Author Topic: Bond Funds in 2021  (Read 1545 times)

jpdx

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Bond Funds in 2021
« on: February 17, 2021, 10:41:06 AM »
I have a 80/20 asset allocation and am slowly transitioning to FIRE. Of that 20% allocation, it breaks down as follows:

60% fidelity vip bond index fund, inside inherited annuity
20% savings account, currently .5%
20% available inside IRA -- what to do here???

I'd like to keep this amount inside Vanguard for easy rebalancing, but it feels like there are no good options with bond funds right now. Any suggestions?

cool7hand

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Re: Bond Funds in 2021
« Reply #1 on: February 17, 2021, 11:14:35 AM »
No good option because bonds are overpriced?

jpdx

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Re: Bond Funds in 2021
« Reply #2 on: February 17, 2021, 02:38:28 PM »
No good options because bond yields are very low, and if interest rates rise the price of bond funds will drop.

cool7hand

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Re: Bond Funds in 2021
« Reply #3 on: February 18, 2021, 07:20:34 AM »
I think of bonds differently. Bonds are part of a balanced portfolio. Covid and the Fed have everything off kilter. To me, that's all the more reason to be in multiple asset classes. Any attempt to identify the right time to get into an asset class is just market timing. Market timing is a strategy for others.

jpdx

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Re: Bond Funds in 2021
« Reply #4 on: February 18, 2021, 05:28:31 PM »
I don't disagree. To clarify, I'm committed to keeping my 20% cash/bond allocation; I am seeking suggestions on which bond funds to hold.

I have a bulk of my bond allocation in FBIQC. I'm looking to purchase additional bond index funds with new money, and am weighing Total Bond Market vs Intermediate Bond Market vs just using a savings account. I'm leaning towards Intermediate Bond Market because I think it offers more diversification in my portfolio considering FBIQC has similarities to Total Bond Market.
« Last Edit: February 18, 2021, 05:31:11 PM by jpdx »

Abe

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Re: Bond Funds in 2021
« Reply #5 on: February 18, 2021, 08:56:47 PM »
Average maturity of the fbiqc fund and vanguard intermediate are similar (7.4 and 7.3 years). Given the main problem with bonds right now are the low interest rates and potential risk of losing value of interest rates ever get off the floor, I’d say a shorter duration fund will provide more diversity than intermediate. The flip side is more of the funds’ holdings will reach maturity in the ultra-low interest environment we’re in, so pickings may be slim for returns. But that’s not why one buys a bond fund anyway.

jpdx

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Re: Bond Funds in 2021
« Reply #6 on: February 20, 2021, 10:01:15 AM »
@Abe : Good point. Short-Term Bond Index Fund currently has an SEC yield of .29%, so does it still make sense to choose the bond fund over a savings account with higher yield? One advantage to the bond fund inside my IRA is slightly easier rebalancing and tax deferral, but are there any other advantages?

Abe

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Re: Bond Funds in 2021
« Reply #7 on: February 20, 2021, 09:02:20 PM »
@Abe : Good point. Short-Term Bond Index Fund currently has an SEC yield of .29%, so does it still make sense to choose the bond fund over a savings account with higher yield? One advantage to the bond fund inside my IRA is slightly easier rebalancing and tax deferral, but are there any other advantages?

Those are the main advantages at this point. If you get a higher yield from a savings account, go with that. Be aware that the yield is subject to change at the bank's discretion, so make sure that it doesn't go to 0 after some time period.
« Last Edit: February 20, 2021, 09:07:34 PM by Abe »

MustacheAndaHalf

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Re: Bond Funds in 2021
« Reply #8 on: February 20, 2021, 09:26:23 PM »
The key thing to watch with bond funds is duration, which tells the impact of a change in interest rates.  The short term (2.8 duration), intermediate term (6.5 duration) and long term (16.2 duration) have different risks when interest rates rise.  You can find that data on Vanguard's website, and the performance of Vanguard ETFs on etfdb (Vanguard doesn't update it very often).

Using treasuries from Jan 4 to Feb 18:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2021

(feb 18) 3 yr treasury, 0.16% to 0.21%, 0.05% x -1 x 2.8 = -0.14% (actual -0.18%)
(feb 19) 3 yr treasury, 0.16% to 0.22%, 0.06% x -1 x 2.8 = -0.17% (actual -0.18%)
=> Not sure why Feb 19 is more accurate here, while Feb 18 is for the others...

7 yr treasury, 0.64% to 0.94%, 0.30% x -1 x 6.5 = -1.95% (actual -1.84%)
10 yr treasury, 0.93% to 1.29% (prorating roughly, 1/3rd of long term)
20 yr treasury, 1.46% to 1.91% (prorating roughly, 2/3rd of long term)
Long term (0.36 / 3 = 0.12) + (0.45 * 2 / 3 = 0.30) = 0.42 x -1 x 16.2 = -6.8%
(actual BLV performance was -6.7%)


Notice that duration was a good estimate of the drop in each bond fund, and that longer term bonds got hit from two directions: larger duration, and bigger increases in yields.  That's why losses in long term bonds were 37x higher than short term bonds, despite their durations being 6x apart.

I generally prefer shorter term bonds, and take my risk in equities.

 

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