Bonds. The Intense Discussion Thread.

JohnChisum

Okay I will jump in and start this thread. It seems to be way overdue.

So what about bonds and bond funds? The new Unconstrained funds everyone is jumping into? Gundlach?

Lots of questions here. Considering we are in a rising interest rate environment, which bonds if any will do better that others? Will the impact be short or long term? What if you are close to or in retirement age? What to do.

Dive in and post your opinions and suggestions.

rjb112

JohnChisum said:

The new Unconstrained funds everyone is jumping into?
Considering we are in a rising interest rate environment, which bonds if any will do better that others? What if you are close to or in retirement age? What to do.

The new unconstrained bond funds are in response to the fact that interest rates have gone down since September 1981, and they can't go down forever. We have been in a bull market for bonds lasting 33 years. On September 8, 1981, the 10-Year Treasury had a yield of 15.59%. Those who bought and held it made 15.59% each and every year for 10 years, risk free, then got their full principal back.

https://research.stlouisfed.org/fred2/series/DGS10

The same 10-Year Treasury has a yield of 2.4% today.

The unconstrained funds typically have a lower duration, with the express purpose of decreasing interest rate sensitivity. A bond fund with a duration of 6 years will experience a 12% loss of NAV if the corresponding interest rates of those bonds rise 2%.
Add in the yield to that loss of NAV and the total return is calculated.

Full disclosure: I have no interest rate forecast nor will I ever have one.

In exchange for interest rate risk, the unconstrained bond funds, flexible income funds, "tactical income funds", or whatever you wish to call them, take on more credit risk.

Why do they have to take on more credit risk as a result of decreasing their duration/maturity? Because very high quality bonds, such as Treasuries, have such a low yield, that when you shorten the maturity of the bonds and subtract the expense ratio of the active bond fund, you are not left with much yield. Therefore, bank loans and junk bonds and other high credit risk securities enter into the portfolios of these mutual funds.

bee

Listen to Dan Fuss explain how it's done (He's a bond manager who was around 30+ years ago). He is a fund manager who looks and, more often than not, finds risk adjusted opportunities :

fuss-trounces-bond-rivals-by-thinking-like-a-stock-picker

JohnChisum

What intrigued me was the discussion on the Callan tables which showed that high yield bonds recovered quickly in a bear market versus most other sectors. Now this upcoming bear market (when it gets here) might be different due to the interest rate scenario. I think the Fed will show an abundance of caution and not raise rates if the markets tumble. I might be wrong.

@rjb112, Once again thank you for your expertise on this subject. I will defer that I don't know much about this subject and most of my thoughts are just hunches or based on prior experience. This next bear market, if the cards fall right, could be much like the secular bear of the 70's and early 80's. I hope not. That was the last time we had higher rates albeit well above the norm.

Edit; I should add the link for the table. https://ipro.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf

Crash

I speak from experience. When there's a scare, and bonds turn south, EM bonds will do so to an even greater extent. But I don't like to be trading often. So I ended up holding not much in the way of bond funds. They are in the portfolio, and I love the pay-outs. But I don't own bonds now just for the pay-outs. It's been shown to me that stocks will do better over the long haul, even if they don't spin off pay-outs monthly or quarterly. And I do own PRWCX and MAPOX, both 'balanced," and both holding over 30% bonds right now, anyhow. PRWCX pays at year-end. MAPOX pays quarterly.

Sven

@Bee, Read that good article a while back. There was another WealthTrack interview with Dan Fuss earlier this year (I believe) that he explained the terrible loss in 2008 (-22% versus LB Agg Bond Index has a +5% gain). During the crisis, risky asset including junk bonds were sold indiscriminatively. Fundamentally the default rate of junk bonds has not worsen in that period, and his holdings continued to pad their dividends. His fund nevertheless has to report the depressed bond price at the end of the day. Dan went on to say he bought more in that period and wished he has more cash. For those who stayed with The fund, it returned 36% in 2009 that far outpaced vast majority of bond funds.

Also I am not a fan of unconstrainded funds - it is another term for bond funds with flexible mandates.

JohnChisum

I think the attraction of unconstrained bond funds is their flexibility versus the standard Treasury fund. Looking ahead, investors sense that flexibility may be an advantage. The key might be the allocation one decides to put towards these funds.

davidrmoran

I have been making money on and off in PDI for over a year now, quite amazing

JohnChisum

@Bee, @Sven, I remember that Fuss interview on Wealthtrack. It was very informative.

We are lucky we have access to these smart minds like Fuss and Gundlach. Then we can form our own opinions and actions.

expatsp

I owned Fuss's LSBRX 2006-2013, I held on and even added to it in 2008, so I did well in the end, but I wanted my bond fund to provide ballast, to go up when my stocks when down so I could take cash from it instead of having to add to it. It's not Fuss's fault that his fund didn't act that way, it was my fault for not understanding the fund.

I sold my stake in LSBRX and bought SUBFX. So far that has been a poor decision, but my hope is that SUBFX will hold up well if the markets crash, and that's what I want from a bond fund. (I'm 85% equities, so I really need the bond funds in my portfolio to be bulletproof.)

Then again, with its negative duration, I am beginning to fear that SUBFX will not provide much protection if the economy stalls and interest rates drop yet further, though I suppose its 50% cash stake will provide a cushion. Can anyone who understands bonds better than me comment on this?

Old_Skeet

Hi John and others,

Here is what I have done to help manage an anticipated rising interest rate environment within the income area of my portfolio. I have two investment sleeves within this area … an income sleeve and a hybrid income sleeve. The income sleeve consist of the more traditional fixed income funds while the hybrid income sleeve consist of funds with a broader spectrum of assets whose focus is to generate income.

In the income sleeve I have selected good fund managers that I believe have the experience to effectively manage changing market conditions along with looking for funds that have short durations and are commonly known as short term bond funds. The funds that I own in this sleeve are EVBAX, LALDX, LBNDX, NEFZX, THIFX & TSIAX. Combined their duration is 3.5 years while their combined yield is about 3.7%. I feel, if these fund manages can not effectively manage interest rate and other risk associated with fixed income investing risk … well it probably just can’t be done.

In my hybrid income sleeve I feel I have selected good fund mangers that I believe again have the experience to use an even broader spectrum of assets to generate income along with using non traditional tools and means that aid them in the management of associated investment risk. Funds that I own in this sleeve are AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX.

My thoughts are that diverfication in of itself provides a certain amount of risk protection. To substantiate this thinking I am linking a recent Morningstar article that addresses this in more detail.

http://news.morningstar.com/articlenet/article.aspx?id=661823

In closing … and in short words … Rather than trying to do this through my own talent window I have chosen to seek out others to manage this for me.

I wish all … “Good Investing.”

Old_Skeet

MikeM

Bonds seem like they should be simple, but for some reason my mind turns off when trying to understand them. I get the basics on duration, quality and bond sectors that are more or less volatile. But my decision is to give the money to managers who have demonstrated results and have flexibility to buy the different types of bonds they think best. Unconstrained, multisector, whatever - not even sure the difference there.

So I decided on splitting most of my bond allocation to 2 multisector funds, a somewhat aggressive fund/manager, Ivascyn/PONDX and to what I see as a more conservative multisector fund, Sherman/RSIVX.

As a side note, I chose PONDX over LSBRX because returns have been as good with less volatility. I could of held both but my mandate is to hold a minimal number of funds. But I did hold LSBRX for years and was very happy with Fuss.

JohnChisum

Bonds are definitely a mystery for most investors. For years I concentrated on stock funds. When I turned 45 I started to think about bonds and decided to $cost avg into them. At that time I was listening to Bob Brinker on the weekends and he was all for Ginnie Mae's so I bought BGNMX which was the Benham Ginnie Mae fund. Benham was a well run firm and later American Century took them over. Those funds had excellent returns during the 90's and beyond 2000. I would use that fund as a sweep account when I swept profits from gold funds and other investments I was planning on using it as my core bond holding until the fiscal crisis hit. Everything changed.

I still track BGNMX and it seems to hold its own. But if and when rates do rise those funds do very poorly from what I hear and read.

Nothing is sure but at least we can try to minimize damage to our portfolios. If stocks drop 30% and bonds drop 10-15% then that is a success in relative terms.

Ted

@MFO Members: Althoughat times I've held bond funds, I much prefer individual bonds for two principal reasons. I want to control both the cost and the maturity.
Regards,
Ted

Soupkitchen

Ted, would you mind informing the board as to how you buy your bonds, and how you decide which kinds of bonds (duration and credit risk) to buy?

Crash

Soupkitchen said:

Ted, would you mind informing the board as to how you buy your bonds, and how you decide which kinds of bonds (duration and credit risk) to buy?

YES! I'd like to know, too! Thank you, Ted.

Ted

@Soupkitchen & Crash: Sorry for the delay in responding. I buy all of my bonds through a full service brokerage, namely, Morgan Stanley. Although, I have some investment grade bonds, I generally buy junk for the larger yield. Since I'm 77, I try and stay in the ten year maturity range, but do have some going out 20 year.
Regards,
Ted

Crash

OK, thanks a lot, Ted. "Enquiring minds wanted to know."

Soupkitchen

Ted, do you select the actual bonds yourself, and if so, what criteria do you use?

Ted

@Soupkitchen: I select from thousands of bonds listed for clients at Morgan Stanley's New York bond desk. I look to maxamize yield with a low probability of default. I've taken a lot of risk and have had only one default.
Regards,
Ted

[Deleted User]

The user and all related content has been deleted.

JohnChisum

I think they are one and the same.

Soupkitchen

Thanks Ted.

rjb112

Maurice said:

I have a question for anyone who cares to respond. Is there differences between an unconstrained and go-anywhere bond fund?

The terms mean the same thing. The bond managers are set free to invest where they think best. Versus a lot of other bond funds that have (by Prospectus) a set benchmark that they stay pretty close to.

rjb112

JohnChisum said:

At that time I was listening to Bob Brinker on the weekends and he was all for Ginnie Mae's

@JohnChisum, do you still listen to Bob Brinker. I listen to him every Sunday for the full 3 hours. Maybe we can share some Brinker stories.....

rjb112

expatsp said:

I owned Fuss's LSBRX 2006-2013....but I wanted my bond fund to provide ballast, to go up when my stocks when down.......
I sold my stake in LSBRX and bought SUBFX. So far that has been a poor decision, but my hope is that SUBFX will hold up well if the markets crash, and that's what I want from a bond fund. (I'm 85% equities, so I really need the bond funds in my portfolio to be bulletproof.)

Then again, with its negative duration, I am beginning to fear that SUBFX will not provide much protection if the economy stalls and interest rates drop yet further, though I suppose its 50% cash stake will provide a cushion. Can anyone who understands bonds better than me comment on this?

@expatsp, your thinking process was very sound. When you are 85% equities and looking for ballast, you don't want a fund like Loomis Sayles, because it doesn't accomplish your stated intent. On the other hand, if you were 85% Treasuries and looking for more risk and return, Loomis Sayles would have been a great choice.

Below investment grade bonds can add diversification to a portfolio consisting primarily of investment grade bonds, like Treasuries, or the total bond market index. The same below investment grade bonds do NOT add diversification to a stock portfolio.

Take a look at bond market performance during the financial crisis, say 2008. Stocks and below investment grade bonds both did terrible and were highly correlated. Treasury bonds did great. Look at the big recovery year, 2009. Stocks and below investment grade bonds again performed in sync.

For your stated purpose, a reasonable choice would have been a Treasury bond fund. The highest quality bonds are the ones most likely to do what you stated, "to go up when my stocks when down." In a financial crisis there is a "flight to safety", and safety means Treasuries.

However, now we have an extra issue to think about: interest rate risk. If a fund has a 6 year duration, then if the interest rate on those bonds goes up 2%, the fund will lose 12% in NAV, then add back in the yield to get the total return.

But you comment is quite correct, "with its negative duration, I am beginning to fear that SUBFX will not provide much protection if the economy stalls and interest rates drop yet further"

Let's wait to you read this to see if we want to continue....

JohnChisum

"do you still listen to Bob Brinker. I listen to him every Sunday for the full 3 hours. Maybe we can share some Brinker stories....."

@rjb112
I don't listen to him any longer and haven't done so for several years now. Do you remember his QQQ buy signal? That was before the tech crash. I was a subscriber and got the bulletin in the mail. It seemed to go against everything he had preached on his show and besides that, the bulletin was on a plain sheet of paper, not even his letterhead. At first I thought it was fake.

I listened to him for a few years after that but he would never talk about that QQQ debacle. During the 90's he had a great show and some excellent advice.

rjb112

JohnChisum said:

"do you still listen to Bob Brinker. I listen to him every Sunday for the full 3 hours. Maybe we can share some Brinker stories....."

@rjb112
I don't listen to him any longer and haven't done so for several years now. Do you remember his QQQ buy signal? That was before the tech crash. I was a subscriber and got the bulletin in the mail. It seemed to go against everything he had preached on his show and besides that, the bulletin was on a plain sheet of paper, not even his letterhead. At first I thought it was fake.

I listened to him for a few years after that but he would never talk about that QQQ debacle. During the 90's he had a great show and some excellent advice.

@JohnChisum: you bet I remember his QQQ buy signal! I made the mistake of buying on that signal! And I still hold a chunk of those QQQs in my account to this day!

I too was a subscriber and got the bulletin in the mail.

You're right, he would never talk about that QQQ debacle. I still listen to him every Sunday and participate in a Google blog that someone has on Brinker.

Yeah, that QQQ call was awful....

JohnChisum

I should add that the BGNMX recomendation he have turned out very well. Most gnma funds did well in the 90's and next century. I used it as a sweep for profits from gold funds (which he hated) and Japanese dead cat bounces which I lucked out on with The Japan Fund. It was out of NYC and it was a single operation. Later on they merged with T Rowe Price ( I think?). It felt very good to take big profits and put them into a fund getting 9% at the time. It was odd though if I talked to anyone about gnma funds they went blank. Nobody knew anything about them.

rjb112

JohnChisum said:

I should add that the BGNMX recomendation he have turned out very well. Most gnma funds did well in the 90's and next century.

Yeah, he was a big believer in GNMA funds. And they are quite good. Especially then, they were a way to get more yield than a traditional Treasury bond, but still have the full faith and credit of the US Gov't. Not a bad deal. Bill Gross was very fond of them too.

JohnChisum

I'm out of it now but I still keep an eye on the fund. It has held up quite well so I got out too early. I was worried about the rates. At some point I will get back in once things stabilize.