Author Topic: Convert all of my Corp investment grade bond fund ($175k) to Total Bond Fund?  (Read 361 times)

FIREin2018

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i own $175k worth of Vanguard's Corp investment grade long bonds, fund symbol VWETX, in my rollover 401k.
i've been reading that in a bear market, dont own corp bonds (even investment grade).
it represents 1/3 of my 401k portfolio.

sell and convert to Vanguard's total bond fund?
sell and sit on cash?
or...?
« Last Edit: March 11, 2020, 09:45:31 PM by FIREin2018 »

jim555

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They really hit those investment grade corporates in the last few days.  In a recession they will go a lot lower.  Can't advise what you should do.

MustacheAndaHalf

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In comparing VWETX (LT corp) and VBTLX (bond mkt), I would suggest comparing yield, duration and credit quality.  Vanguard has all this data on their website, on the overview and portfolio pages.

LT corp yields 2.6% ;  Bond mkt yield of 1.9%.
LT corp has a 14.4 year duration ; Bond mkt a 6.2 year duration.
LT corp is 61% "A" rated bonds  ; Bond mkt is 62% government bonds

I don't know how to turn credit quality into meaningful numbers, but investment grade bond categories are: gov't, AAA, AA, A, BBB.  So Bond mkt has 62% highest quality bonds, while LT corp is one step up from the lowest quality of investment grade.

When bond yields go up, nobody wants an old bond - they can get paid more by purchasing at the new, higher rates.  So the older bonds fall in price, and the duration expresses the amount.  There is an inverse relationship, so you can use "-1" in calculations.  Here's an example if bond yields moved up +0.25% :

LT corp has a 14.4 duration, so: -1 x 0.25 x 14.4 = -3.6%
Bond mkt has a 6.2 duration, so: -1 x 0.25 x 6.2 = -1.6%

So when is the 0.7% greater yield of LT corp overwhelmed by changes in bond yields?
I calculate if bond yields go up by 1/12th of 1%, LT corp and Bond mkt break even.

For 8 years of duration, you're only being paid 0.1% higher yield per year, which is next to nothing.  You can also see the impact of credit quality in yesterday's market losses for these two funds.
LT corp -2.2% yesterday ;  Bond mkt -0.60%

Considering the small difference in yield versus the higher duration and credit risk, I'd say Total Bond Market is the clear choice between the two.

FIREin2018

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In comparing VWETX (LT corp) and VBTLX (bond mkt), I would suggest comparing yield, duration and credit quality.  Vanguard has all this data on their website, on the overview and portfolio pages.

LT corp yields 2.6% ;  Bond mkt yield of 1.9%.
LT corp has a 14.4 year duration ; Bond mkt a 6.2 year duration.
LT corp is 61% "A" rated bonds  ; Bond mkt is 62% government bonds

I don't know how to turn credit quality into meaningful numbers, but investment grade bond categories are: gov't, AAA, AA, A, BBB.  So Bond mkt has 62% highest quality bonds, while LT corp is one step up from the lowest quality of investment grade.

When bond yields go up, nobody wants an old bond - they can get paid more by purchasing at the new, higher rates.  So the older bonds fall in price, and the duration expresses the amount.  There is an inverse relationship, so you can use "-1" in calculations.  Here's an example if bond yields moved up +0.25% :

LT corp has a 14.4 duration, so: -1 x 0.25 x 14.4 = -3.6%
Bond mkt has a 6.2 duration, so: -1 x 0.25 x 6.2 = -1.6%

So when is the 0.7% greater yield of LT corp overwhelmed by changes in bond yields?
I calculate if bond yields go up by 1/12th of 1%, LT corp and Bond mkt break even.

For 8 years of duration, you're only being paid 0.1% higher yield per year, which is next to nothing.  You can also see the impact of credit quality in yesterday's market losses for these two funds.
LT corp -2.2% yesterday ;  Bond mkt -0.60%

Considering the small difference in yield versus the higher duration and credit risk, I'd say Total Bond Market is the clear choice between the two.
ahh.. bond yields going up explains why corp bonds went down.
but why did bond yields go up?

interest rates went down when the fed dropped rates .5%.
shouldnt that have made the corp bonds worth more?

jim555

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Default fears are depressing prices and pushing up yields.

tooqk4u22

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In comparing VWETX (LT corp) and VBTLX (bond mkt), I would suggest comparing yield, duration and credit quality.  Vanguard has all this data on their website, on the overview and portfolio pages.

LT corp yields 2.6% ;  Bond mkt yield of 1.9%.
LT corp has a 14.4 year duration ; Bond mkt a 6.2 year duration.
LT corp is 61% "A" rated bonds  ; Bond mkt is 62% government bonds

I don't know how to turn credit quality into meaningful numbers, but investment grade bond categories are: gov't, AAA, AA, A, BBB.  So Bond mkt has 62% highest quality bonds, while LT corp is one step up from the lowest quality of investment grade.

When bond yields go up, nobody wants an old bond - they can get paid more by purchasing at the new, higher rates.  So the older bonds fall in price, and the duration expresses the amount.  There is an inverse relationship, so you can use "-1" in calculations.  Here's an example if bond yields moved up +0.25% :

LT corp has a 14.4 duration, so: -1 x 0.25 x 14.4 = -3.6%
Bond mkt has a 6.2 duration, so: -1 x 0.25 x 6.2 = -1.6%

So when is the 0.7% greater yield of LT corp overwhelmed by changes in bond yields?
I calculate if bond yields go up by 1/12th of 1%, LT corp and Bond mkt break even.

For 8 years of duration, you're only being paid 0.1% higher yield per year, which is next to nothing.  You can also see the impact of credit quality in yesterday's market losses for these two funds.
LT corp -2.2% yesterday ;  Bond mkt -0.60%

Considering the small difference in yield versus the higher duration and credit risk, I'd say Total Bond Market is the clear choice between the two.
ahh.. bond yields going up explains why corp bonds went down.
but why did bond yields go up?

interest rates went down when the fed dropped rates .5%.
shouldnt that have made the corp bonds worth more?

Yes, but due to liquidity crunch and increasing credit concerns the spreads have widened bringing prices down.   

I would trade out of long term corporates or even total bond into short term inv grade (VFSUX)  1.9% YTM with 2.4 duration vs. 2.0% YTM and 6.4 duration on VBTLX.     Slightly more credit risk due to not having a lot of US Gov but probably priced in at this point

MustacheAndaHalf

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We don't have normal market conditions right now.  Normally US stocks, international stocks, US Treasuries, corporate bonds and gold don't all move together with high correlation.  Heck, add bitcoin in for good measure.  The only thing going up is short-term treasuries - and even the Treasury market had liquidity problems which the Fed had to step in to address.