Sell all bond funds?

Tarwheel

I realize that bond fund returns go up and down, but their abysmal long-term returns after the past year or so are astonishing. With CD yields so high right now, why not just ditch bond funds and put all the money in CDs? I can construct a 5-year CD ladder at Fidelity with every issue exceeding 5% and an overall yield of 5.34%. Jeez … I don’t own a single bond fund that can come close to that over the past five years and only one that tops that over 10 years. How many years would it take my bond funds to earn as much as this simple CD ladder? Answer: a lot.

The only fly in the ointment is that few of the higher yielding CDs are call-protected, so if yields drop a lot, I suspect that many of these banks will be calling in their CDs.

LewisBraham

Not a bad strategy, but it’s a mistake to compare past performance to future expectations as in “I don’t own a single bond fund that can come close to that over the past five years and only one that tops that over 10 years.” It’s the next five- and ten-years that matter, not the last ten. Moreover, if you had held a CD 10 years ago until today, you wouldn’t have received 5.34% annualized either, closer to zero I bet as much of that period rates were considerably lower. So, you must look at the forward yield and credit quality of bonds today and compare them to the forward yield and credit quality of CDs with comparable maturities. I also think the fact that the CDs you mentioned are callable is problematic. If rates go lower, your yield disappears.

Crash

Some level of simple, stupid convenience matters to me. I like what I'm seeing from my sweep account lately, and I can feed it money from the checking account sitting right here in my pyjamas. At the 2 CUs where I do business here on Oahu: Navy FCU offers a good rate but puts a severe limit on how much you can put in. And they don't offer the great rate for longer-term CDs. ... Hickam FCU is offering rates so low, it's just not even pretending to be competitive. So, i'll hold my bonds and keep collecting and reinvesting a monthly yield above the CD rates that are offered. Share price fluctuates, but it's not drastic.

Tarwheel

My question was somewhat rhetorical and I don’t plan to sell all of my bond funds. But I do think I’ll sell at least one fund (FIPDX - a TIPs fund) and put the proceeds into a CD ladder. As a TIPs fund, I am astonished that it’s my worst performing bond fund. Isn’t this kind of market conditions what TIPs funds are supposed to prepare you for? It has totally failed in providing any sort inflation protection. The current yield is very low. A CD ladder would provide guaranteed returns, and if yields continue to rise, I can just reinvest maturing issues into higher yielding ones.

Crash, why not buy CDs through Fidelity? The yields are extremely competitive.

hank

Who knows? Not the sharpest knife in the bond deck here. But I have a lot more bonds (thru funds) than cash. If short or intermediate duration bonds, they may possibly do better than cash over time without a whole lot of duration risk. Don’t overlook some capital appreciation if rates fall. Bonds / bond funds do move around in value day to day, so having some might temper portfolio volatility more than cash would if striving for balance. But it’s a close call.

I like global bonds as a hedge against a falling dollar. I’ve been moving my small bit of cash in and out of a GNMA etf, buying in at near 4% on the 10 year and unloading them when the 10-year nears 3.5%. So I’m currently out with the 10 year around 3.6%. That game will work until it doesn’t. Likely, interest rates are headed higher over the long term - which would kill that goose.

There’s no certainty any of the above will work out as planned. I usually operate differently than most here. So realize cash has been the “flavor of the month” for quite a few months now. The rates are currently attractive. Do I want to tear apart a balanced portfolio to throw a bunch into cash? No.

(PS - I don’t do TIPS. Others can debate the merits. I notice some added commentary below.)

AndyJ

As far as that TIPS fund, or any TIPS fund goes, the key thing to remember is that TIPS are Treasuries first, an inflation protection asset only second, and that that first principle is on steroids for longer durations.

The fund you reference, per M*, has a duration of 6.6. NAV for a fund like that is bound to suffer during a time like the bond market has been through for the past year-plus.

Tarwheel

Andy, I believe that FIPDX’s duration is quite a bit higher now than when I first bought it. However, I don’t see how it can appreciate much unless rates drop a lot because it yields next to nothing. Seriously, the yield from my fund in February was one cent!

LewisBraham

The shorter the maturity of a TIPS fund or individual bond, the more it acts like a pure inflation hedge and less like a Treasury bond. As the maturity increases, it encounters the same duration risk, the same interest rate risk as regular Treasuries. If you're trading TIPS, you want to buy the shortest maturity ones in a rising rate environment and the longest ones in a falling rate environment, assuming you have a normal upward sloping yield curve. That last yield curve bit of course is a big assumption.

AndyJ

@Tarwheel, if M* is correct, that fund doles out income mainly once a year, in December, and it was an 8%+ distribution in Dec. 2022 (80c on a NAV of $9.07). The same table (on the Performance/Distribution page) shows how much the NAV fell over 2022.

Anna

Fearing my own ignorance and possible future unforeseen consequences of an intermediate term TIPS fund (VSIPX), I split the baby between VSIPX and the shorter term VTAPX. When rates started to rise, I says to myself, I says, "You are a genius". This has only resulted in my seeing just how ignorant I really am about funds like these. I should have just gotten rid of it. (In Roth account)

MikeM

Inflation protection is certainly a misnomer. TIPS suffer the same fate as all bond funds and ETFs during rising rates. Duration matters just like all other bonds. I didn't know this until a previous thread was posted a few weeks ago. But that said, now might be the wrong time to dump a TIPS fund you took the ride down with. There is good commentary from Devo on this matter and also earlier posts from some knowledgeable people.

FWIW, I started small investments in VTIP and LTPZ, two ends of the duration spectrum. Both up slightly from my buy a few weeks ago.

larryB

I am no expert on TIPS,,,, lost a bit with SCHP and then less with STIP last year. An expert on TIPS is David Enna on his site Tipswatch.com. I think that TIPS funds disappointed many investors last year. Buying individual TIPS themselves and holding to maturity is a different matter.

sma3

I tend to agree with Tarwheel in that I am astonished how poorly "go anywhere" bond funds have done recently. It seems obvious that once the Fed started raising rates and inflation was high any duration over 1 or 2 was going to kill your NAV. I have a hard time buying funds that are committed, by their prospectus or "mandate" to do things that seem a bad idea

LewisBraham

If you look at a fund's average duration, theoretically for every 1 year of duration, the fund should fall one percentage point for every one percentage point increase in interest rates. So, if a fund has a duration of six years, and rates rise from 0% to 4%, the fund's bond portfolio should fall 24%, maybe 20% overall if you factor in the yield. I think most people just aren't used to a rising rate environment. Bond investors have just had it good for so long, they didn't realize the risks. I would add that if the Fed had raised rates more gradually, funds would've had more time to adapt to the new environment, but Fed Chair Powell wanted to send consumers and labor a message by raising rates quickly and aggressively: "I'll teach you not to ask for higher wages and buy stuff!" Now imagine you're a certain California bank making highly leveraged bets on the same bonds in your fund portfolios you thought were safe.

larryB

And the reverse is true too. At some point rates will reach a plateau and then the long awaited pivot might occur. A fund with a six year duration might also be at peak yield. So if rates fall by 3% a healthy total return would be in the cards. Anyone for timing interest rates?

LewisBraham

@larryb You are correct. When the reverse occurs and rates fall, bonds will have a significant rally just so long as they do not default. With a falling rate scenario, generally in a recession, the concern becomes credit risk as opposed to duration. Low credit quality bonds, junk especially, may not do well in that environment if a sour economy causes them to default. But Treasuries usually do exceptionally well.

yogibearbull

If the objective is to keep up with inflation, 5-yr TIPS held to maturity will do that. Longer-term TIPS will too, but it may be harder to hold them maturity. TIPS funds on the other hand are affected by duration and non-maturity; they are also required to distribute inflation-adjustment annually, whether earned or not, inflows or not.
https://stockcharts.com/h-perf/ui?s=VTIP&compare=$$CPI,TIP&id=p91391514086

LewisBraham

I would say all bonds and bond funds are affected by duration, but if you hold an individual bond to maturity you don't notice it. If you choose to sell that 5-year TIPS in a rising rate environment prior to maturity, you would realize losses from the duration impact. As for taxes, my impression is the treatment and phantom-income like tax adjustments is the same for individual TIPS as for TIPS funds. You pay taxes on the inflation adjustment with an individual bond even though you don't receive it as income:
https://cpapracticeadvisor.com/2022/04/07/the-tax-tips-about-tips-treasury-inflation-protection-securities/49016/
This is why the TIPS funds pay out the inflation adjustments because they are a taxable event and treated by the IRS as income. If anything, I'd rather have the payout in hand from the funds to help pay the taxes. Interestingly, the same is not true for I Savings bonds. The income is completely deferred tax wise.

davidrmoran

My BSV, BND, STIP, VGIT etc. are all down so much I am holding, but I sure do get bummed every time my eyes glance past them looking to see how VONG or QQQ has been.
My more depressing problem is that I have to take an RMD sometime this year out of a retirement account with no gains or even breakeven recovery and almost certainly no prospects for same.

sma3

Once the Fed even hints at a cut they will spike. Maybe not back to your cost but certainly higher.

davidrmoran

tnx, good point

And boy, speaking of hoped-for steady eddies, has CCOR shit the bed since Halloween.

Anna

davidrmoran said:

My more depressing problem is that I have to take an RMD sometime this year out of a retirement account with no gains or even breakeven recovery and almost certainly no prospects for same.

I have been scheduling automatic RMD withdrawals in December. Now I am wondering if it might be better to just take them in early January so they might have a good chance of mirroring the value at the end of the year before.

On the other hand, I imagine you can't win timing this either.

LewisBraham

Depending on your financial situation, you could take that RMD and invest it again, but in a taxable account. CCOR has indeed been poor lately. Here's their explanation: https://corealtfunds.com/assets/pdfs/Core_Alternative-Commentary_January2023.pdf
I've noticed despite it's defensive nature, it has these odd spikes in volatility at odd times. It tends to zig when the market zags, but still has risks apparently. It seems like they have a value tilt, which would mean when growth outperforms, they might underperform. But I also wonder if some of these spikes have to do with options expiring, sometime profitably and sometimes worthless.

hank

davidrmoran said:

tnx, good point

And boy, speaking of hoped-for steady eddies, has CCOR shit the bed since Halloween.

Good one.

Crash

"...The fund you reference, per M*, has a duration of 6.6. NAV for a fund like that is bound to suffer during a time like the bond market has been through for the past year-plus..."

Ya, the duration on my SCHP is 6.6 too. So it's not lighting the world on fire. But in the short time I've owned it, it IS up for me, rather than down. Probably a result of my original purchase price.

Old_Joe

Multiply you guys x 10 to the umpteenth and you got Silicon Valley Bank.

BenWP

@davidrmoran: DSTL would have stood you in better stead than CCOR, says he with the impeccable hindsight. Other value-leaning funds have been hurt as well recently.

LewisBraham

Unless you bought at the peak of CCOR's performance late last year as David described, it has proven generally more defensive than DSTL, up 2.5% in 2022 overall while DSTL was down 10.6%. Yet no question, CCOR is struggling this year. But these two funds seem quite different in their strategies.

davidrmoran

I looked long and hard at DSTL, and passed, rightly or wrongly. I split cash (this was before ~4% available mmf and such) b/w STIP and CCOR. Sigh.

LewisBraham

I would probably wait on STIP, but maybe not CCOR. Bonds are a lot more interesting today than they were last year, despite the name of this entire thread.

hank

I’ve played around a bit with CCOR over the past year or two. Small amounts. Currently out. From what I’ve read it buys / sells deep in the money options with about 10% of assets and so provides a strong hedge on big down days. For whatever reason, that wasn’t the case today, as it fell 0.72% . A guess is that the speed and suddenness with which the markets turned upside down prevented it from working its magic. I still think it’s a good defensive fund - but one needs to find the right role for it inside a diverse portfolio.

Re: CCOR - ”Options are then used to control portfolio volatility and to maintain cash flows. As a hedge, the fund may sell S&P 500 calls to finance the purchase of S&P 500 puts. This strategy may cause the fund to give up some upside potential in exchange for downside protection. Managers may utilize other option strategies like spreads for hedging and income generation as well.” - Source