Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
From a recent Schwab article. What we can say, however, is that one way to mitigate risk in a rising-interest-rate environment has been to focus on relatively short-duration bonds that are high in credit quality. You won’t always outperform other fixed income asset classes, but you are less likely to get caught in a sharp downdraft.
What bond funds would you suggest to meet this criterion?
Due to rising interest rates I've reduced my bond fund positions (from nine funds to six) within my income sleeve and I'm increasing my CD Ladder along with adding to my convertible securities fund plus a few other hybrid funds as well. I'm thinking most bond funds are going to take a hit in a rising interest rate environment I don't care how highly rated they might be or how good they are. Bond funds in general are going to take a hit in a rising interest rate environment. There is no magic sauce to prevent this although some will fair better than others.
Within my fixed income sleeve the average duration is 2.7 years with an average maturity of 5.35 years. Thus far this year on a total return basis the sleeve is at break even with my bank loan fund (GIFAX) and a strategic income fund (NEFZX) performing the best. In my hybrid income sleeve my best performer is my convertible securities fund (FISCX) followed by some hybrid type income funds (AZNAX) and (ISFAX). These funds are carrying their respective sleeves and if it was not for their stellar returns thus far this year both these sleeves would have negative year-to-date total returns. In addition, faltering funds might get trimmed and/or eliminated as the year progresses.
With this, I'm planning on expanding the size of my step positions within my CD Ladder as the steps mature plus I may add some more to my convertible securities fund and the other hybrid income funds that have positive year-to-date returns.
If you have a fixed income fund with positive total returns thus far this year please let your fellow MFO members know. I'm thinking they are few and far between. In my review of Morningstar's Fund Category Returns the bond fund categories with positive year-to-date returns are emerging markets, bank loan, world bond, non traditional bond, and ultra short bond.
I have provided a link below to Morningstar's Category Fund Return site.
MAINX is up YTD +1.73%. Morningstar "World Bond" category, but we all know Matthews is an all-Asia shop. (07 March, 2018 early in the day before US Market opens.) The best I can produce from among my own holdings right now as to fixed income is PRSNX, down by -0.35% YTD. Morningstar also puts it in "World Bond" category. Not exactly apples-to-apples comparison, though. My EM PREMX YTD is down by -1.39%. Venezuelan bonds the reason? Probably to some extent. The monthly div. has been shrinking, too. I like to compare PREMX with Fidelity's FNMIX. YTD, FNMIX is down by -1.4%.
SUBFX is short duration and high quality, though down very slightly for the year. They have a history of waiting till the time is right, then buying higher risk assets when they're beating down. OSTIX is short duration and low quality, but they have a history of picking well among lower-rated bonds so they avoid big losses. (They're at break-even for the year). THOPX has done very well for years (and is up 0.79%) though I don't know enough about it to recommend it--I'm looking into it.
I am close to retirement so my first objective is not to loose much money, given how overvalued most of everything is.
I try to group bond funds by duration, relying on M* stats ( although they are somewhat dated and unreliable)
In order of increasing duration my positive funds seem to be
ZEOIX VUSFX FLRN VWSUX VMLUX ( all less than 1- 2 years duration)
FPINX
BAIIX PFIUX IOFAX
Then specialty funds
Inflation WIW
International MAINX
Worth noting PFIUX outperforming PONDX FPINX is a very slow mover but may be worth keeping for times like this, although I am concerned their heavy use of asset backed loan might hurt if auto loan defaults go up
Traditional TIPs fund underwater, assuming because inflation lower than interest rate rise
I too am buying CDs but under a year so I can have cash for market correction or to live on.
"but you are less likely to get caught in a sharp downdraft"
What is the objective, starting with why invest in bonds? This is not a flippant question. If preservation is paramount, with an eye to getting a little something, as opposed to, say, diversifying a portfolio, then cash/CDs/Savings Bonds meet that need.
The question posed suggests that at least part of the objective is to avoid losing in a sharp downdraft. But how about a market where rates gradually drift higher (lower bond prices)? If the drift is slow enough, one could do better than ultra short bonds by going longer, taking a somewhat bigger hit on price, but making that up with higher yields. Then again, if the focus is on preventing losses in a sharp downdraft, cash provides better protection.
I've written before that in taxable accounts, I like short-intermediate munis (such as VMLUX that sma3 mentioned). They can provide as much after-tax income as taxable bonds, while interest rates on munis tend shift less than they do on taxable bonds (because muni nominal rates are just a fraction of taxable bond rates).
Skeet listed bond categories that are positive YTD. There's yet another category, one where every fund is positive YTD. At least it used to be a category, before it imploded during a sharp downdraft. All that remains are three survivors, not enough any more for their own category.
Adjustable rate (not floating rate) bond funds. Back in '91, Scott Burns wrote of "the growing number of funds dedicated to adjustable rate mortgages. ... Adjustable Rate Mortgage funds may be the Ultimate Intermediate Security they provide the return of 5 to 10 year securities with the price volatility of a 1 or 2 year security."
Then reality came along around 1994 and crushed theory. The category crashed and burned, most funds were converted to different types of funds or shuttered. For example, T. Rowe Price's Adjustable Rate U.S. Government Fund became T. Rowe Price Short-Term U.S. Government Fund March 31, 1995, which merged into PRWBX around Nov 1, 2000. The three survivors (this is not a recommendation) are: FEUGX, FISAX, EKIZX.
As I recall, the problem with these funds was that the rates didn't adjust fast enough, prices dropped quickly, and a feedback loop developed. Not 100% sure, though. The major point is that buying into any particular line of reasoning may be the investing equivalent of buying a Maginot Line (or a "wall", if one wants to update that). The minor point is that how interest rates move can affect prices in unexpected ways.
Circling back to earlier points: if preservation is paramount, IMHO cash/CDs etc. do the best job. If there are other objectives, one can protect against some rising rate risks at the expense of exposure to other rate risks, or diversify using a variety of bond fund types.
Here's a 2 page pdf from Federated showing the rising interest rate periods from 1993 through 2016, and how a few different types of bond indexes did (e.g. HY, EM) during those periods. Federated lists a half dozen different type of funds that might be useful, followed of course by the funds it offers in those categories. http://www.federatedinvestors.com/FII/daf/pdf/literature/45685.pdf
@msf: Appreciate the post. We all have to play both ends off the middle, so to speak, given interest rates, market conditions, personal goals, and our own risk tolerance. CDs and Savings Bonds are worthless for generating real profits these days. I'm willing to slog through some bond-averse conditions like rising rates for quite a while, assuming that rates can't go up forever. And I am less and less worried about share price, and want to see the dividends coming in regularly into my bond funds and "balanced" funds. (bonds= 37% of total portfolio, but that 37% is not all in specific and discreet bond funds.) I have two that pay monthly, and I get quarterlies from the hybrid, MAPOX. (PRWCX is a hybrid, but pays only in December, so its div. is a thing I just consider a supplement to its cap. gains.) How often are we reminded that all of this sh-- (STUFF) is cyclical, eh? Of course evolving markets and new situations cannot just be ignored. Over time, countries move out of "frontier" to "emerging" status. And anything else you can think of, too. It all goes into the soup--- the world we invest into. ************************ Bond funds: much easier than trying to get into individual bonds, except for special offerings like the Massachusetts "mini-bonds" I recall, years ago. It's regular income, even though I don't need it right away and am reinvesting it all. All these years of reinvesting and re-deploying a big slug into STOCKS has worked well for me. And I'm 7 years away, still, from RMDs.
>> how about a market where rates gradually drift higher (lower bond prices)?
Like most I have assumed this would mean trouble for bond fund performance, and generally I am skeptical of 'this time it's different'. But the fed fund rate has tripled since 12/15 (still very low of course), and if you compare over that period two pairs of similar-performing bond funds, FTBFX + DODIX and PONDX + FSICX, it seems as though they hardly notice. Must this be because the rate is so low and not the 4%-5% of "normal" economic times?
Thanks @Bobpa for continuing your questions on bonds. Hearing the responses kind of strengthens my feeling on direction. At this point in the rate cycle, if given the option of short term bonds or a CD ladder, there is no question for me. I'll take the guaranteed 2-3% now and be very confident that next year that ladder can buy into possibly 4% CDs a year from now. I have no faith that your standard high quality short term bond fund can deliver that return. Maybe some intermediate, multisector or global funds can do better, but at much greater risk of losing your principle.
Although I watch bond funds and Treasury yields, I have not viewed this mix together; so I threw your mentions along with FCBFX.
Chart (below) for a 1 year period through March 6, 2018. During this period there were 2 yield bumps of some consequence versus a smooth uptrend, being Sept. 7 and Dec. 14, 2017. For these 5 funds, the following total returns for 1 year are:
One year chart of yield changes for 30,10,5 and 1 year Treasury issues.These, of course; are not the original issues yields, but the yields as determined by market forces. In this case of yield and not performance, the % increase shown at the right edge are the % change upward in the yield for the 1 year period.
Well, beyond central bank plans and such, overall; with the equity market shakes of the past several weeks, folks have not been running to safe haven bonds. Maybe individuals; but apparently the big money is missing. Are they go'in to cash? I don't have a clue. But, as we began shedding equity; we did not move into safe haven bonds, as would have been the case 10 years ago, the sell money moved into money market. And there it sleeps for now, earning a tiny annual yield, but safe from a large draw down.
Like most I have assumed [gradual upward drift in rates] would mean trouble for bond fund performance, and generally I am skeptical of 'this time it's different'. But the fed fund rate has tripled since 12/15 (still very low of course), and if you compare over that period two pairs of similar-performing bond funds, FTBFX + DODIX and PONDX + FSICX, it seems as though they hardly notice. Must this be because the rate is so low and not the 4%-5% of "normal" economic times?
Intuitively, it makes sense to consider multipliers in rates ("rate has tripled"). For example, if you've got a long term bond paying 1% ($1 on a $100 bond), and then market rates triple to 3%, you'd expect the price to get cut on the order of 2/3 - so that the buck of interest would then represent a 3% yield on the $34 bond price. But such effects are already incorporated into the duration figure, so all that matters is the amount of increase (in this example, 2%), not the multiplicative factor.
So while it's true that fed fund rates tripled from 0.5% on Dec 17, 2015 to its current value of 1.5% on Dec. 13, 2017, if one is using duration to estimate price change, what matters is that the rate rose by 1.0%. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
Where the two perspectives (multiplicative rate change and incremental rate change) come together is in how the duration is calculated. The lower the current rate, the larger the duration for a given bond. So when rates are low and a 1% increase represents a tripling, the duration of a bond is relatively high. If rates were at 4% and a 1% increase represented merely a 25% increase in the rate, the duration of the same bond would be lower. Intuition isn't wrong, it just needs to be applied judiciously.
A second consideration is which rate increase is the appropriate one to look at. When rates increase, the yield curve does not shift up uniformly. It may flatten (longer term rates shifting less) or steepen (longer term rates shifting up more rapidly). So it is important to look at the appropriate portion of the curve. For that matter, it's also important to look at the appropriate curve - high yield, corporate, treasury, etc.
For example, the Federated page I cited above shows that the 10 year treasury yield rose 1.00% between 7/29/16 and 12/31/16. During that period of time, the fed funds rate rose just 0.25% - from 0.5% set on Dec. 17, 2015 to 0.75% on Dec 14, 2016. If one wants to look at multiples, the fed funds rate rose 50%, while the 10 year treasury yield went from 1.46% to 2.45%, a 67% increase. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2016
It's not so much that "this time is different", but that every time is a bit different. Yield curves shift differently based on economic conditions and people's expectations. When investors expect a recession, they may bid up long term bonds (pushing down their rates) to lock in yields. Should the fed funds rate be raised at the same time, that would likely strengthen the decline of long term rates.
For an example of how each time is different, look at the Federated data: from 8/21/10 to 3/31/11, ten year treasury yields rose 1.00%, and the US Aggregate index dropped 0.77%.
From 7/29/16 to 12/31/16 the ten year yield again dropped 1.00%. But this time, the aggregate index lost over 3%.
@davidrmoran Correct. The chart performance is strictly total percentage return for a time period; from wherever the total arrives, being price performance, a yield/dividend or a short/long capital gain or loss.
Some may prefer a chart with a $10,000 baseline start point, as with the below M* graph for FSICX. I seldom use this, unless I'm at the page doing something else. If I'm interested in a "what if" had I chosen one investment vs another in terms of an actual dollar value; I'll place the ticker symbols into the charts like I linked in the earlier post, set a begin point, view the total return to the current date and then use my handy-dandy HP-12C calculator to find how much "money" I would have made on a $87,000 investment into FSICX over a 1 year time period. I round the total % return to the nearest 1/10th percentage, and in the example, would have a cash gain of $4,785, more or less; as FSICX has a 1 year percentage return of 5.5%. I personally don't need more than the view of percentage returns. Although all I really needed to satisfy my curiosity was the percentage returns. But, we all process values differently in our brains; and in particular, various types and styles of graphic displays are more pleasing and understandable to the viewer of data. I'm sure studies have been performed of this process. In particular, for a graphic; I don't find scatter or dot plots graphics to be pleasing to my brain input and processing the view for a meaningful "ah-ha" moment of understanding. Our wonderful world of online instant data in various formats should be of great benefit for investors willing to discover the style that suits their needs. Not unlike the various add-ons one finds most pleasing with the final preparation of a hot dog or hamburger. I try to keep all of this as simple as possible, as I fully understand the limits of my abilities to process whatever data into meaningful results.
Comments
Due to rising interest rates I've reduced my bond fund positions (from nine funds to six) within my income sleeve and I'm increasing my CD Ladder along with adding to my convertible securities fund plus a few other hybrid funds as well. I'm thinking most bond funds are going to take a hit in a rising interest rate environment I don't care how highly rated they might be or how good they are. Bond funds in general are going to take a hit in a rising interest rate environment. There is no magic sauce to prevent this although some will fair better than others.
Within my fixed income sleeve the average duration is 2.7 years with an average maturity of 5.35 years. Thus far this year on a total return basis the sleeve is at break even with my bank loan fund (GIFAX) and a strategic income fund (NEFZX) performing the best. In my hybrid income sleeve my best performer is my convertible securities fund (FISCX) followed by some hybrid type income funds (AZNAX) and (ISFAX). These funds are carrying their respective sleeves and if it was not for their stellar returns thus far this year both these sleeves would have negative year-to-date total returns. In addition, faltering funds might get trimmed and/or eliminated as the year progresses.
With this, I'm planning on expanding the size of my step positions within my CD Ladder as the steps mature plus I may add some more to my convertible securities fund and the other hybrid income funds that have positive year-to-date returns.
If you have a fixed income fund with positive total returns thus far this year please let your fellow MFO members know. I'm thinking they are few and far between. In my review of Morningstar's Fund Category Returns the bond fund categories with positive year-to-date returns are emerging markets, bank loan, world bond, non traditional bond, and ultra short bond.
I have provided a link below to Morningstar's Category Fund Return site.
http://news.morningstar.com/fund-category-returns/
The pickings seem to be thin within fixed income funds that have positive year-to-date returns.
Old_Skeet
I try to group bond funds by duration, relying on M* stats ( although they are somewhat dated and unreliable)
In order of increasing duration my positive funds seem to be
ZEOIX VUSFX FLRN VWSUX VMLUX ( all less than 1- 2 years duration)
FPINX
BAIIX PFIUX IOFAX
Then specialty funds
Inflation WIW
International MAINX
Worth noting PFIUX outperforming PONDX
FPINX is a very slow mover but may be worth keeping for times like this, although I am concerned their heavy use of asset backed loan might hurt if auto loan defaults go up
Traditional TIPs fund underwater, assuming because inflation lower than interest rate rise
I too am buying CDs but under a year so I can have cash for market correction or to live on.
Seems you have found your own answer to the question you raised in your most recent post with the funds you listed.
Good deal!
Going to continue with my plan as noted above.
Skeet
What is the objective, starting with why invest in bonds? This is not a flippant question. If preservation is paramount, with an eye to getting a little something, as opposed to, say, diversifying a portfolio, then cash/CDs/Savings Bonds meet that need.
The question posed suggests that at least part of the objective is to avoid losing in a sharp downdraft. But how about a market where rates gradually drift higher (lower bond prices)? If the drift is slow enough, one could do better than ultra short bonds by going longer, taking a somewhat bigger hit on price, but making that up with higher yields. Then again, if the focus is on preventing losses in a sharp downdraft, cash provides better protection.
I've written before that in taxable accounts, I like short-intermediate munis (such as VMLUX that sma3 mentioned). They can provide as much after-tax income as taxable bonds, while interest rates on munis tend shift less than they do on taxable bonds (because muni nominal rates are just a fraction of taxable bond rates).
Skeet listed bond categories that are positive YTD. There's yet another category, one where every fund is positive YTD. At least it used to be a category, before it imploded during a sharp downdraft. All that remains are three survivors, not enough any more for their own category.
Adjustable rate (not floating rate) bond funds. Back in '91, Scott Burns wrote of "the growing number of funds dedicated to adjustable rate mortgages. ... Adjustable Rate Mortgage funds may be the Ultimate Intermediate Security they provide the return of 5 to 10 year securities with the price volatility of a 1 or 2 year security."
Then reality came along around 1994 and crushed theory. The category crashed and burned, most funds were converted to different types of funds or shuttered. For example, T. Rowe Price's Adjustable Rate U.S. Government Fund became T. Rowe Price Short-Term U.S. Government Fund March 31, 1995, which merged into PRWBX around Nov 1, 2000. The three survivors (this is not a recommendation) are: FEUGX, FISAX, EKIZX.
As I recall, the problem with these funds was that the rates didn't adjust fast enough, prices dropped quickly, and a feedback loop developed. Not 100% sure, though. The major point is that buying into any particular line of reasoning may be the investing equivalent of buying a Maginot Line (or a "wall", if one wants to update that). The minor point is that how interest rates move can affect prices in unexpected ways.
Circling back to earlier points: if preservation is paramount, IMHO cash/CDs etc. do the best job. If there are other objectives, one can protect against some rising rate risks at the expense of exposure to other rate risks, or diversify using a variety of bond fund types.
Here's a 2 page pdf from Federated showing the rising interest rate periods from 1993 through 2016, and how a few different types of bond indexes did (e.g. HY, EM) during those periods. Federated lists a half dozen different type of funds that might be useful, followed of course by the funds it offers in those categories.
http://www.federatedinvestors.com/FII/daf/pdf/literature/45685.pdf
************************
Bond funds: much easier than trying to get into individual bonds, except for special offerings like the Massachusetts "mini-bonds" I recall, years ago. It's regular income, even though I don't need it right away and am reinvesting it all. All these years of reinvesting and re-deploying a big slug into STOCKS has worked well for me. And I'm 7 years away, still, from RMDs.
Like most I have assumed this would mean trouble for bond fund performance, and generally I am skeptical of 'this time it's different'. But the fed fund rate has tripled since 12/15 (still very low of course), and if you compare over that period two pairs of similar-performing bond funds, FTBFX + DODIX and PONDX + FSICX, it seems as though they hardly notice. Must this be because the rate is so low and not the 4%-5% of "normal" economic times?
Although I watch bond funds and Treasury yields, I have not viewed this mix together; so I threw your mentions along with FCBFX.
Chart (below) for a 1 year period through March 6, 2018. During this period there were 2 yield bumps of some consequence versus a smooth uptrend, being Sept. 7 and Dec. 14, 2017.
For these 5 funds, the following total returns for 1 year are:
FSICX = +5.5%
PONDX = +5.1%
FCBFX = +3.1%
DODIX = +2.4%
FTBFX = +1.5%
Since Sept. 7, 2017.......
FSICX = +.4%
PONDX = +.4%
FCBFX = -1.9%
DODIX = -.8%
FTBFX = -2.1%
Since Dec. 14, 2017.......
FSICX = +.2%
PONDX = -.8%
FCBFX = -2.4%
DODIX = -1.1%
FTBFX = -1.8%
http://stockcharts.com/freecharts/perf.php?FTBFX,DODIX,PONDX,FSICX,FCBFX&p=5&O=011000
One year chart of yield changes for 30,10,5 and 1 year Treasury issues.These, of course; are not the original issues yields, but the yields as determined by market forces. In this case of yield and not performance, the % increase shown at the right edge are the % change upward in the yield for the 1 year period.
http://stockcharts.com/freecharts/perf.php?$UST30Y,$UST10Y,$UST5Y,$UST1Y&p=5&O=011000
Well, beyond central bank plans and such, overall; with the equity market shakes of the past several weeks, folks have not been running to safe haven bonds. Maybe individuals; but apparently the big money is missing. Are they go'in to cash? I don't have a clue.
But, as we began shedding equity; we did not move into safe haven bonds, as would have been the case 10 years ago, the sell money moved into money market. And there it sleeps for now, earning a tiny annual yield, but safe from a large draw down.
Take care,
Catch
So while it's true that fed fund rates tripled from 0.5% on Dec 17, 2015 to its current value of 1.5% on Dec. 13, 2017, if one is using duration to estimate price change, what matters is that the rate rose by 1.0%.
https://www.federalreserve.gov/monetarypolicy/openmarket.htm
Where the two perspectives (multiplicative rate change and incremental rate change) come together is in how the duration is calculated. The lower the current rate, the larger the duration for a given bond. So when rates are low and a 1% increase represents a tripling, the duration of a bond is relatively high. If rates were at 4% and a 1% increase represented merely a 25% increase in the rate, the duration of the same bond would be lower. Intuition isn't wrong, it just needs to be applied judiciously.
A second consideration is which rate increase is the appropriate one to look at. When rates increase, the yield curve does not shift up uniformly. It may flatten (longer term rates shifting less) or steepen (longer term rates shifting up more rapidly). So it is important to look at the appropriate portion of the curve. For that matter, it's also important to look at the appropriate curve - high yield, corporate, treasury, etc.
For example, the Federated page I cited above shows that the 10 year treasury yield rose 1.00% between 7/29/16 and 12/31/16. During that period of time, the fed funds rate rose just 0.25% - from 0.5% set on Dec. 17, 2015 to 0.75% on Dec 14, 2016. If one wants to look at multiples, the fed funds rate rose 50%, while the 10 year treasury yield went from 1.46% to 2.45%, a 67% increase.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2016
It's not so much that "this time is different", but that every time is a bit different. Yield curves shift differently based on economic conditions and people's expectations. When investors expect a recession, they may bid up long term bonds (pushing down their rates) to lock in yields. Should the fed funds rate be raised at the same time, that would likely strengthen the decline of long term rates.
For an example of how each time is different, look at the Federated data: from 8/21/10 to 3/31/11, ten year treasury yields rose 1.00%, and the US Aggregate index dropped 0.77%.
From 7/29/16 to 12/31/16 the ten year yield again dropped 1.00%. But this time, the aggregate index lost over 3%.
@catch, you are not showing $10k growth, though, right?
Correct. The chart performance is strictly total percentage return for a time period; from wherever the total arrives, being price performance, a yield/dividend or a short/long capital gain or loss.
Some may prefer a chart with a $10,000 baseline start point, as with the below M* graph for FSICX. I seldom use this, unless I'm at the page doing something else.
If I'm interested in a "what if" had I chosen one investment vs another in terms of an actual dollar value; I'll place the ticker symbols into the charts like I linked in the earlier post, set a begin point, view the total return to the current date and then use my handy-dandy HP-12C calculator to find how much "money" I would have made on a $87,000 investment into FSICX over a 1 year time period. I round the total % return to the nearest 1/10th percentage, and in the example, would have a cash gain of $4,785, more or less; as FSICX has a 1 year percentage return of 5.5%. I personally don't need more than the view of percentage returns. Although all I really needed to satisfy my curiosity was the percentage returns.
But, we all process values differently in our brains; and in particular, various types and styles of graphic displays are more pleasing and understandable to the viewer of data. I'm sure studies have been performed of this process. In particular, for a graphic; I don't find scatter or dot plots graphics to be pleasing to my brain input and processing the view for a meaningful "ah-ha" moment of understanding.
Our wonderful world of online instant data in various formats should be of great benefit for investors willing to discover the style that suits their needs. Not unlike the various add-ons one finds most pleasing with the final preparation of a hot dog or hamburger.
I try to keep all of this as simple as possible, as I fully understand the limits of my abilities to process whatever data into meaningful results.
http://www.morningstar.com/funds/XNAS/FSICX/quote.html
Take care,
Catch