Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

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.

    Support MFO

  • Donate through PayPal

Why in the World Would You Own Bond (Funds) When…

beebee
edited March 2021 in Fund Discussions
Is there a Bond Fund that Shorts Bonds?
pension funds, insurance companies, sovereign wealth funds, and savings accounts cannot meet their financial needs with these investments so holding bonds assures their failure to meet their obligations. At the same time, while there is some room for diversification benefit, because of limitations of how low interest rates can go, bond prices are close to their upper limits in price, which makes being short them a relatively low-risk bet.
A Ray Dalio Take:
why-world-would-you-own-bonds-ray-dalio

His link to The Changing World Order
https://principles.com/the-changing-world-order/

There are ETFs that Short Bonds:
If you ever wondered how to short bonds in an ETF then you will be glad to know that there are currently several short bond ETFs. "Short" here does not refer to the duration of the bond (short-term) but rather the fact that it is a bearish or inverse bond ETF or exchange traded fund.

The current inverse bond ETFs available are mostly short treasury ETFs but they include an inverse high yield bond etf and they are issued by either ProShares or Direxion. The short treasury ETFs go up in price whenever Treasury Bonds go down in price and vice versa.
bondetf.net/short-bond-etf.htm
«1

Comments

  • edited March 2021
    Two things: Interest rates can go negative as they have in Europe and Japan. And Japan hovered in zero rate territory for decades. Finally, third thing, while inflation is certainly possible, the idea that it’s a given in this environment and rates will rise as many money managers schooled in classical economics, which has fallen out of favor, assume is mistaken. It could happen but we could also drift sideways for a long time or even see deflation. I'm not saying owning bonds is a good idea now, but I'm not sure shorting them is wise either.
  • Hi LB...geez, I dunno...so many jobs in the USA dependent on the spread in credit...insurance and banking industry would get hurt biggly with neg interest rates..but we'll see, anything is possible right?

    Just saw on CNBC that a year ago, stonk market went down 12% in a day...seems like everyone has forgotten that. Could be a "black swan" day tomorrow if Powell says the "wrong" thing(s)...then all of a sudden bonds could look real good, so to your point, shorting them no good.

    Good Times, hold onto your wallet!

    Baseball Fan
  • edited March 2021
    Baseball_Fan, This is a common view in the U.S. that hasn't proven to be the case in Europe, which actually has negative rates for a while now: https://bloomberg.com/opinion/articles/2020-12-14/the-case-for-ecb-keeping-europe-s-negative-rates-where-they-are
    Still, given that viewpoint here, negative rates are unlikely here, but a double dip recession would make bonds shine again, which is not to say buy bond funds. But shorting them could backfire easily.
  • This thread was already created by @WABAC and it’s a good thread.

    Do you manage for the exception or for the rule?

    That is the question. IMHO... many people manage for the exception. If you do... you will love Bonds right now. You will justify why they will protect you from all sorts of threats. Threats called Black Swans and other perilous names. BUT... are interest rates going lower? Do you really think they are? If so.... load into Bonds.
  • My apologizes to @WABAC...Please link so reader can be redirected.
  • @bee no... it was a good share by you. You have great shares. I was just referencing @WABAC post as it was a good one.

    https://www.mutualfundobserver.com/discuss/discussion/57831/why-do-you-still-own-bond-funds#latest

    By @WABAC
  • Two things... not saying owning bonds is a good idea now, but I'm not sure shorting them is wise either.

    +1
  • @davidmoran @LewisBraham ... no argument with that (shorting). I was referencing bond funds in general and how there are many people still promoting them and I’m having a hard time with it.
  • edited March 2021
    dunno

    I still have a lot in bond etfs, am not about to bail at a loss, until necessary

    have a lot of money earning zero too

    but these inflation headlines and smart articles and even threads are bunk-tending, I am thinking

    and at the same time shorting bonds, nah, asking for bad outcome
  • tnx, read it already, back when, don't know how to let it help me :)
  • @davidmoran in this economy... with the wealth of investment choices... Why.... “have a lot of money earning zero too”?

    That’s not criticism ... I’m trying to learn what I don’t know. I’m looking out for a family member and asking the same questions... re investments and this market and conditions we are in.

    YTD S&P 500 is up 5.50%
  • Why in the World Would You Own Bond Funds?

    I'm a few years away from retirement and am not comfortable with a 100% equity allocation.
    Higher quality bond funds have low correlations to equities and add ballast to one's portfolio.
    My bond allocation is lower than average (based on age) since current bond yields are depressed.
  • edited March 2021

    @davidmoran in this economy... with the wealth of investment choices... Why.... “have a lot of money earning zero too”?

    That’s not criticism ... I’m trying to learn what I don’t know. I’m looking out for a family member and asking the same questions... re investments and this market and conditions we are in.

    YTD S&P 500 is up 5.50%

    Tell me about it. Don't I know it. I will be interested in your own responses to your own questions.

    Where if anywhere will you put spare moneys? Where should I put moneys now which I will not need for a few years (not a decade, but not 3-4y either)?

    50-50 VTIP (GTO, MINT) and VONV (VONE, CAPE)? BND and BIV are down. Something additional into ARK and QQQ? Maybe.

    Shiller p/e is close to 36, higher than it has ever been since the Y2k peak-plunge. Each week it goes higher. I coulda written this post, and believe I did, any month of the last 8 or so. We are 2/3 out of market for the last 10mos. In some sense we have enough and are being prudent in retirement. Otoh my wife, not just me, would like to have, or have had, the several hundred thou we 'missed', if I had stayed the course and done nothing.
  • David you are being prudent and you've been to this rodeo before. Live in the present hindsight is 20-20. With all respect to you and your wife what would the conversation been like if you lost half your net worth?

    I think we all kind of know hussman is prolly right and these stonk markets are way overvalued and could easily come down by over half if not for the fed. We're just greedy and don't want to admit it to ourselves

    We've seen these disruptive, innovation type of fund managers get their lessons during turn of century. I would argue this time is even loonier and way more risky

    I spent a lot of time in the 90s in silicon valley. Real jobs, real men running real companies, not these poofs running bullspit companies that have way fewer employees and burn thru fairy tale cash

    Nothing wrong with sitting on heavy tbills and cash. Waiting like a tiger ready to pounce I'd rather get dinged by inflation than get drawn down by over 80%, like Nasdaq twenty years ago

    I still remember my friends faces a year ago when their portfolios got mowed down. Deer in headlights. Looked despondent. Remember CNBC and all the special report shows with the startling music, keep running the one shot with the empty store shelves, scaring the shett out of everyone

    Good luck to you and all,

    Baseball Fan

  • beebee
    edited March 2021
    @davidmoran @Baseball_Fan

    I try to remind myself skilled fund managers help manage upside/downside potential. A fund like COTZX attempts to gauge these two dynamics and adjusts its holdings according to maximizing the up and minimizing the down. VWINX, PRWCX do the same and continue to be long term buy and holds for me. I feel sectors like healthcare (VHT) and consumer staples (FSRPX) will rise more than fall. I judge these fund's performance over years, not days.

    A bad year in the bond market is often a bad day in the equity market.
    -treasuries are still a flight to safety.
    -I believe highly skilled bond fund mangers can add both alpha and beta strategies and disciplines that I am not capable of.

    If you have won the game...stop playing (sort of)
    -As much as possible diversify your portfolio away from over valued assets. I sold Real Estate (the house I raise my kids in) this year. I downsized my footprint & my tax burden (both property and income tax). By lowering my "living expenses" without sacrificing my "quality of living" I can take less risk in my portfolio.

  • Wasn't there a scene in The Gambler where Goodman tells Wahlberg...any f'idiot knows if you get up $2.5MM you walk away and get a house with a 25 year roof, buy a Jap, econo, sheet box and take your 3-5%/yr to pay your taxes and bills and then you can say F-you. Your boss pisses you off, F-you, someone tells you to do something you don't want to do, F-you...

    Something like that. Stop playing the game if you've won.

    Who knows right?

    Baseball Fan
  • @bee , @Baseball_Fan , @davidrmoran , thanks for spilling your beans ,so to speak .
    All get +1 !!
    Stay Safe , Derf
  • Cullen Roche on the need for both Stocks and Bonds:
    ...we all have specific time horizons on certain liabilities – your rent, your mortgage, your credit card bill, etc. And the key to good financial planning is matching those liabilities with certain assets that are very likely to provide liquidity for those future expected expenses. Your biggest asset is your labor and the predictable income stream that it generates for you over time. But you also need a portfolio of other assets that are likely to provide you with supplemental cash flow streams over time. Especially if you ever want to retire.

    This is why stocks and bonds play such an important role in your portfolio. Most of us won’t generate predictable cash flows from owning real estate, cars, art, Bitcoin and other non-cash flow generating assets.¹ So stocks and bonds play a crucial role in asset allocation specifically because they provide those predictable cash flow streams.
    https://pragcap.com/why-stocks-and-bonds-are-the-core-of-any-portfolio/
  • >> With all respect to you and your wife what would the conversation been like if you lost half your net worth?

    Since the way I do balanced funds was to go 2/3 DSEEX and 1/3 bond something or other, that would not have happened, but yes, general point taken, absolutely.

    I was hardly alone in thinking that the March-April plunge, given the impending scale of the plague and the immense economic hit, was going to establish a new bumpy bottom for a looong time. I sold nothing.

    When almost everything I owned reached breakeven in May, though, I went largely to cash.

    So I have experienced 10 months of jawdropped watching ever since, like so many.

    Roger about hindsight.

    I am not complaining (well, some of the time), being immensely privileged and lucky (also hardworking and frugal and all that virtue stuff), like all of us investing for decades in such a lengthy bull market.
  • edited March 2021
    Is there a Bond Fund that Shorts Bonds? I know a bond fund that is up several % year to date + partially doing short + have a nice 3 years returns.

    why-world-would-you-own-bonds-ray-dalio? Because many retires that have enough don't want to have the high volatility of stocks

    There are ETFs that Short Bonds: No thanks, I want to find managers that do it for me, I hardly ever shorted anything.

  • edited March 2021
    @FD1000: "I know a bond fund that is up several % year to date + partially doing short + have a nice 3 years returns."

    I wonder if it's the one I own that's up a shade over 6% ytd, with negative duration.
  • At 200% long and 16% short fixed income (per M*), the shorting by CLMAX is basically noise. @bee was interested in funds that are purely or at least substantially short. 184% net long is the opposite. The juice in the fund comes more from leverage than a relatively small amount of shorting.

    If one's idea of shorting bonds is to eek out a little more return based on security selection (à la a 130/30 fund or a market neutral fund) rather than making interest rate bets, one might look into long/short credit funds.

    M* created this category of funds in 2016.
    Long-short credit funds seek to exploit mispricings in corporate debt, which may involve outright directional long and short bets, or relative value trades focusing on different securities on a company's capital structure or pair trades between the debt of two different but correlated companies, for example.

    One big difference between long-short credit funds and other nontraditional bond funds is that long-short credit managers tend to hedge out most of their interest-rate risk, putting their strategies' valuation proposition squarely on their credit selection skill.
    https://www.morningstar.com/articles/784363/long-short-credit-funds-have-potential-as-bond-diversifiers

    However, there aren't many such funds. "The Long-Short Credit category has dwindled in size since its launch in 2016, and [Morningstar's] returning the remaining strategies to their prior home in the Nontraditional Bond cateory" in April 2021.
    https://advisor.morningstar.com/Enterprise/VTC/April2021USCategoryLaunchFAQs.pdf

    In that memo, M* refutes the quoted statement about long-short credit funds having a big difference from nontraditional bond funds. "[I]n practice, both groups of funds have tended to minimize interest-rate risk and emphasize credit exposures."

    Makes one wonder if M* makes its decisions first and then comes up with rationalizations to justify them.
  • That’s my problem... I don’t find equity funds to have high volatility. “Because many retires that have enough don't want to have the high volatility of stocks” But I guess high volatility is somewhat subjective given each persons investing timeline. Still learning though and open to different viewpoints.
  • @davidmoran “ Where if anywhere will you put spare moneys? Where should I put moneys now which I will not need for a few years (not a decade, but not 3-4y either)?” ...

    Just saw your question back to me... since I like to ask questions when I’m unsure or want other viewpoints. Based on your question... that implies 2-3 years time horizon. If you need those funds in 3 years... conservatively - I would go S&P 500 Index. Not bonds. Not any kind of bond fund. But yes I suppose a nice 500 index would fair better in the next 3 years vs. in cash earning no money.

    @michaelsaylor would suggest Bitcoin. But I still view that as Vegas gambling (for now).
  • edited March 2021
    SP500 Index for money needed in 3 years?! What happens if in 2-2.5 years the SP500 index drops 20-30% and then takes 3-5 years to recover? You're going to be selling at the worse time. It's been so long people are starting to forget what can happen... most crashes/bear markets don't end as fast as 2020 did. I don't know, maybe that's the new normal fast down and fast back up since everyone carries the stock market around on their phone now.
  • edited March 2021
    Every time I see a new thread about bonds I smile. Yes, I'm the exception and have done it for years. I retired in 2018, we need only 4% (maybe less) including inflation to keep our living standard for the next several decades. I still want to make 6% with SD < 3. I'm mainly a bond OEF trader, probably close to 90% are from bond OEFs. I have invested mostly in 2-3 funds which means I only need 2 great performing bond funds. So far I made much more in the last than the goal + SD=2.5%. YTD already several % up.

    More:
    1) All the money is invested, no cash. Only in high risk market I'm out. In the last 10-11 years I was out under 2%. Before that I was in all the time.

    2) Since the beginning in 1995 I hardly used alternative funds, definitely not for more than several weeks or a big %. I keep is simple, stocks, bond, and allocation funds.

    3) Many average Joe retirees that have enough can do the following. They have some cash flow (from SS + distribution + pension + can sell something), in good times they can sell stocks and in bad times they can sell some bonds. Some of these bonds should be a ballast for stocks which means in market meltdown they will go up or have minimal losses.

    4) Cash? I never believed in cash since the beginning even in retirement. You can have 3-6 months of living expenses and can sell something (per #3 above) 3-4 times annually. I never had an emergency I couldn't handle. I have used credit cards, then I have several thousands in cash and I can always sell my funds and get money in 2 days.


  • edited March 2021
    “Bonds are the anchor of your portfolio”

    From: The Most Overused Analogies in Finance

    See them all HERE.
  • @royal4 - that’s a fair question: “ What happens if in 2-2.5 years the SP500 index drops 20-30% and then takes 3-5 years to recover?”

    I ask myself that question regularly.

    But another way to look at it... how many times in history has the S&P 500 dropped 20-30 percent? The next question is... and when it has... how many times has it taken 3-5 years to recover? When I’ve examined that... I’ve found scarcity and not regularity. That gives me comfort.
  • Going with the "George Costanza method", bonds look GREAT right now, especially longer maturities. But equities would look even BETTER through this lens.

    "YOU CAN"T LOSE".
Sign In or Register to comment.