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``It's unclear what the neutral rate is,” Vataru says. ``It's a slightly untethered market.”
© 2015 Mutual Fund Observer. All rights reserved.
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"One of the fundamental issues dogging the bond market is uncertainty about how high rates will actually need to be raised."
Bond funds are hurting big time this year. I’d expect such from longer dated ones. But some shorter term and intermediate term funds are getting banged up as well. Takes a lot of change in interest rates to bring about that kind of carnage in intermediate and shorter duration bond funds. If investors are fleeing, as I suspect, that worsens the situation as managers need to unload holdings before they mature and at the least unattractive valuations.
Long predicted, rates are moving higher. I try and stick to an allocation model, so I’m not dumping all my bond funds. The portfolio is strong enough to stand up to a hit from any one area. But I have in recent years been shifting more into alternative type funds and out of both equities and bonds. Alternatives constitute 40% of my allocation now - the most ever. Included are multi-strategy, long-short, market neutral, hedged equity and style premia funds - plus probably some types I can’t remember. @Mark makes a good point. If you jump into cash you pretty much commit to very low returns. It you throw it all into equities you increase your risk - though it may not feel that way at the moment. Commodities have been hot a long time. Chase them at your own peril.
If interest rates continue to rise, PFIX will continue to do well.
Or look at funds that have not crashed so far this year. RCTIX ICMUX RPHIX are down a bit but probably will not yield much and won't make a lot of money.
Same thing is true of short duration bond funds like VUSFX.
I am a bit concerned that RCTIX and ICMUX are sorta a black box, focused on RMBS and non agency MBS. Remember IOFIX?
Lots of people are recommending dividend stocks. I am very reluctant to increase my equity exposure by buying dividend stocks just to get income. Consumer staples and Utilities are more resilient to market declines, but could still drop 20% in a major recession.
Right now I am staying in cash and short term bonds funds, with some RCTIX ICMUX RPHIX and PFIX
I am open to other ideas.
Particularly, high-dividend paying stocks. That has been the trend in 2022.
Very recently, i read a post, here or elsewhere, expressing that it makes sense to buy-back some beaten-down bond funds that you are convinced are otherwise solid, good investments. Then, in effect, the dividends are worth more than "face value." I can't find a good argument against that tactic.
Apart from that particular angle, it seems to me that bonds are dead money, currently. I like to stick to a plan, with pre-decided percentages in my allocations between cash, bonds and stocks. (I'm just NOW, after all these years, starting to seriously grow my cash, in order to keep some dry powder handy.) I don't impulsively switch around, but with the world all screwed up the way it is right now, changes must be made to the portfolio. What that means for me is: more stocks, but stocks with good dividends. Those divs are a hedge against mediocre to bad market results. How long will the shit-show last? We shall see. The human race has, from the starting gun, been unable to get out of its own way, time and time again. Ever since we became self-aware creatures.
I think it more likely reflects peoples' continuing belief that stocks will always go up, but they find it hard to see how a bond paying 2% will go up when interest rates are going to 4% and beyond
I wonder how many investors in this market have ever seen a bear market that lasted more than a few weeks. 1998, 2008 anyone?
I wasn't buying stocks in 1981 ( unfortunately) but my wife and I bought a lot ( seemed like a lot back then) of the Dreyfus Liquid Assets Fund. Anybody else remember?
As far as @Mark question… “ So what exactly are those of you who are out of bond funds or considering dumping your bond funds going to do with the cash or proceeds of same?”… what is wrong with fleeing to equities? Greater risk? Given inflation and rising rates…cash is risk too, no? I think I’m splitting the difference by remaining in funds like FMSDX and FBALX expecting them to manage bond exposure better than me.
Might have been mine. I recently moved some excess cash from my household budget that won’t be needed for 6 months to a year out into PRIHX where it can “cohabitate” along with existing longer term money. The fund is categorized “intermediate term” but is so conservatively managed it behaves more like a short term high yield fund. Being down more than 5% YTD I felt it was worth the risk. I can’t predict the future. But I can tell you that should short / intermediate term rates reverse direction and begin trending downward, the fund will respond very favorably and outrun cash.
Nothing ventured, nothing gained.
The bond market is way out ahead of the Federal Reserve Board at this time. What they eventually do will depend on the data (inflation, jobs numbers, housing starts, etc.) What the FOMC might like to do and what it eventually does are two different things.
Losses in bond funds are negatively related to their duration but tend to be self-limiting. Intermediate-term bond fund duration range is wide. MS/NT funds may use derivatives for duration management. So, there may be wide variations in the performance of bond funds.
I've exchanged my largest bond position (DODIX) for a stable value fund late last year.
My other bond funds (VUSFX, RCTIX) are short-duration funds.
I dislike the current investment environment and believe equities are more attractive than fixed-income.
However, I can't assume the inherent risk of a 100% equity portfolio.
I hold my nose while capital is allocated to low-yielding funds¹ guaranteed to generate negative real returns.
¹ RCTIX SEC yield of 4.38% is relatively high
Forward looking, within a year of reaching the sweet spot goal may be good times in bond-land again. Of course throw in another financial disaster and we're back at square one.
Note that 30-day SEC yield is the potential future TR for bonds.
Another rule of thumb is to prefer stable-value (SV) funds when their guaranteed rates well exceed the 30-day SEC yield of bond funds under consideration (as now in many cases); but reverse when that situation changes.
"I was gratified to be able to answer promptly and I did. I said I didn't know."
I'm somewhat happy just sitting on cash, thinking that it's a short term situation. I've added a bit to a few individual stock positions believing they may be a good spot to hide out... BMY, O, VZ, but am cautious.
Frankly, I'm afraid of the next week or so in regards to Putin's next move in Ukraine. This reminds me of early 2020 when Covid was starting to reek havoc in Europe, and yet our stock market just ignored it and kept going higher. Until it didn't. I've asked myself several times since then why I didn't pay closer attention to what was going on, and the associated risks to our markets.
If you have a say 50/50 allocation between stocks and bonds, why would you not just rebalance? Take-advantage of the cheapness?
I get it with trend-following or trading strategies, which I like, but don't long-term investors need to accept that some years will be worse than others, no matter what the asset class?
I saw DODIX mentioned.
Let's say by end of year, it's -9%. About its worst MAXDD. Don't two +9's get remembered, as in 2019 and 2020?
Here are calendar year returns going back to 1990:
Year Count: 32
Worst Year: -2.9
Best Year: 20.2
Average Year: 6.4
Sigma Year: 5.5
YTD (thru 3/24): -5.6
2021: -0.9
2020: 9.4
2019: 9.7
2018: -0.3
2017: 4.4
2016: 5.6
2015: -0.6
2014: 5.5
2013: 0.6
2012: 7.9
2011: 4.8
2010: 7.2
2009: 16.1
2008: -0.3
2007: 4.7
2006: 5.3
2005: 2
2004: 3.6
2003: 6
2002: 10.7
2001: 10.3
2000: 10.7
1999: -0.8
1998: 8.1
1997: 10
1996: 3.6
1995: 20.2
1994: -2.9
1993: 11.4
1992: 7.8
1991: 18.1
1990: 7.4
Granted, all during secular bond bull. But there were certainly some periods in there of rising rates, if not with concurrent inflation.
Also, if there is sufficient liquidity, and there seems to be, why is selling a bond or TBill early bad? Can't you just pick-up another with the reduced principal but higher interest for the remainder of the planned term? Don't you end up in same place, less trading fee/bid spread?
Now if liquidity is crashing, I get it (e.g., IOFIX in March 2020, I do remember and will never forget). Is that what the concern is for investors ... that there will not be enough liquidity with everybody running for the door in bond fund land, perhaps including the Fed?
Last three month changes
6 mo treasury up 0.78%
1 year 1.2%
2 year 1.4%
5 year 1.1%
30 year 0.6%
15 year mortgage rates have risen even more:1.5% and 30 year rates about 1.6%.
DODIX has a duration of 4.7 per M* so you would expect it to drop 4.7% for every 1 % increase, or 5.2% based on treasuries or up to 7% based on mortgages.
It is down 5.5% YTD per M*
These changes are also in line with short duration funds like VUSFX ( duration of 0.98) which is down 1%.
If you use bond funds for income, you are now going to get more, although it will be a while before it makes up for the drop in NAV.
If you use bond mutual funds for portfolio balancing and diversification, it may be a difficult time, because if interest rates continue to rise, NAVs will continue to fall, and this may occur just at the same time stocks fall too, if the war gets worse or there is a recession. This is not how "bonds as ballast" is supposed to work.
An alternative is to look at individual bonds, where ( without a default) you are guaranteed the YTW return and to get your capital back. High rated 5 to 7 year corporates are yielding 2.5 to 3%. If inflation continues to increase, you will still loose money as the coupon rate will not increase, but you will get your principal back (of course it looses some purchasing power).
There are also fixed term ETFs where all the bonds mature about the same time and the ETF terminates at the end of a specific year. You can set up a ladder with equal amounts in each year and roll this years redemption into an ETF on the top of the ladder. This is simpler than individual bonds, provides diversification and has a low expense ratio (0.18% for BSCM the 2022 Invesco product)
ishares and Invesco both have lots of these available for corporate munis emerging market and high yield.
https://www.kiplinger.com/investing/bonds/601759/build-a-bond-ladder
I heard of these ETFs but not quite sure how they work. The article says at the end of the term you get back your money plus capital gains. Does this mean you are guaranteed not to lose any principal if you hold on until the end of the ETF's term, same as if you bought an individual bond? Would this hold true if you bought in the middle of the term?
Individual bonds, on other hand, I'm somewhat familiar with. I do suspect that if investors could hold IG bond certificates at home or in a safety deposit box, while receiving regular dividend drops in the mail or checking account, there would not be the outcry we have been bombarded with since autumn last year.
There are several term CEFs now that may benefit from closing of the discounts at termination.
Good discussion everyone.