Jerry1]

So you are getting around a 5% rate of return at the moment. If I was retired, I would be happy with a consistent 5% rate of return each year during retirement. That's all I need.

I would be curious to know exactly what your holdings are if you are willing to share. I won't be disappointed if you are not willing to share.

Pb4uski has posted about his holdings before. I’m guessing he’s averaging over 5% by buying agency bonds and high quality corporate bonds. Anyway, my point is that there’s higher yields out there with marginally higher risk. 5% is basically “risk free” treasuries.

Reading the fixed income thread - there’s a lot of discussion about higher rate fixed income options.

 

[pb4uski]

^^^ Jerry is correct, portfolio includes agency and high quality corporate bonds. 90% is A or better and 99% is investment grade.

At the end of July my weighted average YTM was 5.2%. All yields except I-Bond yields are based on purchase cost and in most cases are close to coupon. I-bond yields are based on current rate at July 31 for remaining months at that rate and then 3 months at 0% thereafter. Preferreds are ALL-B, C-J and C-K.

	Percentage	Weighted Average Yield
CD	40.7%	5.0%
Agency	29.6%	5.4%
Corp	18.0%	5.2%
I-Bonds	7.0%	4.1%
Preferreds	3.6%	7.6%
Money Market	1.1%	4.9%
	100.0%	5.2%

For the CDs, agency and corporate bonds, purchase yields range from 4.430% to 6.375%.

CUSIP/Ticker	Issue Name	Type	YTM
3130AJRV3	FHLB	Agency	4.430
3130ATZE0	FHLB	Agency	6.375
3130AU5K6	FHLB	Agency	5.200
3130AU5N0	FHLB	Agency	5.300
3130AUJV7	FHLB	Agency	5.000
3133ENYM6	FFCB	Agency	4.450
3133EPMD4	FFCB	Agency	6.330
3134GYA77	FEDERAL HOME LN	Agency	5.250
02007GF24	ALLY BANK	CD	4.950
23204HNN4	CUSTOMERS BANK	CD	5.100
32056GDS6	FIRST INTERNET BANK	CD	4.450
33646CPQ1	1ST SOURCE BANK	CD	5.250
61690U5T3	MORGAN STANLEY BANK	CD	4.600
61768ETF0	MORGAN STANLEY BANK	CD	4.500
62847NDN3	MVB BANK, INC.	CD	5.300
857894J42	STEARNS BANK NTNL	CD	5.400
857894J59	STEARNS BANK	CD	5.350
87164DUW8	SYNOVUS BANK	CD	4.650
9497634S2	WELLS FARGO & CO	CD	4.700
9497634U7	WELLS FARGO & CO	CD	4.700
06749NFM9	BARCLAYS PLC	Corp	5.550
17290A7H7	CITIGROUP INC	Corp	5.125
74456QBH8	PUBLIC SERVICE E	Corp	4.750
78014RKA7	ROYAL BANK OF CANADA	Corp	5.100
89114X6G3	THE TORONTO-DOMINION	Corp	5.000
89114XAL7	THE TORONTO-DOMINION	Corp	6.000
89115A2J0	THE TORONTO-DOMINION	Corp	4.755
91159HHW3	U.S. BANCORP	Corp	5.050

 

[target2019]

In my IRA, I am sitting on 5 bond funds which of course are in a loss position. I am contemplating selling (locking in the loss) and buying a CD ladder. It would take about 2 years at 5% to recover the loss from selling the bond funds. This does not account for any payments from the funds over those two years.

What are the odds ( I know no one can predict the future - just asking for opinions) that bond funds will recover over the next couple of years? Interest rates "should" start to fall as the FED gets inflation under control, but will the bond funds rise back to pre pandemic levels in that time?

I am 63 and not counting on this money for another 6 - 7 years. These bond funds are about 37% of my AA in the IRA. Stock funds make up the other 63%.

I've realized that for some time. Obviously I should have sold them when they got close to zero but I was in the "buy and hold" mentality at that time. Does that mean you think I should hold these funds?

The funds in question are:

FIPDX - down 3.87%
FUMBX - down 5.16%
VCSH - down 7.32%
FUAMX - down 11.77%
VCIT - down 17.44%

I am thinking to keep the FIPDX and sell the other 4 funds, to convert into CD's and/or Treasuries.

Where is your line on OK vs dog, on the annual yields?

FIPDX = 8.78%
FUMBX = 1.4%
FUAMX = 1.97%
VCSH = 2.19%
VCIT = 3.42%

It looks like the middle three are in the dog category to me.

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.

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?

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

These funds are held in my IRA, so no tax loss harvesting available for them.

A long-term trend in bond funds hit bottom. Do you bail now?

Many of us came to realize that "bonds" is actually different things, and not what any particular group was telling us.

You have an asset allocation, so what are the percentages of total portfolio. If it adds up to 50% of all invested, then the challenge is different than if they add up to 25%.

Also, it is total performance which matters to you. Talking about just yield or just NAV does not help you or I in the long run.

So, did last year really knock you about, and now you have a different idea of what Ballast is, or should be?

I avoided some of the bond fund carnage. But now I am thinking about the next 25 years. Will my money market deliver 5% ballast during that time frame? If I go with a 5% 5-year CD (if it exists), that leaves me with another decision not too far into the future.

Our bond fund VBTLX allocation changed during the last 5 years from 20% to 5%, for various reasons. One decision was to sell some in my IRA, and re-invest in a balanced fund (VWIAX) for the future. That slightly changed our overall allocation to more equity.

In other areas where I moved to money market as a temporary substitute, I recognize that CD and MMF interest will drop over some period, and I will have another long-term decision to make in the next year or two. For my spouse I need to set the allocation for the next 25 years, continue to simplify, and not carry out additional tactical or strategic moves.

YMMV.

 

[Chuckanut]

You can get higher yields on CDs and agency bonds if you are willing to accept the lack of call protection. IMO, I need over 1% just to think about it.

 

[G-Man]

Pb4uski has posted about his holdings before. I’m guessing he’s averaging over 5% by buying agency bonds and high quality corporate bonds. Anyway, my point is that there’s higher yields out there with marginally higher risk. 5% is basically “risk free” treasuries.

Reading the fixed income thread - there’s a lot of discussion about higher rate fixed income options.

I will visit the fixed income thread. If I can achieve 5% per year, I would be extremely happy.

Sorry. Which fixed income thread are you are referencing?