Bonds

[kenmoremmm]

let's say i wanted to reduce my VTSAX holdings out of fear of market downturn (i know, top is in; market timing, etc - let's move past that please). what is a good approach for a bond index fund in today's market? short term, corporate, long term, international, the lowest cost vanguard fund, something else?

[EvenSteven]

I would do VBTLX and call it a day.

Add in a little VTABX if I was feeling a little frisky.

[dragoncar]

Depends on your reason for diversifying out of equities I guess.  Corporate bonds are known to correlate with equity performance so they might not offer the diversity you seek.  Might try to exclude corporate bonds.

[rab-bit]

I would do VBTLX and call it a day.

Add in a little VTABX if I was feeling a little frisky.

I think this is good advice.

I would also consider adding some VBIRX (Vanguard Short-Term Bond Index) if you're within 1-3 years of your retirement date.

Another possibility is VAIPX (Vanguard Inflation-Protected Securities) if you're concerned about inflation.

[Impatient Saver]

For my bond allocation, I use VWAHX (Vanguard's High Yield Muni Bond Fund) in my taxable account with VTBLX in my tax-advantaged accounts.  I liked that both funds have a lengthy history.  While past performance is not indicative of future results, VTBLX has performed in line with its 1, 3, 5, and 10 year benchmarks and VWAHX has exceeded its 1, 3, 5, and 10 year benchmarks.  I've been very happy with both holdings over the last few years.  YMMV.

[kenmoremmm]

curious if this article changes anyone's opinion on the subject:
https://www.abc.net.au/news/2019-08-18/a-third-of-global-bonds-17-trillion-dollars-have-negative-yields/11420860

[EvenSteven]

curious if this article changes anyone's opinion on the subject:
https://www.abc.net.au/news/2019-08-18/a-third-of-global-bonds-17-trillion-dollars-have-negative-yields/11420860

What percent of those bonds with a negative yield are held by retail customers?

[EscapeVelocity2020]

I'm interested to see the responses here.  Bill Gross, arguably one of the 'best bond experts' struggled at the recent end to his career.

As someone who would like a reasonable alternative to equities (predictable margin of yield beyond inflation, credit worthiness of issuer, liquidity), I think we are seeing the Achilles heel of this latest bubble.  I personally own VAIPX and VWIUX to hedge against adverse spikes in inflation or taxes going back up.  Probably bought in way too early, but the returns have been reasonable so far.

[habanero]

If you want a safe place to park cash, buy short-term treasuries or similar. They will offer some minor capital appreciation if the economy tanks and the Fed slashes rates. If you buy longer-term bonds you take interest rate risk (more the longer the maturities) and credit risk (more the longer the maturities and the crappier the companies issuing the bonds).

If, for some reason the Fed should hike rates (extremely unlikely in my view) at the moment both equities and bonds will get abseloutely and utterly hammered so there won't be much diversification. So will a bond fund with long duration in a case of higher inflation.

I think the FIRE crowd these days underestimate the fact that the 4% rule has (probably) never been tested on a period like this with bond yields so extremely low as they are now. Bonds just don't offer much return anymore and with yields so low the potential for capital appreciation is much lower than in the old days.  Prior to the last financial crisis 10y treasuries yielded ~4,5%, now they yield ~1,6%. In the shorter end of the curve 2y yielded ~5.0%, now they yield ~1,5%. This is also the reason why bond funds will never see the capital appreciation you've seen earlier as the fed slashes rates. There are just a lot less rates to slash these days.

VBLTX has an average yield of 2.5% to maturity so its low as expected. In addition the duration is medium (6.0) so it still has a decent amount of interest rate risk and will probably offer some capital appreciation if rates are cut aggressively - unless credit spreads blow out at the same time.

VBLTX might be the thing for you, bond bonds are much more complex than equities and it is peculiar times for fixed income markets with the low yields and corporates having debt at an unprecedented scale.

If your only goal is to put cash in a safe place to not loose any money, I'd go for short-term treasuries or a fund/ETF holding short-term treasuries or similar. You don't get much yield, but you are also sheltered from any nasty surprises.

[Buffaloski Boris]

curious if this article changes anyone's opinion on the subject:
https://www.abc.net.au/news/2019-08-18/a-third-of-global-bonds-17-trillion-dollars-have-negative-yields/11420860

That’s a great article and thanks for posting it. It doesn’t change my mind so much as give me a better context for what I’m already thinking and doing. The risk compensation is too low on both equities and bonds. Equities aren’t good and bonds are awful. So I’m mostly on the sidelines avoiding both. That’s heresy around here where being huge into equities, specifically index funds, is the norm. Cuz don’t you know that over time stocks always go up? Really. We have a chart!

[Montecarlo]

I have a significant amount of my portfolio in short term treasuries in case the market rolls over.  My broker allows me to buy commission free.  I just hold to maturity and then buy more, so no interest rate risk at all.

If the market tanks my plan is to roll them into equities as they mature.

[KG28282]

With 3-5 years left until retirement, Bogleheads and this forum convinced me to go 100% Treasuries due to the historical correlations noted above. Corporate bonds will move with the market much more than Treasuries, and avoiding that is the primary reason I want bonds to begin with.

Maturities are a harder thing for me to feel confident in my decision about. Bogleheads talked a lot about matching maturities to investment horizon.

I picked up some intermediates for my 401k, and grabbed GOVT in my HSA today. I'm not reallocating, so I'm alright with throwing new money into what I might consider sub-optimal maturities later on, as I do more research.

[kenmoremmm]

thanks for the feedback so far.

my question pertaining to bonds relates to my 401k and roth funds. no aftertax portfolio for me.

in my 401k, i have the following bond/MM funds:
https://investor.vanguard.com/mutual-funds/profile/VUSXX
https://investor.vanguard.com/mutual-funds/profile/overview/vbtlx
https://investor.vanguard.com/mutual-funds/profile/VBIRX

in my roth, obviously there are more choices. i'm with vanguard and currently just using target retirement 2045 fund.

i feel the same way as norway and buffalochip, but alas, my funds are tied into something that can't be taken out (unless i dump into the MM fund i guess)

[Radagast]

Series I savings bonds are rather kick ass (where kick ass = totally boring). Inflation protection, safe from negative rates, no price movement, the definition of no credit risk, no counter party risk, no state or local taxes, federal taxes on interest deferred until redemption, currently yield 0.5% + future inflation.

Downside: limit of $10k/SSN/year + $5k/tax return/year.

Combine as desired with EDV and LTPZ for interest rate sensitivity, 5-year CD ladder to mitigate sequence of returns risk.

[ChpBstrd]

For a lousy 2% yield, I’d just as soon skip the duration risk of treasuries and hold an FDIC insured savings account.

https://www.nerdwallet.com/best/banking/high-yield-online-savings-accounts

And be ready to pounce when BBB corporates are yielding 5-7% again.

https://www.marketwatch.com/story/the-investing-opportunity-of-a-lifetime-awaits-us-when-the-recession-arrives-2019-08-20?mod=mw_theo_homepage

[Radagast]

thanks for the feedback so far.

my question pertaining to bonds relates to my 401k and roth funds. no aftertax portfolio for me.

in my 401k, i have the following bond/MM funds:
https://investor.vanguard.com/mutual-funds/profile/VUSXX
https://investor.vanguard.com/mutual-funds/profile/overview/vbtlx
https://investor.vanguard.com/mutual-funds/profile/VBIRX

in my roth, obviously there are more choices. i'm with vanguard and currently just using target retirement 2045 fund.

i feel the same way as norway and buffalochip, but alas, my funds are tied into something that can't be taken out (unless i dump into the MM fund i guess)

Series I savings bonds are unique and offer a return which is very high relative to their complete lack of risk, so consider those if they meet your need. CDs are also often in that boat, thanks to FDIC insurance combined with private quest for profit.

The three funds you list are all market rate bond funds, so you will not find any magic bullets there. Their yields are appropriate relative to their risks and the risks of other (eg stock) markets as far as anyone knows. Only the treasury money market fund has no credit risk, but it also has no possible "flight to safety" price increase when stocks tank. VBTLX is very stable relative to its duration. Really, your only option with those is to match the duration of your bond fund to the time until you need the money. If you don't need it for 5 years or more, choose VBTLX. 3 years, VBIRX. 1 year, VUSXX.

[Indexer]

Given the options I would go with VBTLX.

I also like Series I bonds, but you can't have those in a 401k.


Market timing VS appropriate Asset Allocation:  I don't consider what you are describing to be market timing. If the market dropped 40% and then you panicked and went into bonds that would be market timing. What you are describing is changing your AA to something that better fits your risk tolerance and you are doing it when markets are near their recent highs. In other words, you are rebalancing. This is a prudent thing to do.


Bonds VS cash:  Compared to each other in a vacuum you can debate this all day. Compared to each other when the rest of your portfolio is in stocks, the bonds will win every time. Bonds give you returns that tend to beat cash most of the time, and bonds also act as a hedge against stocks, which cash doesn't do. The past 1 year has a great example, stocks have been fairly volatile, but bonds are doing great. Last I checked VBTLX is up over 8% over the past 12 months. 2007 and 2008 were also great examples with VBTLX up over 7% one year and up over 5% the next. If most of your portfolio is in stocks then bonds tend to be a really good hedge.

[kenmoremmm]

if you transfer your VTSAX shares, for example, to VBTLX and it's before quarterly dividends and gains, are those prorated to your transfer amount, or do you lose out?

[MustacheAndaHalf]

If you own shares on the "record date", you get the full dividend, even if you sell a day or two later.  The dividend date is a few days after the record date.  But I don't see information for Sept 2019, and the data for June 2019 and June 2018 aren't consistent.  So maybe in the second week, maybe the third week of September.

The article has a few big problems with it's comparisons.  Once matter goes beyond the event horizon of a black hole, all of it is gone.  Germany's 2 year bond yields -0.85% right now, so if you buy $10,000 worth of those bonds, you'll get $9,830 back after 2 years of negative yields.  You'll lose -1.7% and not -100% like the articles "black hole" comparison might suggest.

The article also makes a comparison to CDOs, at which point I had to stop reading and skim.  CDOs were leveraged to the point that a tiny loss was magnified thousands of times, creating a financial meltdown.  Where's the leverage with negative interest rates?  If you invest at -0.85%, you lose -0.85%.  There's no leverage there.  It's a wildly inaccurate comparison.

I think the article is making false comparisons in order to scare people.