BI: High Yield six-sigma event

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Sidney
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BI: High Yield six-sigma event

Post by Sidney »

http://www.businessinsider.com/high-yie ... ent-2014-8

I don't usually read investing news but I loved this quote:
"[T]he US high yield house is not burning down," said UBS's Matthew Mish. "The real panic will come with a more severe downturn in credit and economic fundamentals, which will likely trigger an exodus from non-institutional and crossover/tourists from US high yield. That moment is unlikely to be a 2014 event."
It reminds me of the scene in Crocodile Dundee about the knife - "that's not a knife ...."
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Leeraar
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Re: BI: High Yield six-sigma event

Post by Leeraar »

These guys are so much a parody of themselves, it's hard to make fun of them.

L.
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Dale_G
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Re: BI: High Yield six-sigma event

Post by Dale_G »

From casual observation it doesn't look like a six sigma event to me, but I don't know over what period they allegedly measured.

Anyway, bring it on. Let the weak hands retire from the field.

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Re: BI: High Yield six-sigma event

Post by nisiprius »

One of the things I've learned from Matthew Fink's book, The Rise of Mutual Funds: An Insider's View, is that the possibility of a "run" on a mutual fund (collapse due to unmanageably excessive redemptions) has actually been a concern for as long as there have been mutual funds. There have been proposals that something be done to prevent the possibility, but the argument has always been won by those saying that it's not a serious concern. They say that mutual fund owners tend to stay put and so far, historically, even during the worst crises, there have never been an unmanageable flood of redemptions by mutual fund owners.

I won't say anything more because I certainly don't want to be the one to trigger a run on high-yield bond funds :D
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Re: BI: High Yield six-sigma event

Post by abuss368 »

I could never get onboard with high yield bonds. I prefer to take risks with equities and have the bond portion be low cost and high quality in nature.

Total Bond Index and also Intermediate Term Tax Exempt does just this. I am really unsure about international bond though.
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Dale_G
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Re: BI: High Yield six-sigma event

Post by Dale_G »

We probably don't need another high yield bond thread. Those that own them seem to like them, those that don't don't.

I guess we need another 70 years of history. May Bogleheads.org last that long, even though I won't.

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Re: BI: High Yield six-sigma event

Post by cfs »

Excessive redemptions.

Let the excessive redemptions continue (they can be ponzi scheme killers, in 2008 Madoff went down when he told his sons that he could not meet billions of dollars in redemptions). Now, these high yield bond funds are no ponzi scheme (I hope). I believe Vanguard and other mutual fund companies have some type of "disruptive redemptions rule" which they can implement to stop investors from draining the fund during a financial panic attack.

Thanks for reading.
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Re: BI: High Yield six-sigma event

Post by Dale_G »

cfs wrote:Excessive redemptions.

Let the excessive redemptions continue (they can be ponzi scheme killers, in 2008 Madoff went down when he told his sons that he could not meet billions of dollars in redemptions). Now, these high yield bond funds are no ponzi scheme (I hope). I believe Vanguard and other mutual fund companies have some type of "disruptive redemptions rule" which they can implement to stop investors from draining the fund during a financial panic attack.

Thanks for reading.
Right, they can "redeem in kind". I hope after the run is over that the are willing to take purchases "in kind". Here is hoping they don't send me a couple hundred different bonds, that is a lot of coupon clipping.

Anyway, I hardly expect a run on HY bond funds and I won't be redeeming anyway.

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Re: BI: High Yield six-sigma event

Post by manwithnoname »

Sidney wrote:http://www.businessinsider.com/high-yie ... ent-2014-8

I don't usually read investing news but I loved this quote:
"[T]he US high yield house is not burning down," said UBS's Matthew Mish. "The real panic will come with a more severe downturn in credit and economic fundamentals, which will likely trigger an exodus from non-institutional and crossover/tourists from US high yield. That moment is unlikely to be a 2014 event."
It reminds me of the scene in Crocodile Dundee about the knife - "that's not a knife ...."
Useless analysis like this is why the 10% of my portfolio invested in fixed income is limited to state GO muni bonds and bonds of TBTF banks.

As for limiting excessive redemptions in bond funds I thought the SEC rule required funds to redeem sales within 7 days. This is one of the risks of owning a bond fund that I avoid.
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Re: BI: High Yield six-sigma event

Post by Dale_G »

Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency circumstances,
as determined by the SEC.
I haven't seen this utilized yet, but a snowfall exceeding 1/2" is regarded as an emergency in Wash. DC. I mean they do send home a couple of million non-essential employees, right. If the NYSE is closed or the SEC has determined an emergency, good luck with disposing of your GO muni.

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Phineas J. Whoopee
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Re: BI: High Yield six-sigma event

Post by Phineas J. Whoopee »

manwithnoname wrote:...
As for limiting excessive redemptions in bond funds I thought the SEC rule required funds to redeem sales within 7 days. This is one of the risks of owning a bond fund that I avoid.
Seven day redemptions may be in kind. What the SEC can do is suspend the usual rule, under emergency circumstances, which will relieve funds from the requirement to redeem shares at all until the emergency is resolved. It isn't limited to bond funds.

I bet if Little Green Men from Mars invade my neck of the woods everybody not immediately contributing all of their resources to the common good will be the first ones up against the wall.

I try not to panic about things I can't do much about. *

PJW

* Except in this case I can. I choose simply not to believe in them. Wasn't there something about the Ravenous Bugblatter Beast of Traal? Maybe the Little Green Men from Mars are like that.
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Phineas J. Whoopee
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Re: BI: High Yield six-sigma event

Post by Phineas J. Whoopee »

Dale_G wrote:...
I haven't seen this utilized yet, but a snowfall exceeding 1/2" is regarded as an emergency in Wash. DC. I mean they do send home a couple of million non-essential employees, right. If the NYSE is closed or the SEC has determined an emergency, good luck with disposing of your GO muni.
...
I'm not at all sure a municipal emergency declaration, which loosens the restrictions on moving resources between separate departments, and on requiring overtime from unionized employees, in the District of Columbia, qualifies as a national financial emergency for economic purposes.

Certainly if severe weather or other events force the NYSE to close there can be temporary difficulty selling assets. As I recall, in one instance well within living memory, the NASDAQ tried to use the situation as a marketing tool, pointing out that their essential computer facilities in New Jersey hadn't been disrupted and offering to continue operations throughout. Somebody with a brain intervened and they stopped doing that post haste. Prior haste would have worked still better.

It took six calendar days to get the whole system back into working order.

Core financial institutions take provision of backup operational centers much more seriously today.

PJW
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Re: BI: High Yield six-sigma event

Post by Leeraar »

Y'all forget the markets were all closed for more than a week after 9/11.

L.
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Re: BI: High Yield six-sigma event

Post by Phineas J. Whoopee »

Leeraar wrote:Y'all forget the markets were all closed for more than a week after 9/11.

L.
Four business days. Closed on a Tuesday morning, opened the following Monday. The part which took the longest was installing temporary communications lines, because Verizon's facilities were severely damaged and they're who practically all Wall Street firms used.

Everybody, including Verizon, wanted to be associated with the World Trade Center, and if they could they concentrated their operations there, including the NYC police and fire departments. The top fire chief was killed in the collapse. The police communications system was severely damaged. New York's bravest and New York's finest couldn't communicate well with each other anyway, even if everything was working. New York's strongest were left to pick up the pieces.

Your main point is correct, but in this instance I feel it's important to get the details right, too.

PJW
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Re: BI: High Yield six-sigma event

Post by manwithnoname »

Phineas J. Whoopee wrote:
manwithnoname wrote:...
As for limiting excessive redemptions in bond funds I thought the SEC rule required funds to redeem sales within 7 days. This is one of the risks of owning a bond fund that I avoid.
Seven day redemptions may be in kind. What the SEC can do is suspend the usual rule, under emergency circumstances, which will relieve funds from the requirement to redeem shares at all until the emergency is resolved. It isn't limited to bond funds.

I bet if Little Green Men from Mars invade my neck of the woods everybody not immediately contributing all of their resources to the common good will be the first ones up against the wall.

I try not to panic about things I can't do much about. *

PJW

* Except in this case I can. I choose simply not to believe in them. Wasn't there something about the Ravenous Bugblatter Beast of Traal? Maybe the Little Green Men from Mars are like that.

Not exactly- Full vote of SEC Commissioners is required to suspend redemption of shares. See link. That takes time.

http://ftalphaville.ft.com/2014/07/28/1 ... und-story/

When was the last time the SEC allowed MFs to suspend redemptions of bond funds, if ever?
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Re: BI: High Yield six-sigma event

Post by Valuethinker »

manwithnoname wrote:
Useless analysis like this is why the 10% of my portfolio invested in fixed income is limited to state GO muni bonds and bonds of TBTF banks.
.
On Too Big To Fail Financial Institutions

I think the Espiritu Santo situation and the Cypriot banks are warnings re shape of future bailouts.

Ireland crucified itself taking on the bond liabilities of the banks at par. The Finance Minister then died of cancer, so we don't know his reasoning-- which was applauded at the time.

Whereas a depositor holds his money at a bank as a store of value, a bond lender lends to a bank to receive a risk premium-- higher return than the equivalent government bond.

So therefore the attitude of the regulators is clear. Holders of the bonds of financial institutions will get to join the 'bail in'. Be converted into equity, at a massive loss (see above examples).

I am sure the US is no different in this regard. The authorities are just not going to bail out a bank without inflicting pain on everyone but the depositors. That, in fact, is the whole point behind the $80bn of CoCos (Contingent Convertibles) being issued by banks at the behest of regulators.

The assumption that TBTF protects you, as a bondholder, is suspect. TBTF is for deposit holders, not other security holders in a bank capital structure.
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Re: BI: High Yield six-sigma event

Post by manwithnoname »

Valuethinker wrote:
manwithnoname wrote:
Useless analysis like this is why the 10% of my portfolio invested in fixed income is limited to state GO muni bonds and bonds of TBTF banks.
.
On Too Big To Fail Financial Institutions

I think the Espiritu Santo situation and the Cypriot banks are warnings re shape of future bailouts.

Ireland crucified itself taking on the bond liabilities of the banks at par. The Finance Minister then died of cancer, so we don't know his reasoning-- which was applauded at the time.

Whereas a depositor holds his money at a bank as a store of value, a bond lender lends to a bank to receive a risk premium-- higher return than the equivalent government bond.

So therefore the attitude of the regulators is clear. Holders of the bonds of financial institutions will get to join the 'bail in'. Be converted into equity, at a massive loss (see above examples).

I am sure the US is no different in this regard. The authorities are just not going to bail out a bank without inflicting pain on everyone but the depositors. That, in fact, is the whole point behind the $80bn of CoCos (Contingent Convertibles) being issued by banks at the behest of regulators.

The assumption that TBTF protects you, as a bondholder, is suspect. TBTF is for deposit holders, not other security holders in a bank capital structure.
You have any accurate prediction of when the next meltdown of TBTF banks will occur? I am still waiting for the increase in interest rates that was predicted 4 years ago.

TBTF banks have less risk today than 4 years ago because of D-F and higher capital requirements. Banks are leaving risky investments such as commodities and prop trading because of the Volker rule. Bank with the biggest risk is GS because it has no retail business lines and gets most of its income from trading on its own account. I don't own GS bonds.
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Re: BI: High Yield six-sigma event

Post by Tanelorn »

manwithnoname wrote:When was the last time the SEC allowed MFs to suspend redemptions of bond funds, if ever?
They don't need SEC permission to provide you with your redemption "in-kind" though, as one would know if one actually read their mutual fund prospectii. Here's one from the Vanguard Emerging Markets Fund, VEIEX:
VEIEX SAI wrote:if Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions.
Needless to say, you aren't going to be amused if, due to some flash crash style event around the market close, your mutual fund decides to redeem your sale in the form of 1000 individual foreign stocks delivered to your account, most of them in markets that Vanguard as a brokerage doesn't support transacting in. So not only would you be stuck with huge commissions to eventually sell all these securities ($100/trade isn't unusual for foreign stocks), but instead of selling when you wanted to get out of the market, you're stuck for weeks or months until you can transfer all these weird securities to a brokerage that will accept them and allow you to actually sell them. The language is the same for the Vanguard Long Term muni and HY Corporate funds too, and I sure wouldn't want to have to sell a bunch of small lots of individual illiquid bonds.

Some funds reserve this in-kind option only for large redemptions ($250k or more, or whatever). For example, Vanguard HY does say that less than $250k of total redemptions by a single person over a 3 month period is guaranteed to be in cash. If you've got more than that, or if you've got money in a fund like EM or munis that lack this protective clause, you could potentially be subject to a very expensive lesson if your sale corresponded to a time when there was a run on the fund.

https://personal.vanguard.com/pub/Pdf/s ... 2210089801
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Re: BI: High Yield six-sigma event

Post by Phineas J. Whoopee »

manwithnoname wrote:...
Not exactly- Full vote of SEC Commissioners is required to suspend redemption of shares. See link. That takes time.

http://ftalphaville.ft.com/2014/07/28/1 ... und-story/

When was the last time the SEC allowed MFs to suspend redemptions of bond funds, if ever?
Right. A political advocacy site offers its objections to making money market mutual fund pricing more transparent, therefore it's impossible for the SEC to vote to suspend non-money-market mutual fund redemptions even under difficult circumstances in which the commissioners would have to communicate with one another electronically rather than by physically inhabiting the same room. Lest there be an objection about what if electronic communication were cut off, in those circumstances even if the commissioners were in the same room how would the SEC communicate its decision to market participants, how would anybody in the securities industry do business at all, and how could we immediately, without physical certificates, revert to over the counter trading of bearer securities?

You'll forgive me if I'm not impressed by ftalphaville.

PJW
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Re: BI: High Yield six-sigma event

Post by manwithnoname »

Tanelorn wrote:
manwithnoname wrote:When was the last time the SEC allowed MFs to suspend redemptions of bond funds, if ever?
They don't need SEC permission to provide you with your redemption "in-kind" though, as one would know if one actually read their mutual fund prospectii. Here's one from the Vanguard Emerging Markets Fund, VEIEX:
if Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions.
Needless to say, you aren't going to be amused if, due to some flash crash style event around the market close, your mutual fund decides to redeem your sale in the form of 1000 individual foreign stocks delivered to your account, most of them in markets that Vanguard as a brokerage doesn't support transacting in. So not only would you be stuck with huge commissions to eventually sell all these securities ($100/trade isn't unusual for foreign stocks), but instead of selling when you wanted to get out of the market, you're stuck for weeks or months until you can transfer all these weird securities to a brokerage that will accept them and allow you to actually sell them.

Some funds reserve this redemption in-kind option for only sales of $250k or more, but that does not appear to be the case for Vanguard and it certainly is something an index fund investor could reach pretty easily in a single fund, especially if they took a relative simple approach to their portfolio.
I am not interested in stock funds. Your response indicted that bond funds could be redeemed in kind. How would a bond fund pay in kind distributions of your shares? Bonds are only sold in $1000 denominations. Most bonds are issued in book entry form. How would the fund transfer the bonds to the investor? Would the bonds have to be allocated in proportion to relative % of each bond issue held in the fund resulting in almost all distributions of bonds being less than $1000. Not going to happen if for no reason than the IT systems of the bond funds are not set up to make in kind distributions.

enough said.
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Re: BI: High Yield six-sigma event

Post by Phineas J. Whoopee »

Valuethinker wrote:...
I am sure the US is no different in this regard. The authorities are just not going to bail out a bank without inflicting pain on everyone but the depositors. That, in fact, is the whole point behind the $80bn of CoCos (Contingent Convertibles) being issued by banks at the behest of regulators.
...
Hi Valuethinker,

On the off chance that the Cyprus reference doesn't get this thread locked or worse, the EU has been moving toward the US system, in which:

The holders of FDIC or NCUA insured deposits are made whole first, using government funds if necessary.
Then, if there's enough left, uninsured deposits are made whole.
Then, if there's enough left, holders of senior debt are made whole.
Then, if there's enough left, holders of subordinated debt are made whole.
Then, if there's enough left, shareholders get something, but if there were enough to make the insured deposits, uninsured deposits, holders of senior debt, and holders of subordinate debt whole there wouldn't have been a need to go out of business in the first place.

That is the dreaded bail-in.

PJW
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Re: BI: High Yield six-sigma event

Post by Tanelorn »

manwithnoname wrote:I am not interested in stock funds. Your response indicted that bond funds could be redeemed in kind. How would a bond fund pay in kind distributions of your shares? Bonds are only sold in $1000 denominations. Most bonds are issued in book entry form. How would the fund transfer the bonds to the investor? Would the bonds have to be allocated in proportion to relative % of each bond issue held in the fund resulting in almost all distributions of bonds being less than $1000. Not going to happen if for no reason than the IT systems of the bond funds are not set up to make in kind distributions.
Stocks are traded in 1 share minimum increments, but that doesn't stop you from occasionally getting fractional stock shares from DRIPs or stock mergers or what-not from time to time. Perhaps you could get a fraction of a bond? I don't know.

In my one unfortunate experience with getting a stock fund redeemed in-kind, I received as little as a single share of a stock and cash for fractional shares in proportion to the fund's holdings. Perhaps that suggests that if your share of a fund's bond holding was less than $1000 (or less than one bond, perhaps worth less than $1000 as we're talking about HY bonds in a period of stress), you would get cash for that.

Vanguard HY has $17.5B in assets as of Q2'14 and their largest bond positions are around $100-200M each or around 0.5-1% of the fund each. There are about 20 such holdings that I see here:

https://personal.vanguard.com/us/FundsA ... Order=desc

If you had $250,001 worth of this HY fund (so that the protection clause didn't apply), a 0.5% fund holding would be $1250 worth of your investment and thus you could expect to get a full bond for at least $1000 worth of that. Thus you would end up with about 20 different bonds and cash for the rest. If you had a sufficiently large holding you tried to redemption, you would keep getting more new bond issues until you got some of all ~400 holdings.

This is what happened to me with stocks - I got 1-2 units of each of the top fund holdings for a total of a dozen or so individual positions. I lost about 1/3 of my investment in transaction costs selling them, so this is not some hypothetical risk. I don't know how bad the spreads or transaction costs are for HY bonds but I sure wouldn't want to be trying to sell them in a crisis. Vanguard offers bond trading so I'm sure they would have no IT problems giving you bonds from their own fund.
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Re: BI: High Yield six-sigma event

Post by jdb »

Dale_G wrote:We probably don't need another high yield bond thread. Those that own them seem to like them, those that don't don't.

I guess we need another 70 years of history. May Bogleheads.org last that long, even though I won't.

Dale
Agree with Dale. As a contrarian it is threads like this that give me an itch to increase my IRA allocation to Vanguard HY Admiral. Better off no more threads on this subject to lead me into temptation.
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Re: BI: High Yield six-sigma event

Post by garlandwhizzer »

I used to hold some HYB but no longer. Interest spreads between HYB and Treasuries or Investment Grade Corporates have narrowed and the quality of most HYB funds has declined in recent years in my opinion. At times in the past the yield spread over safer bonds offered a sufficiently attractive risk/reward tradeoff for me to put a modest percentage of my bond holdings in HYB. Currently and for the past year or two I think HYB take on way too much risk for the small increment in increased yield.

Even TBM and Intermediate Term Treasuries have risk--duration risk and inflation risk. TIPS have duration risk alone. So all of us other than those whose fixed income is 100% in T-Bills or short term TIPS are taking on some risk. It is a question of degree not kind. The problem that each of us must face is where do we want to put our bond money on the risk/reward spectrum. In the crash of 2008-9, Vanguard's HYB fund (which is a conservative HYB fund with 94% of its bonds rated B or better) was yielding more than 12% then andI felt that 12% yield was attractive on a risk/reward basis relative to Treasuries which were yielding less than 2% if I recall correctly. The flight to quality had been overdone as often happens during crisis. Now however the yield spread is nothing to get excited about. Greater safety comes at a reasonable cost now, hence no HYB.

Garland Whizzer
jdb
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Re: BI: High Yield six-sigma event

Post by jdb »

garlandwhizzer wrote:I used to hold some HYB but no longer. Interest spreads between HYB and Treasuries or Investment Grade Corporates have narrowed and the quality of most HYB funds has declined in recent years in my opinion. At times in the past the yield spread over safer bonds offered a sufficiently attractive risk/reward tradeoff for me to put a modest percentage of my bond holdings in HYB. Currently and for the past year or two I think HYB take on way too much risk for the small increment in increased yield.

Even TBM and Intermediate Term Treasuries have risk--duration risk and inflation risk. TIPS have duration risk alone. So all of us other than those whose fixed income is 100% in T-Bills or short term TIPS are taking on some risk. It is a question of degree not kind. The problem that each of us must face is where do we want to put our bond money on the risk/reward spectrum. In the crash of 2008-9, Vanguard's HYB fund (which is a conservative HYB fund with 94% of its bonds rated B or better) was yielding more than 12% then andI felt that 12% yield was attractive on a risk/reward basis relative to Treasuries which were yielding less than 2% if I recall correctly. The flight to quality had been overdone as often happens during crisis. Now however the yield spread is nothing to get excited about. Greater safety comes at a reasonable cost now, hence no HYB

Garland Whizzer
Not arguing with your economic analysis. But sounds a little like market timing in bonds. My estimated holding period for FI allocations in IRA both Vanguard HY and TBM together with TIPS ladder are substantially longer than average duration of those two bond funds, indeed have already exceeded durations since inception of allocation. I know there will be fluctuations but willing to stay the course for the long run. Inflation is the real concern but hopefully the TIPS ladder will ameliorate that risk somewhat.
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