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Bond Funds and rising interest rates

It appears that interest rates are going to rise, when and or how much is the question. Assuming this is true, what bond funds do you think will be able to adjust to this new scenario, when it does occur? I personally am in my early seventies and my portfolio stays around 50% cash and bonds and 50% stock index funds with no need to take excessive risk. For whatever reason, I can handle stock volatility better than bond fund price decreases. If you are retired, what are you doing with the bond side of your portfolio?


  • edited February 2018
    Bank loans/floating rate funds are one possible option in a rising rate environment. Also, you would benefit from staying in a short to intermediate duration for your bond funds.
  • edited February 2018
    Seems to me the likely candidates (bank loan funds and inflation adjusted bonds) have already been bid up (Just an educated guess). And junk of course is expensive. I know @Junkster had something to say on the bank loan floating rate sector a while back. Don’t think he was too hot on the sector.

    Like many things in life, there’s no easy answer to the dilemma of rising rates and need for income. Really a pick-your-poison situation. But others on the board more informed than me have suggested some good PIMCO and DoubleLine funds that cut across fixed-income asset classes. Sounds reasonable to me. Both companies have some good offerings. I’ve gained a lot of respect for Gundlach even though I don’t own his funds.

    As I’m mainly at T. Rowe and D&C I use RPSIX and DODIX. The latter has been positioned very short for several years anticipating a rate rise. Savvy investors. But this fund still could easily fall 2 or 3 percent in a year or even more if rates really heat up. My small venture recently into a gnma fund is probably crazy. What I see here is govt. backed paper in case of an equity collapse and rates a point or more over what an intermediate treasury fund will earn. Also (self excluded) I’d think the gnma investor is a more stable lot - meaning less hot money to flee (and further damage the fund) during a steep pullback than with a treasury fund.
  • edited February 2018
    You might take a look a SPFPX if you decide to consider a bank loan fund. It has enjoyed fairly consistent performance since inception. I have some $'s in this fund. Of course future returns may prove my continued investment in this fund to be ill advised (total assets under management have grown markedly over the past year or so). My age and investment mix are similar to yours (except for my use of active managers).
  • @Ted - thank you !
  • @Bobpa, would a guaranteed 2-3% a year work for at least some of that 50% of your portfolio? That is what CD's are paying now and they most surely will go up as interest rates rise. That's the good news for retirees. Pretty good hedge against decreasing bond returns I think.
  • I've gotten more and more down on bonds over the past decade, as bond yields have gone down more and more. A year ago, I would have suggesting sticking with banks/CUs alone and forgetting about bonds. Yields have come up a bit, IMHO enough to make it worth considering bonds again.

    You might take a look at FPNIX. The managers of this fund (first Rodriguez, now Atteberry) use somewhat esoteric devices (e.g. credit enhanced ABSs for credit risk protection, Interest Only (IO) bonds to reduce duration) to reduce, not increase, risk. This fund has not lost money at in any calendar year going back at least to 1992.

    Its current SEC yield (as of 12/31/17) is 2.84%, and current yield to worst (i.e. assuming every bond in the portfolio actually yields the worst possible amount) is 2.95%. Its duration is just 1.5 years, and it's investment grade (M* puts it at BBB, almost 90% are A or better).

    FPINX fact sheet:

    If you like CDs, and are a veteran or a relative of a veteran, you might look at Navy Fed - it's offering a 15 month CD paying 2.25%. It offers the flexibility of adding money, but only up to $50K.
  • I currently hold FPNIX but it doesn't appear that I can buy it ntf at any brokerages.
  • The net asset value of THOPX has been strangely flat through recent convulsions. It was a fine long term record.
  • I am interested now in world bond funds (like PFBDX) that have no or small emerging market bond allocation. Does anybody have insight on world bond funds and risk related to currency hedging?
  • A couple other bond funds that seem to be holding up fairly well during this rising rate environment: BSIIX, GILPX, DHEIX, ASDAX and ISIAX. They all seem to be shorter in duration and lean toward being more credit sensitive.
  • edited February 2018
    Sometimes we overlook the obvious. So, a statement of the obvious (which we all know) is: “While your investment grade bond fund’s NAV fell today, the rate of return you are now earning just went up”. Should bond prices stabilize, you’re probably better off today than you were yesterday. Not intended to be a ringing endorsement of bonds. Long term I’m not optimistic. The reasons why rates should continue to rise are legion. I don’t need to restate them. As Ralph Kramden might say, “To the moon... #*@# ”

    Also, the media often promotes a misconception that the FOMC “sets” long-term rates. They do not. What they “set” is the overnight lending rate that banks charge one another on overnight loans. Yes, this and other Fed actions may affect longer term rates. But the result is not always as expected. For example, if it pushed short term rates too high it could actually have the opposite effect on the longer end, causing the 10-year or 30-year rate to fall in anticipation of a recession.

  • Any opinions on these funds?
  • TedTed
    edited February 2018
    @Bobpa & MFO Members: Here is U.S. News & World Report's ranking of the best 75 Short-Term Bond Funds.

    BBBMX: Not Ranked
    EALDX: #2
    LALDX: #16 (I've owned from time to time.)
    THOPX: #3
  • edited February 2018

    I sold three of my bond funds yesterday ... FMTNX ... LALDX ... and, THIFX. And, redeployed most of the capital into BAICX ... CTFAX ... and, PMAIX along with sending some to my cash sleeve for perhaps another spiff.

    This leaves my income sleeve holding the following funds: BAICX, CTFAX, GIFAX, LBNDX, NEFZX & TSIAX. Interestingly, a little better than 80% of the sleeve remains invested in bonds from a review of the ticker symbols and their weightings inputed into Instant Xray for analysis. These changes, by my thinking, should help better position the sleeve for a rising interest rate environment. Some noteworthy features of the sleeve are a yield of 3.75%, average duration of 2.6 years and average maturity of 5.35 years along with the prior 12 month total return found to be 4.75%. Currently, PMAIX is held in my global hybrid sleeve found in the growth & income area of the portfolio. This sleeve also holds CAIBX and TIBAX.
  • Any opinions on these funds? BBBMX EALDX LALDX THOPX
    @Bobpa, yes, they all have the same thing in common. Based on YTD, 1, 3 and 5 year return history, they will all earn less than CDs.
  • MIkeM It sounds like you are saying short-term bonds do not make sense in this present investment environment.
  • Old_Skeet What were your reasons for moving out of your position in LALDX?
  • edited February 2018
    Hi @Bobpa,

    All three of the funds that I sold (FMTNX, LALDX & THIFX) had nav negative growth over the past 1, 3 & 5 year periods. In short, their yield was greater than their ability to produce same. I'm with @MikeM as I'm thinking CD's are currently a better deal presently over most short term bond funds.

    Here is a link to the one, three and five year performance for LALDX. Notice its yield of 3.70% is greater than its return numbers which are listed at 1 year @ 1.54% ... 3 year @ 1.98% ... and, 5 year @ 1.87%.

    A couple of Lord Abbett income funds that I own and have been able to produce their yield (and more) are LBNDX (Lord Abbett Bond Debenture) and ISFAX (Lord Abbett Multi Asset Income). ISFAX has a yield of 3.58% with 1 year performance listed at 6.17% ... 3 year @ 4.25% ... and, 5 year @ 5.03%. LBNDX has a yield of 4.15% with 1 year performance listed at 5.69% ... 3 year @ 5.36% and 5 year @ 5.75%. Thus they have produced their yield and then some.

    When an income fund can not make it's distribution for a good number of years, from my perspective, it's time to let it go and I did. This is the reason I no longer hold LALDX ... FMTNX ... and, THIFX. I'm thinking it will only get worse for these funds as interest rates rise so I let them go.

  • MikeM said:

    @Bobpa, would a guaranteed 2-3% a year work for at least some of that 50% of your portfolio? That is what CD's are paying now and they most surely will go up as interest rates rise. That's the good news for retirees. Pretty good hedge against decreasing bond returns I think.

    MikeM, I don't follow your line of thinking. If interest rates are rising, and the rates that CDs are paying will be going up, how is it that bond rates won't be going up as well?
  • I also like FPNIX. Another choice worth investigating is OSTIX.
  • @soup kitchen... If rates go up CD rates do rise. If you invested the same money in a bond fund,,, your principal declines to one degree or another as rates and yield rise. Perhaps it makes sense to build a CD ladder.

  • LarryB, wouldn't that be advantageous if you were reinvesting the dividends? You would be buying more shares at lower prices, which would produce a larger dividend. The NAV would eventually go up as well, wouldn't it?
  • Ted said:

    @Bobpa & MFO Members: Here is U.S. News & World Report's ranking of the best 75 Short-Term Bond Funds.

    BBBMX: Not Ranked

    BBBIX: #2, Ultra-Short Term Bond Fund.

  • @msf: I don't think Bobpa has $ 5 million, to invest in BBBIX that's why he ask about BBBMX.
  • True, but the rankings (despite the tickers) are for the funds.
  • MIkeM It sounds like you are saying short-term bonds do not make sense in this present investment environment.
    Yes, that is what I'm saying.

    Look at the performance of BBMX, 1.7% return over the last 3 years, 1.3% over the last 5. With rising interest rates short term bond funds will be challenged to make even that return going forward. In comparison, CDs are now paying 2% for 1 year and up to 3% for 5 years. And the point here, I think, is if you create a CD ladder where you are converting CDs periodically as they mature into a CD market of risings interest rates it's a win-win investment as compared the short term bonds that will be affected negatively with rising rates.

    This maybe wasn't true a year ago, but I think the time has come. Eliminate volatility and a guess on return completely and CD ladder into a rising return. That of course is just my opinion.

    By the way, this is what I'm going to do with the money I'm bucketing for retirement withdrawals. I happen to choose Synchroney Bank to set up my money market/CD IRA, but there are many good on-line options available.
  • The user and all related content has been deleted.
  • @soupkitchen.good point. But if the bond fund has a duration of 6.5 and rates rise by 2% it will take years to break even. Short duration funds will lose less but for us oldsters who need more income so a CD ladder is looking better nowadays.
  • I started to rebuild my CD ladder about a year ago. Currently, it has three steps starting at 6mo, 1yr and 18mos. Come the first part of April when I have one coming due I plan to add the fourth step and move maturity out to 2yrs. This will give me a four step ladder with maturities coming every six months. I treat CD's as part of my cash allocation while short term bond funds were/are treated as part of my bond allocation.
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