Author Topic: Should I be concerned about bond ETFs?  (Read 359 times)

Beridian

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Should I be concerned about bond ETFs?
« on: March 15, 2020, 11:30:14 AM »
I hold a sizable position of BND - Vanguard Total Bond Market ETF in a retirement account.  I am already retired and rely on my investments for income, I am about 50% in equities and 50% in safe things like cash, bonds, and precious metals.  It would certainly appear that rates are going lower likely to zero and possibly negative.  How would this affect a broad bond ETF like BND? 

I assume that BND will increase in value as rates go down, but then what happens at zero and beyond?  My instincts tell me I may want to sell this ETF and go to cash for awhile with these funds.  I also wonder what forces if any could make rates go higher and is this likely to happen soon?  If the high yield markets have a lot of defaults could that make rates go higher? 

Thanks

MustacheAndaHalf

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Re: Should I be concerned about bond ETFs?
« Reply #1 on: March 15, 2020, 06:28:54 PM »
BND has a surprising amount of "BBB" (or "Baa") bonds according to Vanguard's portfolio page:
https://investor.vanguard.com/etf/profile/portfolio/bnd

Wow do you have interesting timing - the Fed has literally just lowered rates hours ago.  I went to check on current rates, and found they just dropped.  Anyways, here's the key line from their statement:
"the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent"
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm

So, we're now at 0% rates for the Fed, which should translate to a drop in treasury and bond yields.  But Vanguard Total Bond Market had a 1.9% SEC yield before the drop, so don't expect that to go all the way to zero.

If all bonds went to 0%, nobody would need 20 year bonds when they can get the same rate on a 1 year bond.  So because of the time risk, longer term bonds pay more.  And then companies need money, and issue bonds.  If they pay the same as the U.S. government, nobody will prefer a company's bonds - so they pay more.

Vanguard Total Bond Market holds a range of bonds, with 2/3rds being government bonds, and roughly 1/3rd being the lower half of investment grade bonds.  I wouldn't expect it to hit zero.

ChpBstrd

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Re: Should I be concerned about bond ETFs?
« Reply #2 on: March 16, 2020, 07:17:40 AM »
If you are holding bonds, you should be rooting for negative interest rates. That would increase the value of existing bonds, especially long-duration bonds.

However, in the case of popular bond funds like LQD and BND, there is a lot of risk that BBB/Baa bonds will be downgraded, as @MutacheAndaHalf points out. If you want to own treasuries, just buy them direct.

The bigger concern is how the treasury market - yes the treasury market - is experiencing liquidity problems. In theory, forced liquidations without enough buyers could cause a crash.

https://www.marketwatch.com/story/fierce-bond-market-swings-dry-up-liquidity-in-wide-swathe-of-15-trillion-us-bond-market-2020-03-12?mod=article_inline

Beridian

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Re: Should I be concerned about bond ETFs?
« Reply #3 on: March 16, 2020, 08:19:41 AM »
Thanks for your replies.  I was wondering more how zero or negative rates would impact the NAV price of bond ETFs like BND and IUSB.   So far following todays market selloff they look slightly down almost flat.

vand

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Re: Should I be concerned about bond ETFs?
« Reply #4 on: March 16, 2020, 08:29:30 AM »
Thanks for your replies.  I was wondering more how zero or negative rates would impact the NAV price of bond ETFs like BND and IUSB.   So far following todays market selloff they look slightly down almost flat.

Why would you lend money to someone when in return they promise to pay you... NOTHING? It makes as much sense as putting cash inside your mattress.

They have nowhere to go but down.

If you think Bonds are going materially higher then you are, effect, expecting someone even more stupid to accept a even deeper negative return to loan their money. Why would they do that? That makes no sense at all. Jsut keep your cash in the mattress. Yet this is effectively the position people are adopting when expecting more fixed income upside. It is the "bigger fool" theory in play.