AAA gov't bonds have been taking it on the head this week. All of our direct controlled investments into these bonds have been liquidated. Any related positions that remain within a broad bond fund will be at the fate of management.
All other bond types are traveling on different paths. Your return will vary this week ending.
Tis more than enough to observe markets and impact upon bonds. The massive intervention of "cash" into the markets continues to cause so much distortion. I could usually use broad market observations and have my own forecast as to what and where with bonds..........not right now, not today for me. Hats off to the astute traders who can catch a positive wave in bondland right now.
FED yield curve management
Comments
'Course, always want to have a positive total return for the entire portfolio, but capital preservation is the mode here.
I find it encouraging that the 10-year Treasury is over .90% this morning after dipping below .50% briefly in March-April. My understanding of the rate curve is quite limited, but I’d expect returns on very short term investment grade bonds will start improving if this trend continues. So, for those needing to “park” money short-term or wishing to pull risk off the table, it’s a healthy development.
Ed, in last month’s Commentary, referenced using a “barbell“ investment approach. Never been my cup of tea, but with cash yielding so little it also makes sense to me. With a barbell (my crude understanding) an investor loads up on both ends. On one end are riskier assets like equities and on the other end are investment grade securities with the duration to be set by the investor. Personally, I’ve favored the 3-10 year duration bond funds, but have some limited spec positions (thru RPSIX) on the conservative end of the barbell as well.
If using the barbell, one may exit low yielding cash positions and assume that should the risk assets fall, some increase in value at the conservative (bond end) will mitigate the damage.
Our portfolio is a "barbell", IMO. Just more cash than before......right now, for the time being.
Regards
With what I will state were more normal periods for bonds and their yields; that if the Fed. is going to further intervene in attempting to "adjust" the yield curves among Treasury maturities, I've lost my view of real demand by the remainder of what were the traditional buyers of Treasury bonds Meaning, I don't know if bond pricing is what it is because of normal demand OR also being played with by the Fed. , too.
We have more than enough investment grade bond exposure, and our sell is directed towards the longer maturity issues and those holdings.
The sell fits our mix, and is not a recommendation for anyone else.
Will the AAA bond game start again for profits??? We'll discover what happens in this area when the bloated equity markets get picked on by the ALGO machines.
Bonds can be a very important part of a portfolio. But, many here have discovered they didn't really understand what was inside a bond portfolio. I exclude the IOFIX and its extreme performance. More than enough information about bond ratings and types of bonds has been discussed here in the past several months; and the amount of information for study on the net should allow most to have a better understanding of bonds.
I/we really don't like to be "cash". But, for now; we'll observe.
Take care,
Catch
Vanguard has been a real PITA to get approval to sell options. Once I get that taken care off, I plan to roll out a CD ladder of options, one expiring per week, 4 outstanding at any time, i.e. hoping to get option income from 4 options per month at different strikes and different expiry dates further OTM.
If I succeed, I can make proclamations like "Don't invest in what you don't understand". Yes, I don't undertstand bonds. Yes, I understand options. And I know every week what's going on and how to adjust and protect my principal instead of buying and hoping bond fund will give me 5% return on annual basis.
p.s. I also added to IOFIX as if to emphasize my lack of bond knowledge.
Paul Simon lyric.....modified by me:
I met my old lover (investing)
On the street last night
She seemed so glad to see me
I just smiled
And we talked about some old times
And we drank ourselves some beers
Still crazy after all these years
Oh Still crazy after all these years
So, sold about 28% of the portfolio equity in mid-February and bought ZROZ (AAA zero coupon bonds). Good call.....well, yes; to a point. Watched the profit become +15% due to COVID shutdown and then the equity market melt. I let this run too long and kept +5% profit. An, oh well.
'Course we're aware of the Fed backstop of "everything". Then the equity turn around.....my, what a CRAZY run!!!
My topic line here about an exit of AAA bonds found my concern with how many Treasury bonds were going to be issued and who the hell was going to buy........ AAA bond pricing was also fading away.
Here we are again, back into ZROZ............and yes; folks are buying most types of Fed. backed bonds........why not, eh???
Don't know about the equity sell down today (June 11). Perhaps a short lived rotation into whatever by the large players.
Excerpt from below link: The Fed also said it would maintain bond purchases at "the
current pace" of around $80 billion per month in Treasuries and
$40 billion per month in agency and mortgage backed securities.
Fed. Treasury purchases, etc.
NOTE: those holding managed, quality bond funds should discover decent returns, as of late.
Some day in the, future I/we will have to stop playing with the money this way.
I do believe I'm low on coffee intake.
Take care,
Catch
Corporate Bond (Lipper Corporate BBB): FCBFX (BBB, 7.79 year eff duration), 2.43% yield
Intermediate Core (Lipper Core): VCOBX (A, 6.04 duration), 2.02% yield
Intermediate Core (Lipper US Mortgage): OMBAX (BBB, 2.91 duration), 2.38% yield
Intermed Core Plus (Lipper Core Plus): BCOIX (A, 5.56 duration), 2.28% yield
Intermed Gvmt (Lipper GNMA): PRGMX (AAA, 1.50 duration), 2.63% yield
Short Term (Lipper Short Inv Grade): USSBX (BBB, 1.95 duration), 3.30% yield
Ultra Short (Lipper Ultra Short): TRBUX (BBB, 1.00 duration), 2.31% yield
World Bond (Lipper Global Inc.): DODLX (BBB, 3.20 duration), 3.62% yield
World Hedged (Lipper Global Inc.): FGBFX (AAA, 7.17 duration), 3.04% yield
ISTM there are four basic levers for bonds: credit rating/risk, duration, leverage, and options (more generally, derivatives). I've avoided leverage, tried to keep duration moderate to low, and credit rating above junk.
Options present not only a risk, but a risk in estimating the risk. Even for GNMA funds. Unlike vanilla bonds and vanilla funds, the effective duration shown for bonds with options are not exact calculations but are based on models that may fail at the worst times. These models make the effective durations shorter than for comparable vanilla bonds. In addition, the options (ability to pay off early or extend a mortgage past what a model predicts) tend to make the convexity close to zero or even negative. That means that when interest rates move, the effect on the prices of these bonds is worse than than on prices of vanilla bonds.
My point here is that one shouldn't just compare PRGMX to BCOIX and think the choice is a no brainer (higher rating, lower duration, higher yield). IMHO every fund above is worth a look depending on what one wants. But each one has a different risk profile (and a different amount of uncertainty in that risk). It's not just yield that matters, but total return and time frame.
Stay Safe, Derf
Beyond that, I'll just comment on a couple of the funds. I don't own BCOIX, but I've written about it a few times. I don't own it but I do own a similar fund with very close performance both short and long term. So I've never found a reason to change or to use it for management diversification.
Nor do I own TRBUX. I haven't written about this fund, but I have written positively about RPHYX and its use as a place for intermediate term (1-2 year) cash. For much of its life, TRBUX has returned significantly less than RPHYX (see chart here). Further, it fell a little harder than RPHYX in March.
But over the past three years, the two have tracked closely. And it bested RPHYX by nearly 3% since the end of March. While I still need to look at why each of these funds did the way they did, the past three years suggest that TRBUX could serve as a fine "near cash" fund.
Derf
Probably should have included this in @bee's "fund review" thread, but guess there's no end to the "surprises" one could list there. I can't comment on the other funds under discussion here, but as a long time holder of TRBUX wanted to share here my complete surprise and mystification at its behavior back in March. The fund (which targets a $5.00 NAV) fell completely out of bed in March, bottoming March 23 at a mere $4.85 per share. I've owned it nearly since inception and, honestly, never thought such a steep drop possible. These guys are nothing - unless a conservative lot of fund managers. Likewise, since back than the fund has "rocketed" all the way up to $5.05 - also an extraordinary feat for such a normally tame fund.
https://finance.yahoo.com/quote/TRBUX/history/
PS: I submit that the other thread running on "Investing for income in today's environment" strikes me at first blush as oxymoron.