Vanguard: Six questions (and answers) about bonds

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gkaplan
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Vanguard: Six questions (and answers) about bonds

Post by gkaplan »

The Federal Reserve's unprecedented intervention in the U.S. bond market has stimulated more than the economy. Debate is raging over how fixed income investors will fare in the coming years. Kenneth Volpert, head of Vanguard's Taxable Bond Group, and Francis Kinniry, a principal in Vanguard Investment Strategy Group, fielded questions about the bond market....
https://personal.vanguard.com/us/insigh ... ons-052013
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

Great Q&A. Thank you for sharing.
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Re: Vanguard: Six questions (and answers) about bonds

Post by G-Money »

tfb wrote:Great Q&A. Thank you for sharing.
Agreed. This should be mandatory reading before anyone is allowed to post another "bond bubble" thread.
Don't assume I know what I'm talking about.
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Re: Vanguard: Six questions (and answers) about bonds

Post by coldplay221 »

Thanks for the link. It answered a few of my questions.

My takeaways were
1. Bond Yield - Inflation can become negative if rates rise quickly. If not, the difference will not be negative but the real return will be smaller.
2. Smaller real return is much better than investing in other possibly higher yield investments like MLPs or high dividend stocks due to the negative correlation with stocks.
3. International bond funds hedged against currency risk are a good idea.
4. Buying bonds now cannot be as awesome as securing 7.6% return as before but still better than sulking and doing something stupid during a stock market crash.

I am kind of looking forward to Vanguard's international bond fund.
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

G-Money wrote:
tfb wrote:Great Q&A. Thank you for sharing.
Agreed. This should be mandatory reading before anyone is allowed to post another "bond bubble" thread.
Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
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Baseballmom94
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Re: Vanguard: Six questions (and answers) about bonds

Post by Baseballmom94 »

tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
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Re: Vanguard: Six questions (and answers) about bonds

Post by Blues »

Thanks, Gordon, for posting the Q & A. :beer
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Re: Vanguard: Six questions (and answers) about bonds

Post by Bacchus01 »

I know a lot of people argue not to change your allocation OUT of bonds, but what about where to put new money INTO your AA? If I've got $1 of new money to put in, is anyone NOT putting it in bonds? Thoughts?
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Strive for simplicity -- not complexity

Post by Taylor Larimore »

Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Baseballmom:

Why are you trying to "figure out" more fixed income?

With Total Bond and TIPS you have thousands of various type bonds in these two funds. There is no need to add more bond-type securities.

Strive for simplicity--not complexity.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Vanguard: Six questions (and answers) about bonds

Post by abuss368 »

Excellent interview from Vanguard.

Stay the course with Total Bond (Intermediate Term Tax Exempt) and the Inflation Bond Fund.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Vanguard: Six questions (and answers) about bonds

Post by Baseballmom94 »

Taylor Larimore wrote:
Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Baseballmom:

Why are you trying to "figure out" more fixed income?

With Total Bond and TIPS you have thousands of various type bonds in these two funds. There is no need to add more bond-type securities.

Strive for simplicity--not complexity.

Best wishes.

Taylor
Taylor, we are restructuring our portfolio at Vanguard so we currently do not own any bond funds. We currently have $75,000 in TIPs, $350,000 in CDs linked to commodities. In striving towards a 3-fund portfolio, we need to allocate an additional $200,000 (currently in cash) to fixed income. I am concerned when I read things such as the following quote by Ken Volpert: "If rates rise faster than the market is predicting, bond returns could turn negative."

This, to me, is in opposition with the idea that fixed income is money that is at very low risk with low returns while providing stability in the portfolio. I understand why investors who are currently invested in the Total Bond Fund would stay the course. But for investors who are jumping in now during a very low interest rate environment, does the Total Bond Fund still make sense? I get the feeling that we are in unprecedented territory here and that no one (not even the experts) has a clear-cut answer on what to do with fixed income asset allocation at this point in time. I am considering CD ladders to keep our money risk-free. I know I keep repeating the same question but after losing so much money to brokerage firms and ill-advised gold stocks, I do not want to put our hard-earned money into more losing investments. You might say we are a bit gun-shy. I understand the risk with the stock market but certainly don't want our "risk free" assets to erode further than if we put them into low interest CDs.
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Bond risk ?

Post by Taylor Larimore »

I get the feeling that we are in unprecedented territory here and that no one (not even the experts) has a clear-cut answer on what to do with fixed income asset allocation at this point in time.
Investormom:

You are right about "no one has a clear-cut answer." There never is a clear answer or everyone would jump into that investment. Please ignore the media. Every period is different. No one can forecast the future of bond returns.

I was a Director of the Dade County Housing Authority which issues bonds so I have experience. Bonds are extremely competitive. Assume the market knows more than you, the media, or any bond expert. There is no free lunch. If you want higher return you must take more risk of loss.

So the question becomes: How much loss can I accept in search of higher return? Well, let's look at the record of the Aggregate Bond Market Index which Vanguard's Total Bond Market fund tracks:

YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6
1983-------3.8-----------8.4
1984-------3.9----------15.2
1985-------3.8----------22.1
1986-------1.1----------15.2
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9
1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.9)
1995-------2.5----------18.5
1996-------3.3-----------3.6
1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4
2006-------2.5-----------4.3
2007-------4.1-----------7.0
2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7
2012-------1.7-----------4.3
Source: U.S. Department of Labor and Barclays

Observations:
* Inflation increased from 4.9% in 1976 to 13.3% in 1979; nevertheless the Index had positive returns during that period of rising inflation.
* The Index had only two negative years (both small) reflecting low risk.
* Worrying about bond losses of this magnitude is silly when stocks plunged 35-40% or more during the same period.

Past performance does not guarantee future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Vanguard: Six questions (and answers) about bonds

Post by Clever_Username »

Bacchus01 wrote:I know a lot of people argue not to change your allocation OUT of bonds, but what about where to put new money INTO your AA? If I've got $1 of new money to put in, is anyone NOT putting it in bonds? Thoughts?
I'm continuing with my stated asset allocation, so yes, thirty cents of that dollar is going into bonds.
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Yes CDs. I wrote

CD vs Bond Fund: A Case Study
Why Investors Don’t Realize CDs Are a Better Deal Than Bonds

One more coming next Monday on why investment advisors favor bond funds over CDs.
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Re: Vanguard: Six questions (and answers) about bonds

Post by nisiprius »

You have motivated me, at least to find out, about the availability of bank CDs that can have a "Rollover IRA" registration and can accept a direct custodian-to-custodian transfer from a rollover IRA account. Do you happen to know the answer to that off the top of your head?

That is a really good article. It's good not only because it makes the case, but it makes me feel that I'm not necessarily crazy not to actually begin switching--it is a good analysis of the factors and thier balance. The chart ("they used to be better") is great. Personally, when it comes to things like actually switching banks, my "threshold of action" is somewhere around a 0.50-0.75% difference--and, yes, I can calculate that compounded for thirty years--and I personally read that chart more as "about the same, ±0.5%"

By the way, wouldn't the returns of an intermediate-term bond fund like Total Bond be more like the 10-year Treasury than the 5-year? The SEC yield for Total Bond is showing as 1.45%, click click, 5 year 0.65%, 7 year 1.07%, 10 year 1.66%... not saying what you did was an inappropriate comparison, I assume you feel that something about the "effective volatility" (penalty) or the likelihood of interest rate rise makes the 5-year the appropriate benchmark?

I think you left out one additional factor: the "aura of sophistication." As in CDs, bank CDs, come on, that's what financially unsophisticated people invest in. (I wonder if this has changed any now that every bank has someone selling mutual funds ten paces away from the lobby sign with the CD rates posted on it?)

Personally, having been conducting a slow, difficult struggle over the course of over five years to reduce the number of different accounts I have with financial institutions--and having had to take one step back due to the discontinuance of paper savings bonds--I [perhaps over-]value simplicity. In effect, I used all of all of my "account budget" opening up the Treasury Direct account. The "liquidity" concern with me is not the penalty, but the fear--almost surely exaggerated but not completely irrational--that the bank could actually deny an early withdrawal.
One more coming next Monday on why investment advisors favor bond funds over CDs.
Give it to 'em good!

The most poisonous thing in investing advice is the "best possible choice from among the things I can sell you" syndrome.
Last edited by nisiprius on Fri May 03, 2013 6:31 am, edited 1 time in total.
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Re: Vanguard: Six questions (and answers) about bonds

Post by z3r0c00l »

Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else?
One word: Tulip futures.
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Re: Bond risk ?

Post by Clive »

Taylor Larimore wrote:I was a Director of the Dade County Housing Authority which issues bonds so I have experience.
... let's look at the record of the Aggregate Bond Market Index which Vanguard's Total Bond Market fund tracks:
YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6
1983-------3.8-----------8.4
1984-------3.9----------15.2
1985-------3.8----------22.1
1986-------1.1----------15.2
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9
1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.9)
1995-------2.5----------18.5
1996-------3.3-----------3.6
1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4
2006-------2.5-----------4.3
2007-------4.1-----------7.0
2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7
2012-------1.7-----------4.3
Source: U.S. Department of Labor and Barclays

Observations:
* Inflation increased from 4.9% in 1976 to 13.3% in 1979; nevertheless the Index had positive returns during that period of rising inflation.
* The Index had only two negative years (both small) reflecting low risk.
* Worrying about bond losses of this magnitude is silly when stocks plunged 35-40% or more during the same period.
How much tax would the average investor have paid on those gains?

Also, if you compare the above figures from a real (after inflation adjustment) perspective there was a -28% loss from the end of 1976 to the end of 1980.

History indicates that periodically treasury yields are suppressed, either via quantitative easing or by a simple statement that yields will be kept low - inducing the market to adjust prices to reflect those low 'target' yields. During such times inflation has at some point spiked, into double digits for sequential series of years. Which might be considered as a form of partial default/confiscation via inflationary erosion and taxation on nominal rather than real amounts.
coldplay221 wrote:My takeaways were...
3. International bond funds hedged against currency risk are a good idea.
...
I am kind of looking forward to Vanguard's international bond fund.
Some countries might withhold 30% or more of any interest paid - like how the US withholds 30% of foreign investors income from US Treasuries/bonds/stock dividends. Depending upon individual tax treaties, domestic tax may or may not also be liable on top of that.
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Re: Vanguard: Six questions (and answers) about bonds

Post by jimkinny »

tfb wrote:
Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Yes CDs. I wrote

CD vs Bond Fund: A Case Study
Why Investors Don’t Realize CDs Are a Better Deal Than Bonds

One more coming next Monday on why investment advisors favor bond funds over CDs.
yes, Nisi is right, nice article.

Allan Roth has been writing about the superiority of CDs for 2 years or more. I am not really sure how long.

I do not think comparing the yield of a TBM fund that has about 30% IG bonds and about a 5 year duration is as close of a comparison as comparing an intermediate Treasury fund with about the same duration of 5 years to a 5 year CD. It is also true that there is a bit of apples vs oranges when comparing any fund vs a CD, but the article makes a very good case for CDs. When I can get 70-80% increase in yield over a comparable term Treasury with no interest rate risk, it is for me clearly preferable. I recently bought some with a ytm of 1.6 vs the 1.7 (100K) linked in the article. I think the difference is closer to 0.7-0.8% when comapring a Treasury fund vs CD. Maybe this is not enough to overcome the inertia. I do understand that aspect.

This can be a bit like Treasuries vs HY corporate funds, safety vs yield, which seems to be a never ending discussion. But, we can all accept that IG is not as safe as Treasuries, I think, and regardless of the returns frequently cited, a TBM fund is not as safe as a Treasury of the same duration that is reflected in the higher yield.

When i started switching from TBM and substituting CDs, I bought Vanguard's ST IG fund because i still wanted the additional yield that IG gives over Treasuries. Now, I am glad not to have any IG, preferring safety over yield.

I wish I had acted on this when I first read one of Allan Roth's articles. I also wish he would link his blog articles on this site.

jim
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Re: Vanguard: Six questions (and answers) about bonds

Post by gerrym51 »

nisiprius wrote:
You have motivated me, at least to find out, about the availability of bank CDs that can have a "Rollover IRA" registration and can accept a direct custodian-to-custodian transfer from a rollover IRA account. Do you happen to know the answer to that off the top of your head?

That is a really good article. It's good not only because it makes the case, but it makes me feel that I'm not necessarily crazy not to actually begin switching--it is a good analysis of the factors and thier balance. The chart ("they used to be better") is great. Personally, when it comes to things like actually switching banks, my "threshold of action" is somewhere around a 0.50-0.75% difference--and, yes, I can calculate that compounded for thirty years--and I personally read that chart more as "about the same, ±0.5%"

By the way, wouldn't the returns of an intermediate-term bond fund like Total Bond be more like the 10-year Treasury than the 5-year? The SEC yield for Total Bond is showing as 1.45%, click click, 5 year 0.65%, 7 year 1.07%, 10 year 1.66%... not saying what you did was an inappropriate comparison, I assume you feel that something about the "effective volatility" (penalty) or the likelihood of interest rate rise makes the 5-year the appropriate benchmark?

I think you left out one additional factor: the "aura of sophistication." As in CDs, bank CDs, come on, that's what financially unsophisticated people invest in. (I wonder if this has changed any now that every bank has someone selling mutual funds ten paces away from the lobby sign with the CD rates posted on it?)

Personally, having been conducting a slow, difficult struggle over the course of over five years to reduce the number of different accounts I have with financial institutions--and having had to take one step back due to the discontinuance of paper savings bonds--I [perhaps over-]value simplicity. In effect, I used all of all of my "account budget" opening up the Treasury Direct account. The "liquidity" concern with me is not the penalty, but the fear--almost surely exaggerated but not completely irrational--that the bank could actually deny an early withdrawal.
One more coming next Monday on why investment advisors favor bond funds over CDs.
Give it to 'em good!

The most poisonous thing in investing advice is the "best possible choice from among the things I can sell you" syndrome.

saying cds are better than bonds is like saying whats better-a poke in the eye with a sharp stick or dull stick. 10 year cd rates are better than 10 year treasuries-but they both stink. as i write this fidelity has a new cd issue 10 year 2.35 bothe callable and uncallable(its now may 3 1030 am est). i said this to my wife-her reply-2.35 10 years NO.


i have convinced her to invest in a fidelity defined maturity fund (fchpx) invested in only MUNICIPAL BONDS that is starting just now and terminating in 2023.fideliity has several that they started in 2011(terminates 15,17,19,21). this is the first one that will get the full 10 years. what this does is it can never buy bonds longer than years left til termination and will hold maturities instead of being open ended and having to buy toward end of 10 year cycle. i have researched these quite well-i think. no guarantees but i think a good bet.


http://personal.fidelity.com/products/f ... ty-DMF.pdf
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Re: Vanguard: Six questions (and answers) about bonds

Post by david99 »

tfb wrote:
Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Yes CDs. I wrote

CD vs Bond Fund: A Case Study
Why Investors Don’t Realize CDs Are a Better Deal Than Bonds

One more coming next Monday on why investment advisors favor bond funds over CDs.
I doubt that someone working at Vanguard is going to tell us that bank CDs are a better deal than Vanguard bond funds.
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

nisiprius wrote:
You have motivated me, at least to find out, about the availability of bank CDs that can have a "Rollover IRA" registration and can accept a direct custodian-to-custodian transfer from a rollover IRA account. Do you happen to know the answer to that off the top of your head?
A "Rollover IRA" is just a traditional IRA with money rolled over from somewhere else. The word "rollover" in the title doesn't mean much. It's the content that matters (to qualified plans that still only accepts incoming rollovers from previous rollovers, not from your own contributions). If you won't ever roll over the money to an employer plan, it doesn't matter. Just a regular traditional IRA will do.

Most banks and credit unions offer IRA CDs. They will happily do the direct custodian-to-custodian transfer for you. That's how they get the money. They do it all the time. I linked to the custodian-to-custodian transfer form used by Discover Bank as an example in my article.

Some banks offer CDs only in taxable accounts. It's an exception not the rule. Barclays Bank doesn't offer IRA CDs at this time. PenFed, Ally, Discover, and CIT Bank all offer IRA CDs.
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Re: Vanguard: Six questions (and answers) about bonds

Post by longview »

tfb wrote:
Baseballmom94 wrote:
tfb wrote:Although they still create the impression that the only alternatives to bonds are stocks, REITs, high yield bonds, and MLPs. True to them managing billions but not to retail investors. The forbidden words shall not be spoken.
tfb, can you speak the forbidden words? :wink: Are you speaking of CDs or something else? I'm currently trying to figure out where to put our 40% fixed income assets in addition to TIPs and the Total Bond Fund.
Yes CDs. I wrote

CD vs Bond Fund: A Case Study
Why Investors Don’t Realize CDs Are a Better Deal Than Bonds

One more coming next Monday on why investment advisors favor bond funds over CDs.
Fight the fight tfb. I'd love to see some thoughts on those in taxable accounts. Ie, it seems like CDs have a tough time against munis for anyone in the top bracket.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Vanguard: Six questions (and answers) about bonds

Post by longview »

gerrym51 wrote: i have convinced her to invest in a fidelity defined maturity fund (fchpx) invested in only MUNICIPAL BONDS that is starting just now and terminating in 2023.fideliity has several that they started in 2011(terminates 15,17,19,21). this is the first one that will get the full 10 years. what this does is it can never buy bonds longer than years left til termination and will hold maturities instead of being open ended and having to buy toward end of 10 year cycle. i have researched these quite well-i think. no guarantees but i think a good bet.


http://personal.fidelity.com/products/f ... ty-DMF.pdf
These look interesting. Why don't they return par? If the fund holds everything to maturity, I'm confused what NAV would be the day before the fund closes -- and why you don't wind up getting par back.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Vanguard: Six questions (and answers) about bonds

Post by gerrym51 »

longview wrote:
gerrym51 wrote: i have convinced her to invest in a fidelity defined maturity fund (fchpx) invested in only MUNICIPAL BONDS that is starting just now and terminating in 2023.fideliity has several that they started in 2011(terminates 15,17,19,21). this is the first one that will get the full 10 years. what this does is it can never buy bonds longer than years left til termination and will hold maturities instead of being open ended and having to buy toward end of 10 year cycle. i have researched these quite well-i think. no guarantees but i think a good bet.


http://personal.fidelity.com/products/f ... ty-DMF.pdf
These look interesting. Why don't they return par? If the fund holds everything to maturity, I'm confused what NAV would be the day before the fund closes -- and why you don't wind up getting par back.
this explains it better than i. the 2023 is the first that will have the full 10 yrs.i intend to buy each succeeding fund 2025,2027,2029,2031

http://www.learnbonds.com/fidelity-defi ... ity-funds/


watch this video https://www.fidelity.com/mutual-funds/n ... rity-funds


all things being equal they should return par. BUT in 10 yr will will start recouping at maturity and hold in moeny market fund. there are no guarantees but except for cd's its the safest with a decent rate of return i could find. you know fundspeak-they can't guarantee unlessthey can GUARANTEE
Last edited by gerrym51 on Sat May 04, 2013 8:27 pm, edited 1 time in total.
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Re: Bond risk ?

Post by grabiner »

Taylor Larimore wrote:So the question becomes: How much loss can I accept in search of higher return? Well, let's look at the record of the Aggregate Bond Market Index which Vanguard's Total Bond Market fund tracks:
I am picking out from this list a few important years:
YEAR--INFLATION--BOND INDEX
1977-------6.7-----------3.0
1981-------8.9-----------6.3
1990-------6.1-----------8.9
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2008-------0.1-----------5.2

Past performance does not guarantee future performance.
The years above are the seven years the stock market lost money, and the performance above is the reason you hold bonds. The 2000-2002 Internet bubble was greatly cushioned if you held bonds at the time, and 2008 was moderated if you held Treasury bonds, which make up a large part of the index; corporates did lose value.

(edited to correct year; listed 1976, with a stock-market gain, instead of 1977, with a loss)
Last edited by grabiner on Sun May 05, 2013 9:55 pm, edited 1 time in total.
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tfb
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

longview wrote:Fight the fight tfb. I'd love to see some thoughts on those in taxable accounts. Ie, it seems like CDs have a tough time against munis for anyone in the top bracket.
I agree munis are still better than CDs in taxable accounts for someone in the top bracket. Also buy the full quota of I Bonds. Pay down or pay off the mortgage.
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Re: Vanguard: Six questions (and answers) about bonds

Post by lethean46 »

tfb wrote:
nisiprius wrote:
You have motivated me, at least to find out, about the availability of bank CDs that can have a "Rollover IRA" registration and can accept a direct custodian-to-custodian transfer from a rollover IRA account. Do you happen to know the answer to that off the top of your head?
A "Rollover IRA" is just a traditional IRA with money rolled over from somewhere else. The word "rollover" in the title doesn't mean much. It's the content that matters (to qualified plans that still only accepts incoming rollovers from previous rollovers, not from your own contributions). If you won't ever roll over the money to an employer plan, it doesn't matter. Just a regular traditional IRA will do.

Most banks and credit unions offer IRA CDs. They will happily do the direct custodian-to-custodian transfer for you. That's how they get the money. They do it all the time. I linked to the custodian-to-custodian transfer form used by Discover Bank as an example in my article.

Some banks offer CDs only in taxable accounts. It's an exception not the rule. Barclays Bank doesn't offer IRA CDs at this time. PenFed, Ally, Discover, and CIT Bank all offer IRA CDs.
tfb

Thanks for linking your CD articles. I've saved them in favorites, and I'm going to start reading your articles as they come out. Thank you.

Question. Can I not buy CDs right at Vanguard for an IRA held at Vanguard? I assumed so. Am I wrong?

I previously bought and sold CDs through Vanguard for a taxable account. I don't remember why I held them in the taxable account. ??? That seems strange in hindsight.

However, this week I tried finding the page that lists all CD offerings at Vanguard. I logged in to Vanguard, and I still couldn't find the page listing CDs.

Can someone give me the directions for accessing the CD listing page on the Vanguard site? I've looked everywhere.

At this point, I need CDs in the IRA held at Vanguard. Is that possible? This is for estimated 1, 2, and 3 year future RMDs. That cash is currently sitting in Prime MM. Ugh.

Thank you.

ML
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

lethean46 wrote:Can I not buy CDs right at Vanguard for an IRA held at Vanguard?
You can, but you are not going to get the best rates. It's like paying a very high ER on the CDs. You can see rates at

https://personal.vanguard.com/us/funds/bonds/bonddesk

Bank of India 1-year 0.45% (0.85% if you buy directly from Discover Bank)
Discover Bank 2-year 0.55% (1.0% if you buy directly from Discover Bank)
Discover Bank 3-year 0.75% (1.2% if you buy directly from Discover Bank)

I'm just using Discover Bank as an example to show the effective ER because Vanguard also happens to offer CDs from Discover Bank. Other banks offer even higher rates.
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Re: Vanguard: Six questions (and answers) about bonds

Post by lethean46 »

tfb wrote:
lethean46 wrote:Can I not buy CDs right at Vanguard for an IRA held at Vanguard?
You can, but you are not going to get the best rates. It's like paying a very high ER on the CDs. You can see rates at

https://personal.vanguard.com/us/funds/bonds/bonddesk

Bank of India 1-year 0.45% (0.85% if you buy directly from Discover Bank)
Discover Bank 2-year 0.55% (1.0% if you buy directly from Discover Bank)
Discover Bank 3-year 0.75% (1.2% if you buy directly from Discover Bank)

I'm just using Discover Bank as an example to show the effective ER because Vanguard also happens to offer CDs from Discover Bank. Other banks offer even higher rates.
Thanks. I get it now. The interest in moving IRA cash outside of Vanguard to purchase CDs. What a tough environment!
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Re: Bond risk ?

Post by jmk »

Clive wrote:- Also, if you compare the above figures from a real (after inflation adjustment) perspective there was a -28% loss from the end of 1976 to the end of 1980.
It's actually worse.
By my calculations, in inflation adjusted terms a synthesized version of the total bond index would be down 52% from 1940 through end of 1981.

(Data source: Vanguard yearly aggregate bond index returns 1926 to 2011 at https://personal.vanguard.com/us/insigh ... about-risk . )
Last edited by jmk on Sun May 05, 2013 5:40 pm, edited 4 times in total.
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Re: Vanguard: Six questions (and answers) about bonds

Post by staythecourse »

No relation to bonds, but an interesting quote from the article and view on "how much equity should I hold" which many on here discuss:

"The right allocation is having as much equity as possible but never so much that you aren't willing to stay committed to the allocation, including the discipline to rebalance in the worst of times."

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Vanguard: Six questions (and answers) about bonds

Post by Baseballmom94 »

This has been an enlightening and interesting discussion on bonds vs. CDs. After reading Taylor's list of bond returns/inflation and reading tfb's blog entries about CDS (very informative blog, by the way!), it has clarified my decision to hold both the Total Bond Fund (about 10%) and CDs as part of our overall 40% fixed income allocation. We also own some TIPs in there. There are no easy answers but it's quite educational to hear all the different viewpoints. Anything will be better than leaving the cash sitting in the bank account or Vanguard money market :oops:
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Re: Vanguard: Six questions (and answers) about bonds

Post by garlandwhizzer »

The lack on instant liquidity without incurring penalties is why I do not and will not own CDs. I don't like the idea of having my money locked up until the maturity date, unless I pay a penalty which reduces gains which are already bad in this yield-free environment. One of the main reasons I hold bonds is to rebalance into equities whenever severe disruptions of the equity market occur. Bond funds allow me to pull the trigger whenever I feel there is overwhelmingly negative bearish sentiment among investors driving stock fundamentals to very attractive levels. I did that in 2008-9 for example. With bond funds you can sell as many or as few shares as you desire whenever you desire, rebalancing your asset allocation precisely at any point in time. In contrast CDs charge a penalty for early withdrawal and cannot be partially liquidated. That flexibility in my opinion is more than worth the small difference in interest rates that CDs may offer.


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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

garlandwhizzer wrote:One of the main reasons I hold bonds is to rebalance into equities whenever severe disruptions of the equity market occur. Bond funds allow me to pull the trigger whenever I feel there is overwhelmingly negative bearish sentiment among investors driving stock fundamentals to very attractive levels. I did that in 2008-9 for example.
Did you go to 100% stocks in 2008-9? You don't have sell every $ in fixed income (and probably shouldn't).
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Re: Vanguard: Six questions (and answers) about bonds

Post by jmk »

tfb wrote:
longview wrote:Fight the fight tfb. I'd love to see some thoughts on those in taxable accounts. Ie, it seems like CDs have a tough time against munis for anyone in the top bracket.
I agree munis are still better than CDs in taxable accounts for someone in the top bracket.
CDs are FDIC insured, though. Aren't munies less safe than CDs due to their default and interest rate risks?
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Re: Vanguard: Six questions (and answers) about bonds

Post by tfb »

jkandell wrote:
tfb wrote:
longview wrote:Fight the fight tfb. I'd love to see some thoughts on those in taxable accounts. Ie, it seems like CDs have a tough time against munis for anyone in the top bracket.
I agree munis are still better than CDs in taxable accounts for someone in the top bracket.
CDs are FDIC insured, though. Aren't munies less safe than CDs due to their default and interest rate risks?
Yes. IMO the yield compensates for the risks OK for someone in the top bracket. See this from Mike at Long Term Returns:

Municipal Bonds or CDs
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Re: Bond risk ?

Post by Clive »

jkandell wrote:
Clive wrote:- Also, if you compare the above figures from a real (after inflation adjustment) perspective there was a -28% loss from the end of 1976 to the end of 1980.
It's actually worse.
By my calculations, in inflation adjusted terms a synthesized version of the total bond index would be down 52% from 1940 through end of 1981.

(Data source: Vanguard yearly aggregate bond index returns 1926 to 2011 at https://personal.vanguard.com/us/insigh ... about-risk . )
Thanks for that link.

From a quick look, there were no 30 year period of positive real gains from bonds for years starting 1936 up to 1949 (I didn't bother checking further), and those 'gains' are gross real values. Presumably worse for net (after taxes/costs). For instance a 1940 to 1969 thirty year investment that the link indicates would have lost -41% may also have had to pay taxes on nominal income.

I recall buying some Gilts (treasury bonds) in the mid 1970's that were paying around 15% yield, when inflation was also around 15%. Not working at that time however (student) I didn't have to pay tax on those bonds as the income was below the tax threshold. Those paying basic rate tax or above however were seeing around a third of that income going in taxes, so more like a -5% net real rather than a 0% real.

Bid/ask spreads were also a rip off back then. 5%+ spreads was common. Even today some bonds can still have such high spreads.
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