Bond fund overlap

[Mr.BB]

I own Vanguard intermediate bond fund (vficx) in our 401K brokerage account, it is approximately 5% of our total portfolio.
I also own Wellesley (vwinx), T Rowe cap appreciation fund (prwcx) we also have a global Bond Fund in our 401k which is classified as an Intermediate bond fund.

Since these other funds I have mention also have a percent of their fund as an intermediate bond fund, do I really need this separate intermmediate bond fund? I was thinking about exchanging into my short term bond fund if I really don't need it.

[PFInterest]

You can see what your x-ray says. Do you need more short term anyways?

[Mr.BB]

My choice would be either to exchange into the short term bond fund( I have no problem trying to keep the duration shorter as interest rates rise) or I could exchange it into the global Bond Fund I guess it would be somewhat of a wash that way, just reducing our holdings overall.

[welderwannabe]

My choice would be either to exchange into the short term bond fund( I have no problem trying to keep the duration shorter as interest rates rise) or I could exchange it into the global Bond Fund I guess it would be somewhat of a wash that way, just reducing our holdings overall.

VFICX has a lot of corporate debt. A lot of people (Larry Swedroe for one) recommend keeping corporate debt on the short end as they believe longer duration corporate debt risk/reward just isn't there versus intermediate treasuries. If that is why you wanted to go short then I would understand it.

However, to move to short duration now to avoid interest rate risk is somewhat akin to closing the barn door after the horses have already escaped. Unless you think intermediate term rates are going to go up more than what the market currently believes, I would stay put. It is already priced in.

[Mr.BB]

I agree with the corporate bonds, that is why I do like the global bond fund (it is about 46% treasuries), though I do have a couple of questions about that fund; which is for another thread. I do believe rates are going up (high how, who knows), but I am just thinking with the other mixed funds that I own (they are all intermediate ranked), is owning a separate intermediate fund just an extra layer that I don't need.

[Kevin8696]

Mr. BB... I'd suggest using Morningstar.com to help sort out your intermediate-term bond exposure. The goal would be to see how many dollars you have invested across those funds in intermediate-term bonds (i.e. duration of about 5-7 years), take a look at the mix of issuers, and how it all fits with your overall investment strategy.

Btw... Given the Fed's program of raising short-term rates, many analysts are now saying that the yield curve is so flat that intermediate-term bond holders are not being adequately compensated for the interest rate risk they are taking in their portfolios. As such, these analysts are recommending folks to shorten the duration of their fixed income portfolios. Personally, as a retiree, I have moved a good portion of my fixed income exposure to a money market fund.

Of course, it all depends on your individual circumstances, your risk tolerance, and especially your investment time horizon.

[Munir]

Mr. BB... I'd suggest using Morningstar.com to help sort out your intermediate-term bond exposure. The goal would be to see how many dollars you have invested across those funds in intermediate-term bonds (i.e. duration of about 5-7 years), take a look at the mix of issuers, and how it all fits with your overall investment strategy.

Btw... Given the Fed's program of raising short-term rates, many analysts are now saying that the yield curve is so flat that intermediate-term bond holders are not being adequately compensated for the interest rate risk they are taking in their portfolios. As such, these analysts are recommending folks to shorten the duration of their fixed income portfolios. Personally, as a retiree, I have moved a good portion of my fixed income exposure to a money market fund.

Of course, it all depends on your individual circumstances, your risk tolerance, and especially your investment time horizon.

Agree with Kevin. As an 81 year old retiree, I just moved the bulk of my IRA intermediate bonds to Money Market Prime. Younger investors may want to ride out the "temporary" dip in NAV of intermediate bond funds.

[welderwannabe]

I agree with the corporate bonds, that is why I do like the global bond fund (it is about 46% treasuries), though I do have a couple of questions about that fund; which is for another thread. I do believe rates are going up (high how, who knows), but I am just thinking with the other mixed funds that I own (they are all intermediate ranked), is owning a separate intermediate fund just an extra layer that I don't need.

However, the future direction of interest rates for intermediate term bonds has, in theory, already been priced into the current market price of the bond issues and therefore factored into the NAV of the fund. The only reason to sell now for interest rate reasons would be if you think the interest rates are going to move in a direction or with a velocity that the market hasn't already priced in.

[Kevin8696]

I agree with the corporate bonds, that is why I do like the global bond fund (it is about 46% treasuries), though I do have a couple of questions about that fund; which is for another thread. I do believe rates are going up (high how, who knows), but I am just thinking with the other mixed funds that I own (they are all intermediate ranked), is owning a separate intermediate fund just an extra layer that I don't need.

However, the future direction of interest rates for intermediate term bonds has, in theory, already been priced into the current market price of the bond issues and therefore factored into the NAV of the fund. The only reason to sell now for interest rate reasons would be if you think the interest rates are going to move in a direction or with a velocity that the market hasn't already priced in.

If the future direction of interest rates has been priced into current bond prices, in what month and year do you expect that the YTD total return of -1.41& for VBTLX will be overcome and the fund back at 12/31/17 net asset value ?

[vineviz]

I agree with the corporate bonds, that is why I do like the global bond fund (it is about 46% treasuries), though I do have a couple of questions about that fund; which is for another thread. I do believe rates are going up (high how, who knows), but I am just thinking with the other mixed funds that I own (they are all intermediate ranked), is owning a separate intermediate fund just an extra layer that I don't need.

However, the future direction of interest rates for intermediate term bonds has, in theory, already been priced into the current market price of the bond issues and therefore factored into the NAV of the fund. The only reason to sell now for interest rate reasons would be if you think the interest rates are going to move in a direction or with a velocity that the market hasn't already priced in.

If the future direction of interest rates has been priced into current bond prices, in what month and year do you expect that the YTD total return of -1.41& for VBTLX will be overcome and the fund back at 12/31/17 net asset value ?

Keeping in mind that NAV and total return are different measures, and that expectations about future interest rates are constantly changing, it is possible to roughly estimate (assuming no future changes in expectation) how long it will take for someone who invested $10,000 in VBTLX on 12/31/17 to be back to $10,000: roughly six months from now.

[Munir]

I don't understand the argument that any future rise of interest rates is already priced in the current NAV of the fund. Then, why does the NAV keep falling?

[ruralavalon]

I don't understand the argument that any future rise of interest rates is already priced in the current NAV of the fund. Then, why does the NAV keep falling?

Because expectations change?

[welderwannabe]

If the future direction of interest rates has been priced into current bond prices, in what month and year do you expect that the YTD total return of -1.41& for VBTLX will be overcome and the fund back at 12/31/17 net asset value ?

And selling and putting money into short term bonds will somehow overcome the loss of NAV?

Some expect the yield curve to invert shortly...If that happens, the losses in short term bond funds could exceed that of intermediate. You could even see intermediate yields fall (and NAV rise) if that happens because an inverted yield curve can be a harbinger of a recession. Who knows? I don't. However it is hard to argue that selling intermediate and moving to short is not a bet against what the market already expects and has priced in.

If you think rates are going to increase further and faster than the market thinks then feel free to sell and shorten your duration. I just want to make sure people understand that the bond market is not sitting around waiting to see whether or not the Fed will actually raise rates at their next meeting here this month before they reprice the bonds. The rate rise is widely expected. Its already priced in.

[welderwannabe]

I don't understand the argument that any future rise of interest rates is already priced in the current NAV of the fund. Then, why does the NAV keep falling?

That is not what I said. I said that the expected rise in interest rates is already priced in. The current expectations could be wrong. Selling now and moving to short duration is a bet that the market is wrong. The market could be wrong...it often is. But which direction is it wrong in?

[Kevin8696]

I don't understand the argument that any future rise of interest rates is already priced in the current NAV of the fund. Then, why does the NAV keep falling?

Because expectations change?

Like most everything in life... it all works fine until it doesn't.