After selling all of my bond funds last year for tax losses, I ended up reinvesting in PIMIX, and promptly lost money. Not much, but enough to curtail my plans in reinvesting in the other bond funds that I had sold. So far, I am mostly in FZDXX, earning over 4% and happy I'm not losing more money. Is anybody daring to invest in bond funds? So far, I will wait and see what happens. When the train leaves, I'm usually waiting at the station.
Comments
This was an uncharacteristic move on my part since DODIX represented ~20% of my overall portfolio.
My other fixed-income investments were sold during 2022 for different reasons:
1. Sold ultra-short-term bond fund to harvest tax losses.
2. Sold multisector bond fund after an abrupt fund manager departure.
The stable-value fund was exchanged for DOXIX (replaced DODIX in 401k) at the beginning of 2023.
Sales proceeds from the ultra-short-term and multisector bond funds were invested in T-Bills/VMRXX.
I'm comfortable with my current fixed-income allocation and have no plans
to increase/decrease bond positions in the near future.
We're probably close to the Fed's terminal rate (if not already there) during this tightening cycle.
I don't believe the Federal Reserve will be cutting rates soon unless we experience a sizable recession.
Right now, FED rate hike cycle is near the end (terminal rate) and likely to hold at that rate for the remaining of the year. This means that there are more opportunities to have respectable gains in bonds and bond funds. YTD total return of the Barclays aggregated bond index (bond benchmark) is up 3.7%, and it is only May. So there is still time to invest in bonds. If US falls into a severe recession, the FED will cut rate quickly and bond prices will go up too.
During the banking turmoil in March, bonds fell and recovered when FDIC and Treasury intervened. Otherwise, bonds have moved up most of the year. Today, we prefer high quality bonds including short- and intermediate-term treasury, total bond index (BND), and DODIX. Other bond exposure we have are from balanced ad global allocation funds.
I will be back in bond OEFs, but it may not be to any significant degree until well into Q3 or even Q4, depending on the rate situation. Then again, once the debt debacle plays out, that may be a time for IG, and maybe some credit too. But I'll likely keep to etf's for maximum flexibility.
I'm a retiree sans pension who couldn't handle major losses, so this is just my individual take. YMMV.
A: Um, not us.
Why not? Well, we ask ourselves, what do we expect as likely/probable average annual TRs from dedicated bond funds over the next say, five years? We answer, maybe 4%-5% if we're very lucky.
With 5-yr, non-callable, 4.5% CDs widely available now, and over 5% widely available back at the peak, why should be bother with dedicated bond funds for the next 3-5 years?
We are sufficiently over the interest rate hurdle that allows us to "Just Say No" to dedicated bond funds for the next several years.
I figure they have a decent chance of avoiding credit blow ups and high yield may be less interest rate sensitive.
I also bought some long term munis and muni bond funds
It is hard to beat 4 to 4.5%
I keep some bond funds, yes. I'm not the sort that reacts and makes moves based on the macro picture------much. SCHP tips and HYDB junk. And prcpx & tuhyx, both junk. I bought into tuhyx at just the wrong time. i held on, and it's very slowly rising for me. attractive dividends.
*Note: I also hold a convertible bond fund. That’s considered an “alternative” type investment and so is not included in the above fixed income amount.
With taxable and municipal bond funds, indeed it is.
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Here's a link to the 1,921 taxable bond funds that Fido currently offers.
https://fundresearch.fidelity.com/fund-screener/results/table/overview/averageAnnualReturnsYear5/desc/1?assetClass=TBND&category=BL,CI,CL,CS,EB,FX,GI,GL,GS,HY,IB,IP,MU,NT,PI,RR,TW,UB,WH,XF,XP&order=assetClass,category
For kicks, sort them by descending 5-yr total returns.
Note that only 11/1,921, or 0.57% exceeded TRs of 4.50% for the past 5 years.
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Here's a link to the 903 municipal bond funds that Fido currently offers.
https://fundresearch.fidelity.com/fund-screener/results/table/overview/averageAnnualReturnsYear5/desc/1?assetClass=MBND&category=HM,MC,MF,MI,MJ,ML,MM,MN,MO,MP,MS,MT,MY,SI,SL,SM,SS&order=assetClass,category
For kicks, sort them by descending 5-yr total returns.
Note that only 0/903, or 0.00% exceeded TRs of 4.50% for the past 5 years.
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Read it again s-l-o-w-l-y and try to understand it.
Then s-l-o-w-l-y try to explain why an investor, going forward, should invest in either taxable or municipal bond funds in their portfolio's fixed income sleeve instead of say, 5-yr, 4.50%, non-callable CDs.
But please leave out the widely understood part about past performance being no guarantee of future results. Got that part.
I do agree with everyone else though that with CD's at 5%, it's hard to take on more risk to get 6, 7 or 8% as rates plateau or start to come down. But it may be close to that time IMHO. I do believe the next 3-5 years will not look like the past 3-5 years. Extrapolate YTD returns on some of these funds now and it shows returns growing greater than 5% for the year.
The only bond fund I've held on to over the past couple years is in my withdrawal bucket, RPHYX. I recently added RGHYX and SAMBX to that bucket in small dosage. A couple TIP funds too, but that bucket still consist of more than 50% in 3-12 month treasuries, CDs and MM. I'll add, because it's not talked about much, also a nice consistent player in this bucket has been SPC, Crossing Bridge Pre-Merger SPAC ETF.
Premerger-SPACs is a niche area that benefits from the problems of SPACs - they have about a 2-yr window to find something OR refund the money. It is the latter part that benefits the pre-merger SPACs. There are only a handful of ETFs in this niche area. So far so good. While it is routine to have the disclaimer that "The past performance is not a guarantee of future returns", IMO, it applies to pre-SPAC merger ETFs especially well and remember to get off this train when the right station come along.
As for the problems of SPACs, recall that even Bill Ackman (Pershing Square/PSH/PSHZF) had to kill his dream of pulling through the biggest SPAC-merger, but his complicated strategy didn't pass the regulatory muster and he too had to return billions.
Had you, would you have instead stated "I do believe the next 3-5 (and 10) years will not look like the past 3-5 (and 10) years"?
And would your basis also be that if you extrapolate out the recent ST bounce for those periods, bond fund investors will (I guess, magically) get LT TRs of "6, 7 or 8%" for those periods?
I'll ignore your wild-eyed notion of bond funds returning 7%-8% over any LT period of time because it just doesn't happen.
But I will address the HOPE of 6% LT because, in the past, it was achieved by a few taxable bond funds. To wit, did you see that only 7/1,921 taxable bond funds returned over 6% during the LIFE of their respective funds, um, that was during the greatest, 30+year bond bull market in history?
Bottom Lines: Starting several months ago, investors were given the once in over a decade opportunity to buy (ugh, unsexy) CDs and ASSURE themselves % returns for the next 5 years equal to/greater than the LT % we all strive for in bond funds, which is generally 4%-5%.
Many missed the short-lived peak period. But all still have a chance to get it done. If they can just get over themselves.
I don't understand the widely held bias against CDs paying 5% as a preferred alternative to bond funds for the next 5 years.
I don't understand why investors who are striving for LT bond sleeve TRs of 4%-5% don't get that all their time, energy and HOPE spent trying to achieve that level of returns is effectively wasted as guaranteed returns of those levels are there for the taking.
Did anyone say you shouldn't own cash? I missed that if they did.
CDs and T bills are still cash equivalents, and I own plenty of them for the time being. They are maturing in coming years, and they will be deploy in bond ladders and bond funds.
If it can be trusted, Morningstar is telling me that my portfolio is yielding me 150% more than the SP500. But of course, that's an apples-to-oranges comparison. No one invests in the SP500 for yield.
Let's start with the question. It gives as one option a 5-yr, 4.5% non-callable CD. Even non-callable CDs may be redeemed early by a debtor. Should a bank fail (no longer an unexpected event), high yielding CDs may be redeemed by the FDIC or reset to a lower rate by an acquiring bank.
Thus actual rate of return, though highly likely to be as stated, is not certain. Some posters have addressed this risk by saying they would only buy CDs from well-managed banks. You did not. (I discovered that by reading your post s-l-o-w-l-y.)
The question carries an implicit assumption that an investor is absolutely certain that they will not want to withdraw money early. Any possibility of pulling money out would expose the investor to the same interest rate risk as experienced by a bond fund.
Further, the investor would have less flexibility in selling off a CD (basically, all or nothing on a per-CD basis) as opposed to a bond fund where one can sell as little as 0.001 shares. In addition, the investor would take a big hit on the bid-ask spread that isn't present when selling bond fund shares.
So already we have a reason - flexibility - for an investor to consider using a bond fund rather than a CD with the same (or even marginally lower) expectation value of rate of return. Maybe you wouldn't, but the question was asked about any investor.
That brings us to the expected rate of return going forward. As explained (slowly) above, aside from minor risks expected rate of return is pretty well though not quite 100% certain for the CD. The challenge is to figure out at a minimum what the expected rate of return of a bond fund is. Ideally one would want to estimate not only the expected return but the dispersion of possible outcomes. That plays into risk analysis, which I'll (slowly) get to.
What you did was look at past 5 year returns. In do so, you acknowledged but disregarded the fact that past returns may be poor predictors of future returns. Putting that problem aside, you also disregarded that fact that all rates were lower over the past five years than they are now. One could make at least a passing attempt at compensating for this this by looking at 5 year CD rates 5 years ago vs. now and adjusting the question's comparison accordingly.
According to depositaccounts.com, 5 years ago the best one could do was about 3.3%, while now it is, as you stated, about 4.5%. So if we use your method of estimating bond fund returns going forward based on past performance, we should adjust those past performance figures upward by about 1.2%. I'll leave that as an exercise for the reader.
But situations change, and as already noted, past returns may be poor predictors.
bond funds returning 7%-8% over any LT period of time ... just doesn't happen.
This is easy to disprove by counter example. It does sometimes happen. From inception (12/31/1986) through the end of 2002, VBMFX had an annualized return of 7.85%. More generally, looking at 10 year rolling averages, AAA corporate bonds had annualized returns ranging between 7.30% and 11.29%(!) for every 10 year period ending between 1975 and 2000. So, over a period of at least 30 years (three non-overlapping ten year periods between 1965 and 1995) the average return on AAA corporates was more than 7.3%. That seems long term enough.
Baa corporates did even better. Their 10 year average rate of return surpassed 7.26% every 10 year period ending between 1973 and 2005, topping out at a 10 year average return of 12.84%. Interested in T-bonds? The same analysis shows that 10 year T-bonds had ten year rolling average returns exceeding 7.12% for every period ending between 1984 and 2002.
Source is spreadsheet from NYU/Stern, whose ultimate data source is FRED.
Even though you asked for an explanation given s-l-o-w-l-y, I can understand your quick and dirty search for 5 year bond fund returns. I can understand your saying that there were 1921 funds even though 138 of them didn't have five year records. I can understand your excluding the 114 funds that are closed at Fidelity, even if some of them were open five years ago.
I can understand your using Fidelity's screener though it gives fewer than half the number taxable bond funds with 5 year records that Portfolio Visualizer's screener returns. Because a reasonable (though unverified) assumption is that the funds currently open and sold by Fidelity are representative of all the bond funds available five years ago.
But when it comes to expected returns going forward, one is going to have to do better than assert 7%-8% LT returns just don't happen.
So far, most of what I've done is explain why some of the data presented is either unhelpful, biased, or simply wrong. I've also provided one rationale for preferring bond funds to broker-sold CDs, viz. flexibility.
Implicit in your reasoning (and that of most others) is that investors are risk averse. Someone who is truly risk indifferent will consider a bond fund with an expected 4.5% return to be just as good - not better, not worse - than a CD at that rate. (As I explained before, given the additional risk of possibly needing access to the money, someone who is risk indifferent would demand a higher rate from the CD than from the bond fund.)
An investor who is only slightly risk averse will not need a much higher expected rate of return to choose the bond fund. So the question comes down to: what is a reasonable expectation for five year returns of some bond funds? Past performance used blindly clearly is not a good approach to answer this; there have been extended periods of time when bonds have returned well in execess of 7%. It could happen again.
The question is not what has happened before, but what (and why) one expects going forward.
Others have offered some explanations for better returns going forward - based on their expectations for interest rates. I could dig up a bunch of papers explaining that over particular long terms, what one should expect from bond funds (total return) is determined by their current yields. That's how I look at bond funds, assuming that I'll hold for a long period of time.
Checking out current SEC yields, it's not hard to find several familiar funds yielding above 4.5%. Many multisector funds sport yields above 6% (i.e. 1.5% or more above the CD) such as DBLNX (8.69%) and MWFSX (7.69%). PIMIX (5.86%) comes in just below 6%, but still well above the CD rate. The core plus fund TGLMX has a 6.17% yield. Even a fund as conservative as FCNVX has a yield above 5% and can serve as a dynamic (flexible) cash backup.
(These are not recommendations; just a listing a few familiar funds.)
We've seen this question before: RPHYX/RPHIX vs. 6 mo T-bills. As here, I used current data, not past performance (i.e. 2022 or earlier). What one gleans from past performance is general behavior of a fund, not performance that can be easily extrapolated.
With respect to CD ladders, I've just had a CD mature, but I'm not going to replace it because of the current unease with much of the banking sector. I'm thinking about treasuries, even though the expected return is somewhat lower than CDs of equivalent duration.
WIth the Treasuries, remember that they are state tax exempt. That could mean a lot (around half a percent of net yield) in a high tax state.
As far as the banking sector goes, I expect most banks to be just fine. Still, I find myself wondering where to put cash that I expect to need for payments over the next couple of months. Really an odd thing to be thinking about.
I was reminded of reading an early 80's edition of Random Walk, in which Malkiel recommended buying bonds.
And, well . . .
Slowly I turned. Step by step. Inch by inch.
Good answer on the bond fund question; I read all of it too.
For the reason of being state tax exempt, we invest in treasury over CDs in taxable account. Additionally, we like the liquidity aspect that enable selling treasury before maturity in secondary market, whereas brokered CDs do not share the same level of flexibility. Selling bank CDs before maturity date would face with stiff penalties ( losing several months of interest).
Speaking of bonds and bond funds, our MFO contributor, Lynn Bolin provided a very nice article in April 2023’s commentary. Enjoy.
https://mutualfundobserver.com/2023/04/bond-funds-for-a-recession-and-falling-rates/#more-17875
“quick and dirty search” / nice added touch (kinda poetic)