Author Topic: What do we think about bonds (funds) in this interest rate environment?  (Read 1318 times)

TempusFugit

  • Pencil Stache
  • ****
  • Posts: 628
  • Location: In my own head, usually
Given that bonds are now returning such low rates and that when the Fed allows rates to rise (eventually), the shares in bond funds will drop in value as new issue bonds at higher rates are more attractive than existing bonds at <1% rates, does it make sense to still have much invested in bond funds? 

I've always been a pretty conservative investor, and currently have about 23% of my invested portfolio in bonds (VBTLX mostly). 

I'm mostly concerned about protecting my mother's investments, which I manage for her and which are much more conservatively allocated.  Her bond funds represent about 56% of her portfolio and are spread across 3 Vanguard funds for short and medium term bonds along with total bond (VBTLX).   

The value of the holdings has increased YTD so they've been good investments to this point, but now I'm considering what other options make sense for fixed income type investments. 

Has anyone else started considering shifting out of bond funds?  What other options do conservative or short-horizon investors have?



Indexer

  • Handlebar Stache
  • *****
  • Posts: 1463
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #1 on: September 07, 2020, 02:33:40 PM »
The problem:  Bond yields have gone down.
The other problem: All the other yields also went down.

I wish there was a good alternative. You can put $10,000 per year into Ibonds through treasury direct. These bonds guarantee returns at least equal to inflation. The fixed rate on these bonds is currently 0.10%, so you will only track inflation, but that is still likely a higher return than regular treasury bonds.

FINate

  • Magnum Stache
  • ******
  • Posts: 3104
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #2 on: September 07, 2020, 03:22:29 PM »
What other options do conservative or short-horizon investors have?

Indeed. I realize this was not meant as a rhetorical question, but it gets to the crux of the matter.

ice_beard

  • Bristles
  • ***
  • Posts: 251
  • Location: East Bay, CA
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #3 on: September 07, 2020, 03:26:21 PM »
I have been wondering about bonds myself, especially in regards to retirees and near retirees.  If you're already in bonds, then you are doing pretty well.  However, the return on junk bonds is now around around 4-5% (generally speaking) so in order to get what used to be what would have been considered a more "normal" yield in years past, you have to invest in risky debt or earn basically nothing.  Or even lose money since I don't think the governments inflation numbers matches reality all that well.  Gasoline is cheaper, but if you include the things people actually spend money on, housing, health care, education, food, everything has become markedly more expensive beyond what government figures show.

I know if I was about to pull the trigger or even within a few years of FIRE, I would not be wanting to put my index funds/etfs  into bonds yielding ~1.5%.  This is a real quandary.  I'm curious how others are dealing with this.  Just adding more work years to make up the difference?? 

I have read a bit about foreign debt.  India was paying 7-8% on their government debt.  I have not put much effort into figuring if/how you can invest in this.   

Abe

  • Magnum Stache
  • ******
  • Posts: 2647
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #4 on: September 07, 2020, 10:36:30 PM »
Bonds are not meant for returns (at least for the last 1-2 decades). They are to stabilize your portfolio’s swings. Think of it this way: Loans of all types are so cheap, why would anyone pay anyone else more than a pittance for a loan, unless the borrower is high risk? So now we’re relying on the solvency of poor performers in the stock market for lower returns than the stock market has historically provided.

Also don’t invest in Indian government debt, especially with that low a return. My family is from India and has been burned many times by the corruption and incompetence of the Indian government (regardless of who is in power). 7-8% is nothing for the amount you will be swindled. Legally swindled, by restructuring or whatever via the IMF, but swindled nonetheless. Consider some tech Or heavy industry companies there, since they have enough money to pay bribes.

vand

  • Handlebar Stache
  • *****
  • Posts: 2297
  • Location: UK
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #5 on: September 08, 2020, 03:33:47 AM »
Nothing good works forever, and imo the traditional 60/40 which has worked like a dream for the last 3 decades (and especially the last 2 decades, where bonds have soared as equities have crashed, which has not always been the case) will work far less well going forward.

I think current valuations in (US) stocks and bonds are such that any traditional portfolio mix is going to be underperforming on a 10-15yr timescale.

I think investors will need  more diversification from other asset classes to improve their risk adjusted returns. EMs, gold, commodities, infrastructure, international real-estate, crypto, volatility.. can all play a part. Some of them may not be easiest to get exposure to, but that is big part of the reason why they're still reasonably valued.
« Last Edit: September 08, 2020, 03:36:49 AM by vand »

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8659
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #6 on: September 08, 2020, 06:33:50 AM »
I know if I was about to pull the trigger or even within a few years of FIRE, I would not be wanting to put my index funds/etfs  into bonds yielding ~1.5%.  This is a real quandary.  I'm curious how others are dealing with this.  Just adding more work years to make up the difference??

I waited until I was prepared to terminate my FT income to buy any bonds and then I purchase several year's worth of spending in US and CDN bond. That still left the vast majority of my investments in stock index ETFs. I'm not looking for any return from those bonds. If they keep up with inflation that's just fine. They are there so I have a stable chunk of my portfolio I can spend in crash. My stocks are meant to provide a return and fuel my FIRE spending.

I didn't have any quandary about this and low interest rates were not on my mind either.

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6634
  • Location: A poor and backward Southern state known as minimum wage country
Re: What do we think about bonds (funds) in this interest rate environment?
« Reply #7 on: September 08, 2020, 10:35:05 AM »
Preferred stocks (i.e. PFF, PGF) still pay over 5%, as do many REITs and a few banks like BNS and RF. Many REITs also have preferred stocks - just stay away from retail, office, and tourism REITs! However, all these assets can tank just like stocks. For example, PFF is currently $36 but dipped below $30 in March.

You could hedge the risk of principal loss by writing put options on these names instead of buying them, getting paid to basically hold a limit order to buy these assets. One could make a breakeven living on a 5% WR just writing puts. Worse comes to worse, another crisis occurs and you are assigned an investment yielding closer to 6%. I watched PFF and PGF hit yields of 7.5% back in March, and through about retiring at that point.