Short Vs. Intermediate Corp. Bonds

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BetaTracker
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Short Vs. Intermediate Corp. Bonds

Postby BetaTracker » Sun Mar 19, 2017 10:37 pm

I've read that short-term corporate bond funds like the Vanguard Short-Term Bond Index provide more bang for your buck than something like the Intermediate-Term Corporate fund. I'm considering adding one to fill a 25% slot in our bond portfolio that recently opened due to a new one-time source of money becoming available. The other 75% is allotted to the Total Bond Market.
Any suggestions would be appreciated. My other thought would be to stick to the simplicity of 100% TBM. (The only other funds we own are Total Stock Market and Total International Stock.) This is all invested with long-term goals in mind and not intended to be used for at least 10 years.
I'd rather be content than happy -- Lao Tzu.

clown
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Re: Short Vs. Intermediate Corp. Bonds

Postby clown » Sun Mar 19, 2017 10:48 pm

Well, of course the ST fund has a lower duration so would have lesser impact from future interest rate increases. On the other hand, if you have a 10 year time frame, TBM pays more and has time to reinvest at higher rates than ST. I have no numbers to back this up, and I am no guru, but the gut feel is to go with TBM.

sport
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Re: Short Vs. Intermediate Corp. Bonds

Postby sport » Sun Mar 19, 2017 11:08 pm

Short term bonds are safer than intermediate term bonds due to less interest rate risk. They also yield less. I am not sure what you mean by "more bang for your buck".

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Bogle_Feet
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Re: Short Vs. Intermediate Corp. Bonds

Postby Bogle_Feet » Mon Mar 20, 2017 3:55 am

The shorter the duration the lower the potential for higher returns. At the same time, shorter duration bonds are less sensitive to interest rate hikes which negatively affect bond prices.

You own bonds as a stock shock absorber. Generally a total bond market index fund has a nice middle ground duration of about 5.6 years.

BetaTracker
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Re: Short Vs. Intermediate Corp. Bonds

Postby BetaTracker » Mon Mar 20, 2017 2:33 pm

Thanks -- supports my inclination to stick with TBM and not add a small overweight to corporates. I'm less concerned about trying to play yields than total return over the long turn, in any case.
(For explanation about the "bigger bang"comment, I read somewhere that the risk-reward tradeoff betwen greater yields for the amount of risk taken favors shorter duration corporates as a complement to TBM.)
I'd rather be content than happy -- Lao Tzu.

robertmcd
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Re: Short Vs. Intermediate Corp. Bonds

Postby robertmcd » Mon Mar 20, 2017 3:22 pm

From what I have read from Larry Swedroe, there is not a good reason to use corporate bonds at all when you look at the risk/return tradeoff of them when implemented in an equity heavy portfolio. There risk shows up at the worst time, when stocks are doing poorly. As opposed to treasuries which benefit from a flight to liquidity and have gone up in value in times like 2008. Also you can get a ''free lunch'' over institutions by buying direct or brokered CD's and getting a yield premium over treasuries. However, the evidence also shows that shorter term corporates do not have as much risk for their yield as intermediate term and longer, and so they are the best if one wants to diversify their fixed income portion and get more yield. I think something like 50% short term corporates (VCSH) and 50% 7-10 yr treasuries (IEF) giving a blended duration of 5.15 years would be a great fixed income portfolio. Short term treasuries are not as good as intermediate term for diversifying equities, and short term corporates lower your duration while maintaining a reasonable yield, giving you the best of both.

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patrick013
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Re: Short Vs. Intermediate Corp. Bonds

Postby patrick013 » Mon Mar 20, 2017 3:41 pm

For BBB rated bonds the average default rate is .30%
The max default rate seen is 1.4% per year. The higher
ratings are much better, for global corporate bonds.
age in bonds, buy-and-hold, 10 year business cycle


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