Should We Our Shorten Bond Duration?

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galeno
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Should We Our Shorten Bond Duration?

Post by galeno » Thu May 21, 2020 5:51 pm

Due to extremely low interest rates we are worried that our bond duration is too long. We are thinking of shortening it. We will sacrifice yield to get a far greater reduction in bond duration.

Right now we are using 50% Intermediate Term US Treasury ETF + 50% Intermediate Term US Corp Bond ETF.

Duration = 7.4 yr. Yield = 1.68%.

We are thinking of using the Short Term version of each:

Duration = 1.9 yr. Yield = 1.17%.

We think this is a smart move. We reduce our bond yield by 30%. But we reduce duration by 74%.

Anybody think this is not a good idea?
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by Grt2bOutdoors » Thu May 21, 2020 5:57 pm

galeno wrote:
Thu May 21, 2020 5:51 pm
Due to extremely low interest rates we are worried that our bond duration is too long. We are thinking of shortening it. We will sacrifice yield to get a far greater reduction in bond duration.

Right now we are using 50% Intermediate Term US Treasury ETF + 50% Intermediate Term US Corp Bond ETF.

Duration = 7.4 yr. Yield = 1.68%.

We are thinking of using the Short Term version of each:

Duration = 1.9 yr. Yield = 1.17%.

We think this is a smart move. We reduce our bond yield by 30%. But we reduce duration by 74%.

Anybody think this is not a good idea?
Why do you think this is a "smart move"? You reduce duration by 74% and if rates go lower? Do you need all of the money in those ETF's over the next 7.5 years? You actually believe yields are moving higher in the next few years? How high?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

aarondearu
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Re: Should We Our Shorten Bond Duration?

Post by aarondearu » Thu May 21, 2020 6:03 pm

I would base my decision on when I needed the money (duration) and the amount.

The difference in interest on $100,000 is $510/year or $5100 over 10 years.
The difference on $1MIL would be $51000 over 10 years.

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galeno
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Re: Should We Our Shorten Bond Duration?

Post by galeno » Thu May 21, 2020 6:17 pm

We are retired and use the 4% rule. The duration of our stock and bond holdings is 33 years. When both my wife and I are 95.

We are more concerned with rising interest rates. With a duration of 7.4 yr our bond ETFs should lose 7.4% of NAV with each 1% in interest rates. So if interest rates rise from today's 0% real to 3% real our bonds' NAV should decrease by 22%. Yikes! OTOH with a bond duration of 1.9 the NAV would fall only 5.7%.

This is our 4th equity bear market. We've experienced equity losses and we know how to deal with them. But we've never experienced a crash in our FI allocation. I think a 22% decline in bond NAV would freak us out.

I fear if interest rates go up both stocks and bonds will decline. Hard. That would be horrible. I really don't like this QE idea. Am I being paranoid?
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by anon_investor » Thu May 21, 2020 6:29 pm

galeno wrote:
Thu May 21, 2020 6:17 pm
We are retired and use the 4% rule. The duration of our stock and bond holdings is 33 years. When both my wife and I are 95.

We are more concerned with rising interest rates. With a duration of 7.4 yr our bond ETFs should lose 7.4% of NAV with each 1% in interest rates. So if interest rates rise from today's 0% real to 3% real our bonds' NAV should decrease by 22%. Yikes! OTOH with a bond duration of 1.9 the NAV would fall only 5.7%.

This is our 4th equity bear market. We've experienced equity losses and we know how to deal with them. But we've never experienced a crash in our FI allocation. I think a 22% decline in bond NAV would freak us out.

I fear if interest rates go up both stocks and bonds will decline. Hard. That would be horrible. I really don't like this QE idea. Am I being paranoid?
I think it is reasonable to move some to short term bonds but not all. It is quite possible that interest rates stay this low for many years like after then 2008/2009 crash. By moving to all short term bonds you open up yourself to diminished yields if interest rates go sideways or drop.

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PriceOfFreedom
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Re: Should We Our Shorten Bond Duration?

Post by PriceOfFreedom » Thu May 21, 2020 6:35 pm

Well, Larry Swedroe suggests a rule of thumb that, to make increased bond duration worthwhile, yield should increase by 20 basis points per added duration year.

For your example, the intermediate term bond yield exceeds that of the short term bonds by 51 points, while the duration increases by 5.5 years, yielding 9.3 yield points per each duration year increase. Not very appetizing, so on that basis, the short-term bonds make more sense.

But you are then trading off duration risk for reinvestment risk. In my opinion, it is a tradeoff worth making and thereby going with the shorter term bonds. Your circumstances and goals may be different from mine, and so your optimal course may not be the same as mine.

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Re: Should We Our Shorten Bond Duration?

Post by nisiprius » Thu May 21, 2020 6:49 pm

On July 19th, 2009, someone posted
Interest rates can only go up, why go intermediate in bonds?

I see the total bond fund and intermediate treasuries recommended a lot on here. I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit.

So isn't it wise to go short in this environment where rates can only go up?
If you had invested $10,000 in the Vanguard Total Bond Market Index Fund on July 19th, 2009, and if that poster invested $10,000 in the Vanguard Short Term Bond Index Fund on the same day, you would have made a cumulative total of $5,391.95 (blue) and he would have made $2,785.91 (orange). That is to say, you would have made very close to twice as much. You can judge for yourself whether it was worthwhile giving up that much return in order to get the smaller fluctuations in Short Term Bond Index.

Source

Image

I've made variations on this posting quite a few times in the last eleven years. Each time, of course, people have chimed in with reasons why it's different now, and shouldn't be expected to hold true going forward. (And, yes, I know what the yield curve is like currently.)

The SEC yield of Total Bond is currently 1.48%. Honestly, yes, I can see the point of investing in five-year bank CDs instead if you can get comparable interest rates. That is, it seems like a reasonable alternative to a bond fund. I don't see the point in short-term bond funds as an alternative.
Last edited by nisiprius on Thu May 21, 2020 6:50 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

SemiRetire
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Re: Should We Our Shorten Bond Duration?

Post by SemiRetire » Thu May 21, 2020 6:49 pm

This is my gestalt on bond funds:

Say duration 5 years.

Rates go up by 1 percent: The worth of the Bond fund at the time drops but the new bonds as bond continually roll over earn one percent more than they used to break even point is five years

Rates go down by 1%: The worth of your existing bond fund goes up but gradually over time as new bond roll over your new bonds interest rate are 1% less. Break even 5 years.

Basically the duration is the amount of time it takes to break even more or less fromInterest rate changes.

Shorter duration = lower interest rate expectantly.

So if you want to break even quicker then go for the shorter duration but you’re going to be paid less interest.

I recommend that you search the old bond questions from about five years ago where people were convinced that rates could not go lower but in fact they have and I looked at the Bon fun aggregate bond with a roughly 5 year duration or so from vague recollection and it had gone up 10%.

It is possible that we may have negative interest rates for sometime for a bond funds Years perhaps look at the Japan experience.

I did go to some short term bonds for my 529’s about a year ago my one daughter is going in the college this coming year and my other daughter is going there next year so I want the duration to match the need closer but unless you need that money within the timeframe I wouldn’t change your duration to accept a lower yield.
Last edited by SemiRetire on Thu May 21, 2020 6:52 pm, edited 1 time in total.

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galeno
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Re: Should We Our Shorten Bond Duration?

Post by galeno » Thu May 21, 2020 6:52 pm

Our Interm Term US Corp Bond ETF has a duration = 7.8 yr. Yield = 2.79%. Short term version is duration = 1.9 yr. Yield = 2.09%

Our Interm Term US Treas ETF has a duration = 7.0 yr. Yield = 0.57%. Short term version is duration = 1.9 yr. Yield = 0.25%

How should I cut the duration cake? Maybe even go 100% short term corporate bonds and no US treasuries? We'd get short duration = 1.9 yr. Higher yield = 1.91%. But worse ballast.

Then again maybe I should just stay with the longer durations? This is a difficult choice. I've never liked bonds since we started using them in 2006.
anon_investor wrote:
Thu May 21, 2020 6:29 pm
I think it is reasonable to move some to short term bonds but not all. It is quite possible that interest rates stay this low for many years like after then 2008/2009 crash. By moving to all short term bonds you open up yourself to diminished yields if interest rates go sideways or drop.
Last edited by galeno on Thu May 21, 2020 6:57 pm, edited 1 time in total.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by sycamore » Thu May 21, 2020 6:55 pm

If you're going to shorten duration, an oft-proposed idea is to sell some of the bond fund and put it into CDs or higher-yielding savings. You may be able to get a signup/new account bonus. Probably requires opening accounts at new institutions so there's some extra work. Typically you'll get a rate equivalent or greater than what the intermediate term bond fund was yielding. So you won't have to sacrifice yield by shortening duration.

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Re: Should We Our Shorten Bond Duration?

Post by gr7070 » Thu May 21, 2020 7:05 pm

I have yet to truly research the subject enough to know where I'll be in retirement with fixed income, but a few general idea that might help you...

I do not dislike the bonds should be safe thus use safe (short and/or govt) bonds idea. Especially if we're just going to use one type of fixed income.

Additionally, diversification is important for risk and yield.

Yes, those two are contradictory. Very unsure how I'll eventually be positioned. One could certainly overweight short term while greatly improving diversification holding all durations.

TIPS and total bond would seem to be very worthy portions of one's fixed income, as well.

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galeno
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Re: Should We Our Shorten Bond Duration?

Post by galeno » Thu May 21, 2020 7:08 pm

I'm looking at it this way.

If my bonds are worth $1M we lose $5100 per year in yield using the short term versions. That's a lot of money. But we'd lose only $19K NAV with a 1% increase in interest rates. And that gets "rolled up" in 2 years.

With the intermediate version we'd lose $220K and it would take about 7.5 yr for the bonds to "roll up" again.

Like I said. I'm real good with equity declines. I just sell bonds and buy more stocks. But I"ve never really dealt with a stock + bond decline at the same time. With interest rates this low. This could happen.

Life would be so easy if we could get 3% real yield on the TBM.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by Northern Flicker » Thu May 21, 2020 9:21 pm

I've never liked bonds since we started using them in 2006.
What, exactly, has been the problem with bonds since 2006? (Below VTSAX is US stocks, VTIAX is non-US stocks, and VBILX is intermediate bond index):
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Index fund investor since 1987.

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Re: Should We Our Shorten Bond Duration?

Post by magicrat » Thu May 21, 2020 9:31 pm

Why are you so anchored on a 22% decline? Seems quite arbitrary.

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Re: Should We Our Shorten Bond Duration?

Post by typical.investor » Thu May 21, 2020 10:11 pm

galeno wrote:
Thu May 21, 2020 7:08 pm
I'm looking at it this way.

If my bonds are worth $1M we lose $5100 per year in yield using the short term versions. That's a lot of money.
It is. And that's $5100 you are spending each year. Correct.
galeno wrote:
Thu May 21, 2020 7:08 pm
But we'd lose only $19K NAV with a 1% increase in interest rates. And that gets "rolled up" in 2 years.

With the intermediate version we'd lose $220K and it would take about 7.5 yr for the bonds to "roll up" again.
First of all, your intermediates have appreciated this year - correct. Probably you have already had a $220K gain. No? I'm thinking a capital loss will get you back to where you were.

Second, maybe you should calculate how much you are actually withdrawing per year and see what your per year loss will be.

In other words, if you are withdrawing 4%/year, then a 1% rise in rates would cost you about $40k * 7.5% or $3000/year which is less than the $5100 you would be giving up to move to short term bonds. Also, most of your portfolio will have time to recover in the 7.5 years.

I don't see short term bonds as being in your favor. Of course if high inflation is possible and reinvesting short term bonds at higher rates would outperform the term premium, then short would seem better. I don't see high inflation soon. I bet rates will increase as the economy recovers and then drop again when we hit the next downturn.

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Re: Should We Our Shorten Bond Duration?

Post by hudson » Fri May 22, 2020 8:52 am

galeno wrote:
Thu May 21, 2020 5:51 pm
Anybody think this is not a good idea?
galeno,
Is it a good idea? As you know, nobody knows.
I personally am going to stick with intermediate bonds. Larry Swedroe said that intermediate is the "sweet spot" for bonds. You've probably read his bond book?

For my fixed income, I like
Treasuries or CDs
Intermediate
High quality muni funds: Mostly AAA/AA/A...very little below
Vanguard Risk Potential 1-2...with exceptions

I pass on
Investment grade/corporate funds of any duration

I used the think that I could predict where interest rates were going. I was wrong so many times that I gave up. I completely ignore all talk or predictions on interest rates. When I have money to invest, I just take the best available 5 year CD or the best/safest intermediate bond fund.

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Re: Should We Our Shorten Bond Duration?

Post by vineviz » Fri May 22, 2020 9:27 am

galeno wrote:
Thu May 21, 2020 5:51 pm

Anybody think this is not a good idea?
I think this is not a good idea. Market timing is NEVER a good idea.

Your plan is to increase your interest rate risk and decrease your expected return (i.e. yield) by placing a speculative bet that you can predict future bond prices better than other market participants can. How COULD that be a good idea?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Should We Our Shorten Bond Duration?

Post by Anon9001 » Fri May 22, 2020 10:04 am

The inflation rate for your country is much higher than USA so the question is why are you using USA bonds in the first place?
https://fred.stlouisfed.org/series/FPCPITOTLZGCRI#0

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

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galeno
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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 10:18 am

Our default bond preference is intermediate term.

We want 3 things from our bonds:
1. Ballast for equity bears.
2. Port (real net) yield >/= 0%.
3. Partial protection against unexpected USD inflation.

Real = net of USD inflation.

Net = net of Level 1 & 2 dividend withholding taxes (0.12%), port ER (0.17%), and commissions/spreads (0.11%).

TER = 0.40%

Since Jan 2017 the USD CPI CAGR = 1.59%.

To get our port's nominal gross yield there (2.0%) we need to "reach for that yield" by holding 20% of port in a USD corp bond ETF.

With these extremely low yields on US Treas and TIPS I'm concerned with ballast / rebounding abilities of our US Treas and TIPs. They bounced nicely with this BEAR. But what about if it's not done yet? Or the next one?
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 10:41 am

Excellent question.

We live in Costa Rica. A "dessert province " of our regional hegemon: the USA. When the USA government tells CR to jump we only ask "how high sir"?

Our economy is the size of the Oklahoma City metropolitan area. Which is number 100 in the USA.

Our currency is tied to the USD. Our banks are risky. Our government and corporate bonds are junk.

Anon9001 wrote:
Fri May 22, 2020 10:04 am
The inflation rate for your country is much higher than USA so the question is why are you using USA bonds in the first place?
https://fred.stlouisfed.org/series/FPCPITOTLZGCRI#0

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by Anon9001 » Fri May 22, 2020 10:43 am

galeno wrote:
Fri May 22, 2020 10:41 am
Excellent question.

We live in Costa Rica. A "dessert province " of our regional hegemon: the USA. When the USA government tells CR to jump we only ask "how high sir"?

Our economy is the size of the Oklahoma City metropolitan area. Which is number 100 in the USA.

Our currency is tied to the USD. Our banks are risky. Our government and corporate bonds are junk.

Anon9001 wrote:
Fri May 22, 2020 10:04 am
The inflation rate for your country is much higher than USA so the question is why are you using USA bonds in the first place?
https://fred.stlouisfed.org/series/FPCPITOTLZGCRI#0

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
Right but you doknow you could buy EM Government USD bonds right? They should be much less risky than your local bonds while being better suited for your higher inflation rate:https://www.ishares.com/ch/individual/e ... -ucits-etf

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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 10:55 am

Bogleheads prefer to take risk on the equity side.

I consider EM bonds to be very "equity-like". At 50% equities we don't want more equity-like risk. If we did we'd just hold more stocks.

Our currency is tied to the USD. For us the only inflation rate that matters is the USD CPI.
Anon9001 wrote:
Fri May 22, 2020 10:43 am
Right but you doknow you could buy EM Government USD bonds right? They should be much less risky than your local bonds while being better suited for your higher inflation rate:https://www.ishares.com/ch/individual/e ... -ucits-etf
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by Anon9001 » Fri May 22, 2020 10:58 am

galeno wrote:
Fri May 22, 2020 10:55 am
Bogleheads prefer to take risk on the equity side.

I consider EM bonds to be very "equity-like". At 50% equities we don't want more equity-like risk. If we did we'd just hold more stocks.

Our currency is tied to the USD. For us the only inflation rate that matters is the USD CPI.

Right but you doknow you could buy EM Government USD bonds right? They should be much less risky than your local bonds while being better suited for your higher inflation rate:https://www.ishares.com/ch/individual/e ... -ucits-etf
I consider owning bonds that pay me 0% interest to be riskier than bonds that pay me above 0% interest. The riskiness is in the eye of the beholder. The inflation rate for your country is very different compared to USA despite the currency being tied to USA. How does that work?

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

https://fred.stlouisfed.org/series/FPCPITOTLZGCRI#0

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Re: Should We Our Shorten Bond Duration?

Post by vineviz » Fri May 22, 2020 10:59 am

galeno wrote:
Fri May 22, 2020 10:55 am
Bogleheads prefer to take risk on the equity side.

I consider EM bonds to be very "equity-like". At 50% equities we don't want more equity-like risk. If we did we'd just hold more stocks.
EM bonds are much less “equity like” than US corporate bonds are, though.

A combination of EM bonds and long-term Treasuries (nominal and/or TIPS) according to your desired yield would provide more diversification than corporate bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Should We Our Shorten Bond Duration?

Post by nisiprius » Fri May 22, 2020 11:06 am

I agree with vineviz.

A valid reason for shortening bond duration would be that you have discovered something new about your risk tolerance; you now feel that intermediate bonds exceed your risk tolerance and wish you had held short-term bonds all along.

But it's my personal opinion that the risk of high-quality (investment-grade) bond funds of intermediate duration is trivial for any investor who also invests in stocks. Do you honestly see your self being spooked by the risk of 60/40 with the 40% in intermediate-term bonds (blue), yet feeling comfortable with the 40% in short-term bonds (portfolio 2, red)?*

Source

Image

The volatility, as measured by standard deviation, was actually microscopically higher, while the maximum drawdown was actually microscopically worse for the short-term bonds, possibly because there might have been a tiny "low correlation" benefit from the intermediate-term bonds.

But the risk, even in a pure bond holding, does not seem very large, either. In August of 2010, Jeremy Schwartz and Jeremy Siegel published a fairly alarming Wall Street Journal op-ed warning of "The Great American Bond Bubble," in which they draw comparisons with the tech bubble and bust of 2000, asserting that "A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds." The interesting thing is that everything they warned about really happened, as I detailed here, and yet the actual effect in the Vanguard Total Bond and Short-Term Bond Funds, which I posted earlier in the thread, happened here:

Image

So the question is: have you recently realized that you are no longer prepared to stomach volatility of the kind seen in intermediate-term bond funds like Total Bond?

*(In order to include the "bond massacre" of 1994, I used the Vanguard 500 Index Fund for stocks and two Vanguard Treasury funds).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Should We Our Shorten Bond Duration?

Post by nisiprius » Fri May 22, 2020 11:08 am

Anon9001 wrote:
Fri May 22, 2020 10:58 am
...I consider owning bonds that pay me 0% interest to be riskier than bonds that pay me above 0% interest. The riskiness is in the eye of the beholder...
No, that's not "risk," that's "return," and no useful purpose is served by mixing up the two concepts.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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galeno
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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 11:16 am

The nays have won. Reason trumps fear. Thanks all.

Sacrificing 0.49% yield per year is a lot of money (fun).

We're going to maintain our current intermediate term bond ETFs.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by aarondearu » Fri May 22, 2020 11:21 am

How about a 3 year 2.1% annuity as an alternative?
viewtopic.php?f=1&t=313935

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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 11:36 am

I'm going to look into this idea!

Our corp bond ETF yields 2.7%. The EM bond ETF yields 5.2%. The duration is shorter. The credit quality = BBB.

Instead of using 20% corp bonds we could hold 10% EM bonds. Both corps and EM bonds went down hard. EM bonds are still -8% YTD. Corps are up 1% YTD.

We already tilt more EM in equities. FTSE all cap world holds 10%. We hold 18%.
vineviz wrote:
Fri May 22, 2020 10:59 am
EM bonds are much less “equity like” than US corporate bonds are, though.

A combination of EM bonds and long-term Treasuries (nominal and/or TIPS) according to your desired yield would provide more diversification than corporate bonds.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by Munir » Fri May 22, 2020 11:46 am

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) has a duration of 5.2 years. Is that short enough?
Total Bond Market Index (VBTLX) 's duration is 6.3.

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Re: Should We Our Shorten Bond Duration?

Post by trueblueky » Fri May 22, 2020 12:01 pm

PriceOfFreedom wrote:
Thu May 21, 2020 6:35 pm
Well, Larry Swedroe suggests a rule of thumb that, to make increased bond duration worthwhile, yield should increase by 20 basis points per added duration year.

For your example, the intermediate term bond yield exceeds that of the short term bonds by 51 points, while the duration increases by 5.5 years, yielding 9.3 yield points per each duration year increase. Not very appetizing, so on that basis, the short-term bonds make more sense.

But you are then trading off duration risk for reinvestment risk. In my opinion, it is a tradeoff worth making and thereby going with the shorter term bonds. Your circumstances and goals may be different from mine, and so your optimal course may not be the same as mine.
I use that rule of thumb for CDs and Treasuries, but have not for funds. It certainly makes G Fund (no duration) look good.

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Re: Should We Our Shorten Bond Duration?

Post by Nowizard » Fri May 22, 2020 1:05 pm

If accepting the concept that CD's are preferable to STB funds for the reasons stated, how would that be accomplished if the funds are in retirement accounts?

Tim

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Re: Should We Our Shorten Bond Duration?

Post by 2pedals » Fri May 22, 2020 2:24 pm

I think you have a valid concern. As a recent retiree in the go-go years with more discretionary spending now prior to pre social security, my max draw downs will be within the next several years. I don't like yield curve and environment today. If bond yields go higher the current prices for bond funds might not recover before I want to the harvest money. It seems to me this risk can be mitigated by limiting your exposure to intermediate and long term bond funds with other short term instruments, at least for the funds that you expect to be used for funding your pre SS years in the go-go years. I currently have most of my non-equity in stable value funds and some in brokered CDs.

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Re: Should We Our Shorten Bond Duration?

Post by galeno » Fri May 22, 2020 3:02 pm

We won't use those USA domiciled ETFs off a USA domiciled stock exchange.

As USA-NRAs we buy and hold Ireland domiciled ETFs off the London Stock Exchange.
Munir wrote:
Fri May 22, 2020 11:46 am
Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) has a duration of 5.2 years. Is that short enough?
Total Bond Market Index (VBTLX) 's duration is 6.3.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by nisiprius » Fri May 22, 2020 6:54 pm

Nowizard wrote:
Fri May 22, 2020 1:05 pm
If accepting the concept that CD's are preferable to STB funds for the reasons stated, how would that be accomplished if the funds are in retirement accounts?

Tim
Many banks offer both traditional IRA and Roth IRA accounts, both savings account and CDs. I've had no trouble transferring funds from my Vanguard rollover IRA (a form of TIRA) to a bank TIRA, and from my Vanguard Roth IRA to a bank Roth IRA. IIRC there was some straightforward ink-and-paper needs-to-be-mailed paperwork. It's just another form of "custodian-to-custodian" transfer.
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Re: Should We Our Shorten Bond Duration?

Post by typical.investor » Fri May 22, 2020 8:54 pm

nisiprius wrote:
Fri May 22, 2020 6:54 pm
Nowizard wrote:
Fri May 22, 2020 1:05 pm
If accepting the concept that CD's are preferable to STB funds for the reasons stated, how would that be accomplished if the funds are in retirement accounts?

Tim
Many banks offer both traditional IRA and Roth IRA accounts, both savings account and CDs. I've had no trouble transferring funds from my Vanguard rollover IRA (a form of TIRA) to a bank TIRA, and from my Vanguard Roth IRA to a bank Roth IRA. IIRC there was some straightforward ink-and-paper needs-to-be-mailed paperwork. It's just another form of "custodian-to-custodian" transfer.
Who has competitive rates on CDs in an IRA though? Especially when they rollover and don’t get the promotional rate which is of course more attractive.

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Re: Should We Our Shorten Bond Duration?

Post by ram » Fri May 22, 2020 10:28 pm

gr7070 wrote:
Thu May 21, 2020 7:05 pm
I have yet to truly research the subject enough to know where I'll be in retirement with fixed income, but a few general idea that might help you...

I do not dislike the bonds should be safe thus use safe (short and/or govt) bonds idea. Especially if we're just going to use one type of fixed income.

Additionally, diversification is important[/b] for risk and yield.

Yes, those two are contradictory. Very unsure how I'll eventually be positioned. One could certainly overweight short term while greatly improving diversification holding all durations.

TIPS and total bond would seem to be very worthy portions of one's fixed income, as well.


Why is diversification necessary for (US) govt bonds.
Ram

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Re: Should We Our Shorten Bond Duration?

Post by gr7070 » Fri May 22, 2020 10:43 pm

ram wrote:
Fri May 22, 2020 10:28 pm
gr7070 wrote:
Thu May 21, 2020 7:05 pm
I have yet to truly research the subject enough to know where I'll be in retirement with fixed income, but a few general idea that might help you...

I do not dislike the bonds should be safe thus use safe (short and/or govt) bonds idea. Especially if we're just going to use one type of fixed income.

Additionally, diversification is important[ for risk and yield.

Yes, those two are contradictory. Very unsure how I'll eventually be positioned. One could certainly overweight short term while greatly improving diversification holding all durations.

TIPS and total bond would seem to be very worthy portions of one's fixed income, as well.
Why is diversification necessary for (US) govt bonds.
You inserted *US*. There other other government bonds than federal. But going with your assertion anyway, as one part of that diversification...

I would think diversification of treasurys is reasonable, as well. Would not owning some of bills, notes, and bonds be a reasonable approach to the unpredictability of interest rates? Throw in TIPS, as well.

Happy to be corrected. As I said I'm trying to figure out what I'll do in a handful+ of years when we retire. Currently I'm as simple as can be for fixed with the 3-fund portfolio.

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Re: Should We Our Shorten Bond Duration?

Post by midareff » Sat May 23, 2020 4:16 am

I think I would have a second look at your Effective Duration numbers and add consideration for what the funds are actually yielding rather than current SEC Yield, of which Vanguard says; "A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield." I added the bold.

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Re: Should We Our Shorten Bond Duration?

Post by galeno » Sat May 23, 2020 8:31 am

With Ireland domiciled ETFs we don't get SEC Yields. We use YTM (yield to maturity). We need to use SOMETHING for apples to apples comparisons. I happen to like the USA's SEC Yield.
midareff wrote:
Sat May 23, 2020 4:16 am
I think I would have a second look at your Effective Duration numbers and add consideration for what the funds are actually yielding rather than current SEC Yield, of which Vanguard says; "A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield." I added the bold.
USA-NRA. TER = 0.40%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Should We Our Shorten Bond Duration?

Post by midareff » Sat May 23, 2020 9:02 am

galeno wrote:
Sat May 23, 2020 8:31 am
With Ireland domiciled ETFs we don't get SEC Yields. We use YTM (yield to maturity). We need to use SOMETHING for apples to apples comparisons. I happen to like the USA's SEC Yield.
midareff wrote:
Sat May 23, 2020 4:16 am
I think I would have a second look at your Effective Duration numbers and add consideration for what the funds are actually yielding rather than current SEC Yield, of which Vanguard says; "A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield." I added the bold.
Understood......... I would still have a look at the actual monthly distribution and see how well it matches (or not) the cited yield.

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Re: Should We Our Shorten Bond Duration?

Post by JoeFriday » Sat May 23, 2020 2:01 pm

For VDCP it is much easier to gauge the credit risk than the interest rate risk. It is 49% BBB rated, making the credit risk too high and to me, a greater concern than the yield going forward. Regardless of the duration you target for a replacement for VDCP, if you stay in corporates I'd suggest you look for an investment with much better credit quality.

Yields on most Treasury securities up through 10 years are poor. In the current environment, the yield on most short and intermediate treasury funds can't do anything but continue to drop as older securities mature and are replaced with new issues with lower yields. The Fed interventions into the bond market add to the uncertainty about what's ahead, I don't think anybody knows. Personally, my fixed income allocation is now in a ladder of online bank CDs, lackluster returns but no guess work (principal loss).

"I'm more concerned about the return of my money than the return on my money".

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Re: Should We Our Shorten Bond Duration?

Post by Northern Flicker » Sat May 23, 2020 9:15 pm

vineviz wrote:
Fri May 22, 2020 10:59 am
EM bonds are much less “equity like” than US corporate bonds are, though.
What is the evidence for that claim? The only thing I can come up with to look at the question is sample correlations in portfoliovisualizer using some existing products. While this is hardly a definitive analysis, it suggests that EM bonds have a higher correlation with US equities than US corporate bonds have with US equities.

https://www.portfoliovisualizer.com/ass ... &months=36

Daily rolling correlations make the gap in correlation even wider than the monthly correlations in the linked backtest.
Index fund investor since 1987.

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Re: Should We Our Shorten Bond Duration?

Post by Northern Flicker » Sat May 23, 2020 11:07 pm

About 9 months ago, the Vanguard quantitative group that models the managed portfolio in VPGDX added an allocation to the Vanguard Ultrashort Bond fund, effectively reducing duration and increasing credit exposure of the fixed income portion of the portfolio. The fixed income sub-portfolio of the fund currently is:

60% total US bond market index fund
30% total int’l bond market index fund
10% ultrashort bond fund
Index fund investor since 1987.

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