Announcement

Collapse
No announcement yet.

Any thoughts on bond funds at this point?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Any thoughts on bond funds at this point?

    I've read a number of reliable sources talking about an impending problem for bond mutual funds as rates tick up. Other than sticking to shorter maturities, what else could be done to lessen the risk while remaining invested in bonds? I have no experience buying individual bonds but I know that's an option since as long as you hold the bond until maturity, the rate fluctuation doesn't matter. There are also TIPS to consider but I don't really know a whole lot about those either.

    Any thoughts from the bond investors out there?
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    #2
    Don't you visit bogleheads.org Steve? There are more threads over there on this subject than you can shake a stick at.
    seek knowledge, not answers
    personal finance

    Comment


      #3
      if you study the history of tips, I think you will find they tend to be more volatile that nominal bonds. that has to do with the fact that their coupons are lower. they can get hurt worse in a rate backup that is not driven by inflation. however if you look at uk tips during high inflation periods, you will find their rates tended to peak at 3-4%, whereas nominal bonds might go to 10% or something.

      there are also some retail products that are structured to move inversely to bonds. powershares might have some - seems like their style. you can probably structure the same thing by just selling bonds or shortening maturity. you would only use something like that if you were restricted from selling the bond funds you already own and want to hedge it.

      other standard sorts of play with institutional investors deal with the steepness of the curve (expecting it to flatten with a rate rise). they may sell short-intermediate maturities (2-7 years) and place some in long term callable bonds and cash. you duration weight the new portfolio to match the old one. individuals can probably mimic these moves. however, shorting the front end of the curve with leverage to offset long term bond exposure is probably beyond the reach of retail investors.

      Comment


        #4
        Originally posted by feh View Post
        Don't you visit bogleheads.org Steve? There are more threads over there on this subject than you can shake a stick at.
        I'll have to check that out. Thanks for the info.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          I'm old enough to remember 1982 when pundits and analysts were saying the same things about bonds that they are saying today. Those who listened to the noise missed the biggest bond rally in history.

          I'm a Boglehead through and through. I have been shifting into short-term bond funds to alleviate the risks, but I still believe in holding my age in bonds. I also hold long-term municipal bond funds (outside my retirement accounts) because the tax break is worth it to me; YMMV.

          My BF is an economist and explained all the reasoning to me, but I'll be honest and say that I can't do justice to most of the arguments so I won't attempt to recap here.

          Comment


            #6
            Originally posted by shaggy View Post
            I'm old enough to remember 1982 when pundits and analysts were saying the same things about bonds that they are saying today. Those who listened to the noise missed the biggest bond rally in history.
            I'm not looking to get out of bonds at all. I'm just wondering if the way I'm in bonds is the best way at this point. I'm in Vanguard's Total Bond Market Index primarily. I know there are a lot of other options out there, even at Vanguard, so just wondering what others are doing.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              Originally posted by disneysteve View Post
              I'm not looking to get out of bonds at all. I'm just wondering if the way I'm in bonds is the best way at this point. I'm in Vanguard's Total Bond Market Index primarily. I know there are a lot of other options out there, even at Vanguard, so just wondering what others are doing.
              Assuming you won't be selling for 10+ years, it's my opinion you don't need to do anything.

              However, I'm a newb when it comes to bonds. Much more knowledgeable people over at bogleheads.
              seek knowledge, not answers
              personal finance

              Comment


                #8
                I think you guys need to understand that bonds are instruments with specific maturities. even if you own a bond fund, it is nothing but a portfolio of individual bonds. you can't hold a portfolio of 5 year bonds for 10 years. they mature. what you effectively own is a portfolio of 5 year bonds for 5 year and then a reinvestment for a second 5 years. distributed more evenly over time, it is a laddered portfolio of bonds with varying reinvestment rates.

                holding a portfolio of bond funds over the long term is making 2 decisions. 1 is the outlook for the current portfolio. the second is an assumption about the effects a passive reinvestment. but the op is asking how to make an active decision. that would restrict the discussion to the current outlook for interest rates and what is the most efficient way to address it.

                Comment


                  #9
                  Originally posted by disneysteve View Post
                  I'm not looking to get out of bonds at all. I'm just wondering if the way I'm in bonds is the best way at this point. I'm in Vanguard's Total Bond Market Index primarily. I know there are a lot of other options out there, even at Vanguard, so just wondering what others are doing.
                  I'd hold different bond funds outside of retirement accounts than inside.

                  If you go over to Bogleheads.org, you'll find enough info on bonds to make your head spin.

                  Comment


                    #10
                    Originally posted by shaggy View Post
                    I'm old enough to remember 1982 when pundits and analysts were saying the same things about bonds that they are saying today. Those who listened to the noise missed the biggest bond rally in history.
                    The difference between now and 1982 is interest rates were extremely high then whereas now they're just the opposite.

                    In '82 the 10-yr had a coupon of ~15% and rates have been falling ever since resulting in capital gains in bonds funds. Now with rates artificially low and only poised to go higher over time, there are going to be losses in the bond funds as rates increase.
                    The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
                    - Demosthenes

                    Comment


                      #11
                      Originally posted by shaggy View Post
                      I'd hold different bond funds outside of retirement accounts than inside.

                      If you go over to Bogleheads.org, you'll find enough info on bonds to make your head spin.
                      Yep, bogleheads is savingadvice on steroids!

                      Comment


                        #12
                        Originally posted by disneysteve View Post
                        I've read a number of reliable sources talking about an impending problem for bond mutual funds as rates tick up. Other than sticking to shorter maturities, what else could be done to lessen the risk while remaining invested in bonds? I have no experience buying individual bonds but I know that's an option since as long as you hold the bond until maturity, the rate fluctuation doesn't matter. There are also TIPS to consider but I don't really know a whole lot about those either.

                        Any thoughts from the bond investors out there?
                        When holding an individual bond rate fluctuations don't matter if you hold to maturity.

                        However, and I'm sure you know, you do have to take into consideration the yield to maturity (YTM) since you'll most likely be buying the bond at a premium in this market and you'll get back less than what you paid for it when it matures.
                        The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
                        - Demosthenes

                        Comment


                          #13
                          Originally posted by kv968 View Post
                          Now with rates artificially low and only poised to go higher over time, there are going to be losses in the bond funds as rates increase.
                          Yes, NAVs are very likely to fall. Of course, in a mutual fund, new bonds are always being purchased that will reflect the higher interest rate. Over time that should make up for the loss in NAV.

                          That's why the average duration and the length of time the fund is held are important factors.
                          seek knowledge, not answers
                          personal finance

                          Comment


                            #14
                            Originally posted by feh View Post
                            That's why the average duration and the length of time the fund is held are important factors.
                            Actually, the duration and average maturity for any index fund is not predetermined, it is based upon, for example, the bonds rolling into the 1 year or less category being removed from the index and any new issuance, irrespective of their maturities. so you are not locking in a maturity structure over time in an index fund. for an actively managed fund, their purchases are timed in the market, so duration can swing quite a bit there as well.

                            Comment


                              #15
                              Originally posted by kv968 View Post
                              The difference between now and 1982 is interest rates were extremely high then whereas now they're just the opposite.

                              In '82 the 10-yr had a coupon of ~15% and rates have been falling ever since resulting in capital gains in bonds funds. Now with rates artificially low and only poised to go higher over time, there are going to be losses in the bond funds as rates increase.
                              But they could be low for decades.

                              One can make likely predictions about the bond market, there is always a chance one will be wrong.

                              But that's a bit OT for this thread.
                              Last edited by shaggy; 06-14-2013, 10:48 AM.

                              Comment

                              Working...
                              X