What mix of intermediate and short term bonds?

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BlueEars
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What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 12:12 pm

I am asking myself what mix of intermediate term bonds (IT) versus short term bonds (ST) to hold? Many here hold intermediate term and since the early 1980's that has been a good position. But in the 1950's through the 1970's, ST bonds actually did somewhat better then IT.

For some perspective, I used the Simba data to calculate 5 year rolling returns for the different bond classes available. Treasury returns were the only type available before 1976. Then I plotted the difference between IT and ST returns using these 5 year rolling values. You can see for Treasuries the ST bonds beat IT more often then not when there was an uptrend in rates. No mystery there.

The chart also compares returns for investment grade IT (IG IT) versus investment grade ST (IG ST) bonds. In general the trend on investment grade (IT - ST) is similar to Treasuries.

Image

Here is the rate picture for 5 year constant maturity bonds. Viewed here as a proxy for the intermediate bonds. As we know, the rates are very low now and lower then the 1953 start of this chart.

Image

Since I am in the spending phase (retired) some ST bonds make sense to me. I have recently increased the ratio of ST to IT bonds. Wondering what others think about this issue and what ratio the ST to IT to hold.

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Re: What mix of intermediate and short term bonds?

Post by tigerdoc93 » Sun Dec 10, 2017 12:42 pm

I’m interested in this question as well, especially with interest rates expected to increase over time. I’ve heard a couple different “experts” predict bonds may not work as a good diversifier during the next recession (whenever that occurs). In my portfolio I’ve started a position of vanguard short term corporate bonds, ~15%. The other 85% bonds are the total bond market and intermediate term bond index.

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Re: What mix of intermediate and short term bonds?

Post by stan1 » Sun Dec 10, 2017 12:45 pm

I manage a portfolio for a relative that is 1/3 Total Bond Market, 1/3 Short Term Investment Grade (corporate), and 1/3 Inflation Protected Securities fund. I don't know whether it is optimal or more complex than necessary but I believe it to be a balanced strategy. This individual will most likely need the money for end of life care or will leave a nice estate to his heirs (he has a military pension).

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Re: What mix of intermediate and short term bonds?

Post by dbr » Sun Dec 10, 2017 12:52 pm

I think you should hold IT and not try to predict interest rates.

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Re: What mix of intermediate and short term bonds?

Post by retiredjg » Sun Dec 10, 2017 12:59 pm

I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.

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Re: What mix of intermediate and short term bonds?

Post by Stormbringer » Sun Dec 10, 2017 1:03 pm

Are you in a position to build a CD ladder? I recently switched a portion of my IT bond holdings into CDs, which seem to enjoy a bit higher interest rate.
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Re: What mix of intermediate and short term bonds?

Post by dbr » Sun Dec 10, 2017 1:03 pm

retiredjg wrote:
Sun Dec 10, 2017 12:59 pm
I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.
Good point to make clear. It could also be true that one could find a fund that does mainly try to hold bonds of a given duration, but I think that is less usual.

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 1:07 pm

dbr wrote:
Sun Dec 10, 2017 12:52 pm
I think you should hold IT and not try to predict interest rates.
Why? Is it that we should just assume the term premium will always be there (on average) for us? Also, what about the somewhat flat yield curve?

We know rates are very low as compared to the last 70 years. I totally agree that there is no way to the predict future direction of rates.

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Re: What mix of intermediate and short term bonds?

Post by livesoft » Sun Dec 10, 2017 1:11 pm

I have both Total Bond Index and Short-term Corporate Index funds. I am not sure what kind of mix that you want, but I will say that I have a mix of about 60:40 and market time the ratio freely since I do not have to pay commissions on ETFs such as BND, AGG, VCSH, and SPSB nor taxes since these are not in taxable accounts. The market timing signals are rather clear I think.

One way to market time is to switch from Interm to Short based on a chart like the following:

Image

Simply buy the line that is lower or increase the fraction to the bond fund with the lower line. Right now, short-term corporate bond is lower.

Another way to market time is to sell the intermediate bond fund on days it goes up more than 0.5% in price and buy when it drops back down.

And if one fails at market timing it won't cost you very much anyways. After all, for folks who say that short-term bonds have lower performance than intermediate-term bonds are not talking about the points in the chart where the two lines intersect. At those points, the two funds have the same performance since the start of the chart.
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Re: What mix of intermediate and short term bonds?

Post by dbr » Sun Dec 10, 2017 1:13 pm

BlueEars wrote:
Sun Dec 10, 2017 1:07 pm
dbr wrote:
Sun Dec 10, 2017 12:52 pm
I think you should hold IT and not try to predict interest rates.
Why? Is it that we should just assume the term premium will always be there (on average) for us? Also, what about the somewhat flat yield curve?

We know rates are very low as compared to the last 70 years. I totally agree that there is no way to the predict future direction of rates.
Sure. It is a reasonable middle ground in not taking too much risk and not giving up too much return. Why worry about the yield curve of today?

The alternative is an even less discriminating answer that for holders of mixed portfolios of stocks and bonds any selection of fixed income is fine and just adjust the risk and return by adjusting the proportion between bonds and stocks. Even long term bonds might be ok if the portfolio is largely stocks.

Another nuance is that a logical consideration for bonds is 100% TIPS because it makes no sense to allow inflation risk if you don't have to. This probably doesn't apply in the paragraph just above about how it doesn't matter.

The answer to rates being low is that the bowl sometimes contains only pits and no cherries.

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 1:28 pm

TIPS are also pretty low right now. VIPSX has a 0.2% SEC yield.

FWIW, in the FI portion of my portfolio I have 50% intermediate bonds (IG IT, using VFIDX). The other 50% is less inflation sensitive: short term investment grade (VFSUX) and older iBonds keepers. Total average duration = 3.7 years.
Last edited by BlueEars on Sun Dec 10, 2017 1:33 pm, edited 2 times in total.

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Re: What mix of intermediate and short term bonds?

Post by garlandwhizzer » Sun Dec 10, 2017 1:29 pm

BlueEars wrote:
Since I am in the spending phase (retired) some ST bonds make sense to me. I have recently increased the ratio of ST to IT bonds. Wondering what others think about this issue and what ratio the ST to IT to hold.
I also am in the retired spending phase and the very same question occurred to me. I did the same thing that BlueEars did and have moved from 100% IT to a 50/50 split between ST bonds and IT bonds. In a rising rate environment, even the slowly rising rate structure which is anticipated, short term bonds are attractive IMO. This is especially so now when interest rate spreads between short and intermediate term bonds have narrowed considerably. You get paid very little these days to take on duration risk and duration risk in a rising rate, rising inflationary environment can be significant. We're not sure how quickly rates will rise or how much, if any, inflation we'll have in the future but there is a real possibility with full employment and continued economic growth that wage inflation may at last get going. This can produce cost-push rather than demand-pull inflation. I believe the FED has concerns about this possibility and may raise rates 3 or even 4 times next year so as not to fall behind the curve. That would make short term rates rise dramatically, but longer term rates will likely be capped by yield-hungry international demand for US Treasuries, mostly IT and LT, which provide higher yields than any other safe DM. Demand at the long end also comes from insurance/annuity companies with fixed future financial obligations. In short, the yield spread between ST and IT which is already narrow is likely to flatten even further if the FED continues to raise rates next year.

I believe there is a case to be made for shortening average duration of bond holdings at present for those in the spending phase who have only IT or IT + LT. I also believe that LT bonds do not currently provide adequate yield return differential to compensate for their higher level of duration risk than shorter duration bonds. I hold no LT bonds except as a small segment of TBM.

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Re: What mix of intermediate and short term bonds?

Post by tigerdoc93 » Sun Dec 10, 2017 1:31 pm

Thanks Livesoft for the excellent post. I like the KISS principle and the chart you posted is very informative. I’m starting to like the short term corporate bond fund even more.

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 1:39 pm

Regarding market timing, I am not adverse to it. But for me, the rules have to be stated very clearly ahead of time. Data has to be presented rigorously. It cannot be a daily endeavor as I might be on vacation or something, maybe use monthly data. For me, I have used monthly data going way back and have not found a good algorithm to switch between short term and intermediate term bonds. Believe me, I really tried. Not that there isn't a good algorithm out there. :happy

But I will just say this, I think I have a decent algorithm to switch between investment grade and Treasury bonds. This has used data over the last 30 years. It is not highly sensitive to the month you switch. It is also probably not that big a return booster and could decrease returns going forward (always a criticism of MT). That's all I'll say about market timing here. ;-)

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Re: What mix of intermediate and short term bonds?

Post by livesoft » Sun Dec 10, 2017 1:46 pm

^Right, I cannot imagine that monthly data is going to do it. Here is a 5-day chart for BND compared to VCSH. There is quite a clear time to sell BND and buy it back later. Of course, this kind of thing doesn't happen very often and folks who use mutual funds instead of ETFs would not even notice.

Image

Furthermore, it won't be a daily endeavor. One just gets an alert on their smart phone. If one is on vacation, then one says, "I'm on vacation. Better luck next time."
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Re: What mix of intermediate and short term bonds?

Post by saltycaper » Sun Dec 10, 2017 1:49 pm

garlandwhizzer wrote:
Sun Dec 10, 2017 1:29 pm

In a rising rate environment, even the slowly rising rate structure which is anticipated, short term bonds are attractive IMO. This is especially so now when interest rate spreads between short and intermediate term bonds have narrowed considerably. You get paid very little these days to take on duration risk and duration risk in a rising rate, rising inflationary environment can be significant.
I, too, think the yield spread and duration difference between funds are the main things to consider (credit too, if applicable), if one is going to tinker with their fixed income allocation. Is 3-4 extra years duration worth an extra 1% or whatever it may be? That would be the question.
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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 2:00 pm

saltycaper wrote:
Sun Dec 10, 2017 1:49 pm
garlandwhizzer wrote:
Sun Dec 10, 2017 1:29 pm

In a rising rate environment, even the slowly rising rate structure which is anticipated, short term bonds are attractive IMO. This is especially so now when interest rate spreads between short and intermediate term bonds have narrowed considerably. You get paid very little these days to take on duration risk and duration risk in a rising rate, rising inflationary environment can be significant.
I, too, think the yield spread and duration difference between funds are the main things to consider (credit too, if applicable), if one is going to tinker with their fixed income allocation. Is 3-4 extra years duration worth an extra 1% or whatever it may be? That would be the question.
Swedroe mentioned some years back that DFA used a rule on the slope of the yield curve to determine how far out to purchase. Something like if you got an extra 25 bp/year then extend out. But I have not seen any reliable rule for how to do this. I tried a few things using Fed data and got nowhere.

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Re: What mix of intermediate and short term bonds?

Post by dbr » Sun Dec 10, 2017 2:09 pm

BlueEars wrote:
Sun Dec 10, 2017 2:00 pm
saltycaper wrote:
Sun Dec 10, 2017 1:49 pm
garlandwhizzer wrote:
Sun Dec 10, 2017 1:29 pm

In a rising rate environment, even the slowly rising rate structure which is anticipated, short term bonds are attractive IMO. This is especially so now when interest rate spreads between short and intermediate term bonds have narrowed considerably. You get paid very little these days to take on duration risk and duration risk in a rising rate, rising inflationary environment can be significant.
I, too, think the yield spread and duration difference between funds are the main things to consider (credit too, if applicable), if one is going to tinker with their fixed income allocation. Is 3-4 extra years duration worth an extra 1% or whatever it may be? That would be the question.
Swedroe mentioned some years back that DFA used a rule on the slope of the yield curve to determine how far out to purchase. Something like if you got an extra 25 bp/year then extend out. But I have not seen any reliable rule for how to do this. I tried a few things using Fed data and got nowhere.
Larry suggests/suggested 20bp for each year of duration makes sense for extending duration. He also has published a table somewhere for shifting duration of TIPS funds. It is up to the investor to decide if it makes sense to manipulate duration that way. I have not seen an analysis wherein those rules are derived and an expected benefit is estimated. I suspect there is not a really helpful quantitative technique to make this worthwhile.

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Re: What mix of intermediate and short term bonds?

Post by saltycaper » Sun Dec 10, 2017 2:13 pm

BlueEars wrote:
Sun Dec 10, 2017 2:00 pm

Swedroe mentioned some years back that DFA used a rule on the slope of the yield curve to determine how far out to purchase. Something like if you got an extra 25 bp/year then extend out. But I have not seen any reliable rule for how to do this. I tried a few things using Fed data and got nowhere.
Although it doesn't hurt to get ideas, I wouldn't worry too much about someone else's rule, particularly one based on basis points. That data could have little meaning if the yield curve changes. Percentages maybe, but there could be exceptions there too.

If you compare a 5-year note to a 30-year bond, I'm guessing you'd have little trouble determining the extra risk is not worth the potential reward for you. Just work your way down the curve.
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Re: What mix of intermediate and short term bonds?

Post by dwickenh » Sun Dec 10, 2017 2:44 pm

Delaying SS and living off a small pension and my taxable account. I have VSCSX (short term corporate bond) in my taxable account for withdrawals. In my IRA I have 50/50 in Total bond and IT corporate bond. My intent is to not draw from the IRA for 7 + years at 70 1/2. The daily changes in this account will be replaced with higher yield within the scope of my withdrawal horizon. Could it be different, sure it could. I am trying to keep it simple and not rely on chasing duration and pricing on a monthly basis.
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Re: What mix of intermediate and short term bonds?

Post by PFInterest » Sun Dec 10, 2017 3:16 pm

All int. None short.

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Re: What mix of intermediate and short term bonds?

Post by feh » Sun Dec 10, 2017 6:06 pm

Stormbringer wrote:
Sun Dec 10, 2017 1:03 pm
Are you in a position to build a CD ladder? I recently switched a portion of my IT bond holdings into CDs, which seem to enjoy a bit higher interest rate.
+1

OP - if you aren't comfortable just holding IT bonds, consider all shorter duration fixed income options.

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Re: What mix of intermediate and short term bonds?

Post by naha66 » Sun Dec 10, 2017 9:12 pm

retiredjg wrote:
Sun Dec 10, 2017 12:59 pm
I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.
Maybe they can hold bonds of all terms, I just checked 4 vanguard intermediate bond funds and one fund hold's .01% of greater than 10 year bonds and no bonds greater than 20 year. In what circumstance would they hold a 20year or longer bond?

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Re: What mix of intermediate and short term bonds?

Post by sambb » Sun Dec 10, 2017 9:51 pm

Bogleheads say dont time the market (except in bonds??)
People here have speculated that interest rates were going up for years and years

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Sun Dec 10, 2017 10:24 pm

sambb wrote:
Sun Dec 10, 2017 9:51 pm
Bogleheads say dont time the market (except in bonds??)
People here have speculated that interest rates were going up for years and years
This thread is not really keyed on MT nor speculation. Just trying to find a happy medium.

There has to be some basis for selecting your FI. That is what I am trying to get at. If this discussion had taken place in the 1960's, perhaps the answers would be different. I believe the years since 1980 have probably biased the current holdings of many. After about 37 years of roughly down rates, who could be blamed for thinking of that as the base line?

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Re: What mix of intermediate and short term bonds?

Post by lack_ey » Sun Dec 10, 2017 10:30 pm

If you want to optimize FI, use CDs as part of the picture. You get higher yields compared to comparable maturity Treasuries. With direct bank CDs you get lower term risk too, via early withdrawals even under penalty. Obviously you still want some funds and/or cash for the higher liquidity, but you don't need it for everything.

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Re: What mix of intermediate and short term bonds?

Post by retiredjg » Mon Dec 11, 2017 6:21 am

naha66 wrote:
Sun Dec 10, 2017 9:12 pm
retiredjg wrote:
Sun Dec 10, 2017 12:59 pm
I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.
Maybe they can hold bonds of all terms, I just checked 4 vanguard intermediate bond funds and one fund hold's .01% of greater than 10 year bonds and no bonds greater than 20 year. In what circumstance would they hold a 20year or longer bond?
Did you look at total bond market?

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Re: What mix of intermediate and short term bonds?

Post by Seasonal » Mon Dec 11, 2017 6:53 am

BlueEars wrote:
Sun Dec 10, 2017 1:28 pm
TIPS are also pretty low right now. VIPSX has a 0.2% SEC yield.

FWIW, in the FI portion of my portfolio I have 50% intermediate bonds (IG IT, using VFIDX). The other 50% is less inflation sensitive: short term investment grade (VFSUX) and older iBonds keepers. Total average duration = 3.7 years.
What are you using for the duration of your ibonds? Zero, something else?

VIPSX currently has an expense ratio equal to its SEC yield.

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Re: What mix of intermediate and short term bonds?

Post by Doc » Mon Dec 11, 2017 7:35 am

lack_ey wrote:
Sun Dec 10, 2017 10:30 pm
If you want to optimize FI, use CDs as part of the picture. You get higher yields compared to comparable maturity Treasuries. With direct bank CDs you get lower term risk too, via early withdrawals even under penalty. Obviously you still want some funds and/or cash for the higher liquidity, but you don't need it for everything.
Risk is a two way street. If rates fall bond prices rise. With CDs you are either stuck or have to eat an early withdrawal penalty.

Funds do not hold bonds to maturity. An individual CD or bond holder does not have to either.
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Re: What mix of intermediate and short term bonds?

Post by Lloydo » Mon Dec 11, 2017 7:42 am

retiredjg wrote:
Sun Dec 10, 2017 12:59 pm
I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.
Sorry, but I don’t believe that’s the case. It certainly is for Total Bond Market as the average maturity is just that, the average of all bonds, short, intermediate and long term maturity. However, intermediate term means just that. There may be long term bonds in the portfolio, but they will still mature within the targeted 5-10 year time frame.

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Re: What mix of intermediate and short term bonds?

Post by Doc » Mon Dec 11, 2017 7:43 am

BlueEars wrote:
Sun Dec 10, 2017 12:12 pm
I am asking myself what mix of intermediate term bonds (IT) versus short term bonds (ST) to hold? Many here hold intermediate term and since the early 1980's that has been a good position.
I use a 1-10 Gov/credit bogey and break up the portfolio into four components - short & intermediate, and Treasury & corporate for tax and liquidity purposes. Duration about 4.1, credit AA (all investment grade). If you need to sell you pick the best at that time and rebalance next year.
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Re: What mix of intermediate and short term bonds?

Post by retiredjg » Mon Dec 11, 2017 8:07 am

Lloydo wrote:
Mon Dec 11, 2017 7:42 am
retiredjg wrote:
Sun Dec 10, 2017 12:59 pm
I don't know the answer to your question, but I think it is important for people to realize that an intermediate term bond FUND may contain individual bonds of all terms - short, intermediate, and long term. Like total bond market - all those bonds are not intermediate term. It contains bonds of all terms, but the fund itself "averages out" to be intermediate term.

BlueEars, I'm sure you know this, but some of the newer people might not.
Sorry, but I don’t believe that’s the case. It certainly is for Total Bond Market as the average maturity is just that, the average of all bonds, short, intermediate and long term maturity. However, intermediate term means just that. There may be long term bonds in the portfolio, but they will still mature within the targeted 5-10 year time frame.
Maybe this is semantics - the difference between a fund classified as "intermediate term" and a fund filled with intermediate term bonds. Either way, I don't think it has enough bearing on the original question to pursue it much. I was just trying to point out to people who might not know that some bond FUNDS may have a mix.

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Re: What mix of intermediate and short term bonds?

Post by rkhusky » Mon Dec 11, 2017 8:12 am

Put the money that you expect to withdraw in less than 3-5 years and the money that you consider to be your emergency fund into short term bonds and/or CD's, the rest can go in intermediate and/or Total Bond.

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Mon Dec 11, 2017 10:00 am

Seasonal wrote:
Mon Dec 11, 2017 6:53 am
BlueEars wrote:
Sun Dec 10, 2017 1:28 pm
TIPS are also pretty low right now. VIPSX has a 0.2% SEC yield.

FWIW, in the FI portion of my portfolio I have 50% intermediate bonds (IG IT, using VFIDX). The other 50% is less inflation sensitive: short term investment grade (VFSUX) and older iBonds keepers. Total average duration = 3.7 years.
What are you using for the duration of your ibonds? Zero, something else?

VIPSX currently has an expense ratio equal to its SEC yield.
I use duration = zero for Ibonds.

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Re: What mix of intermediate and short term bonds?

Post by dbr » Mon Dec 11, 2017 10:02 am

Seasonal wrote:
Mon Dec 11, 2017 6:53 am
BlueEars wrote:
Sun Dec 10, 2017 1:28 pm
TIPS are also pretty low right now. VIPSX has a 0.2% SEC yield.

FWIW, in the FI portion of my portfolio I have 50% intermediate bonds (IG IT, using VFIDX). The other 50% is less inflation sensitive: short term investment grade (VFSUX) and older iBonds keepers. Total average duration = 3.7 years.
What are you using for the duration of your ibonds? Zero, something else?

VIPSX currently has an expense ratio equal to its SEC yield.
Be sure everyone understands that TIPS yield is real yield. The nominal yield is that plus inflation, possibly more like 2% total right now, or whatever current inflation is.

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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Mon Dec 11, 2017 10:15 am

Doc wrote:
Mon Dec 11, 2017 7:43 am
BlueEars wrote:
Sun Dec 10, 2017 12:12 pm
I am asking myself what mix of intermediate term bonds (IT) versus short term bonds (ST) to hold? Many here hold intermediate term and since the early 1980's that has been a good position.
I use a 1-10 Gov/credit bogey and break up the portfolio into four components - short & intermediate, and Treasury & corporate for tax and liquidity purposes. Duration about 4.1, credit AA (all investment grade). If you need to sell you pick the best at that time and rebalance next year.
It looks like the ETF corresponding to 1-10 Gov/credit would be GVI shown here: https://www.ishares.com/us/products/239 ... t-bond-etf

Your 4.1 average duration is not too much higher then my 3.7.

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Re: What mix of intermediate and short term bonds?

Post by livesoft » Mon Dec 11, 2017 10:18 am

This will be a great thread to revisit in 3 years or so. Thanks for starting it! :)
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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Mon Dec 11, 2017 10:54 am

I went back to my notes on some bond topics here. Some very well versed investors were stating that ST bonds might be the better alternative going forward. I mention this for completeness. They might have just been too early. Perhaps in the next decade we will see interest rate risk?

For instance this post from "Multifactor Advisor" who had a lot of good bond data to present. Note the 5yr Treasury has declined by only 0.15% since that post and yet the IT minus ST returns have strongly favored IT.

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livesoft
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Re: What mix of intermediate and short term bonds?

Post by livesoft » Mon Dec 11, 2017 11:01 am

Well, as long as we are dredging up old posts, here another "short-term bond?" thread where I shifted from BIV to VCSH before the 4.5% drop in BIV over the next few months:
viewtopic.php?p=1638192#p1638192

But intermediate-term bonds caught back up to short-term bonds about 14 months later. So the reality is that one probably shouldn't care too much about the mix of intermediate-term and short-term bonds.

That experience gave me the courage to do what I wanted to with bonds. That's because any bad consequences could be overcome by waiting, but good consequences made me feel good.
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Re: What mix of intermediate and short term bonds?

Post by Doc » Mon Dec 11, 2017 11:10 am

livesoft wrote:
Mon Dec 11, 2017 11:01 am
But intermediate-term bonds caught back up to short-term bonds about 14 months later. So the reality is that one probably shouldn't care too much about the mix of intermediate-term and short-term bonds.
That builds on the point I was trying to make earlier. If you split your FI into components and then there is a market "correction" you can use the best piece of your FI to rebalance and then when the "intermediate-term bonds caught back up to short-term bonds about 14 months later" you rebalance your FI protfolio. Of course next time maybe it will be the reverse bu by splitting your FI you get to chose in real time.

Of course it's not as simple as TBM or BlueEars' observation "It looks like the ETF corresponding to 1-10 Gov/credit would be GVI shown here: https://www.ishares.com/us/products/239 ... t-bond-etf"

The GVI has a significantly shorter duration than TBM so the market timers can still use a three fund portfolio. :wink:
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Re: What mix of intermediate and short term bonds?

Post by Seasonal » Mon Dec 11, 2017 11:55 am

livesoft wrote:
Mon Dec 11, 2017 11:01 am
That experience gave me the courage to do what I wanted to with bonds. That's because any bad consequences could be overcome by waiting, but good consequences made me feel good.
Is good is a higher current portfolio value or a higher yield, indicating a higher future portfolio value?

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Re: What mix of intermediate and short term bonds?

Post by JoMoney » Mon Dec 11, 2017 12:07 pm

If it were me, I would hold a mix such that the combined duration was similar to the duration of a ladder of bonds maturing over a time period I might expect to need the money.
i.e. If was looking at a ladder of individual bonds/CDs maturing over the next 5 years, I would be looking at a fund duration of about 3 years, similar to that of a portfolio of individual bonds expiring in 1,2,3,4, and 5 years would blend to about 3 years.

Knowing the money will be there when I need it is more important to me in my fixed-income investments then trying to guess what some future optimal maturity/duration will turn out to be.
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Re: What mix of intermediate and short term bonds?

Post by BlueEars » Mon Dec 11, 2017 12:29 pm

JoMoney wrote:
Mon Dec 11, 2017 12:07 pm
If it were me, I would hold a mix such that the combined duration was similar to the duration of a ladder of bonds maturing over a time period I might expect to need the money.
i.e. If was looking at a ladder of individual bonds/CDs maturing over the next 5 years, I would be looking at a fund duration of about 3 years, similar to that of a portfolio of individual bonds expiring in 1,2,3,4, and 5 years would blend to about 3 years.

Knowing the money will be there when I need it is more important to me in my fixed-income investments then trying to guess what some future optimal maturity/duration will turn out to be.
Interesting thoughts. If I am spending at a rate of 4% of the portfolio, then over 5 years I might need about 20% of the portfolio in ST bonds (VFSUX duration = 2.6 years)?

It turns out that is about my ST bond percentage (in VFSUX). I view the ST bonds as a continuous strategy to finance retirement spending. Additionally the position is there to mitigate inflation risks and interest rate risks.

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Re: What mix of intermediate and short term bonds?

Post by livesoft » Mon Dec 11, 2017 1:15 pm

Seasonal wrote:
Mon Dec 11, 2017 11:55 am
livesoft wrote:
Mon Dec 11, 2017 11:01 am
That experience gave me the courage to do what I wanted to with bonds. That's because any bad consequences could be overcome by waiting, but good consequences made me feel good.
Is good is a higher current portfolio value or a higher yield, indicating a higher future portfolio value?
Good is avoiding lower values in what I sold and being able to buy the shares I sold back at a lower value than I sold them for.
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Re: What mix of intermediate and short term bonds?

Post by jhfenton » Mon Dec 11, 2017 3:34 pm

Doc wrote:
Mon Dec 11, 2017 7:43 am
I use a 1-10 Gov/credit bogey and break up the portfolio into four components - short & intermediate, and Treasury & corporate for tax and liquidity purposes. Duration about 4.1, credit AA (all investment grade). If you need to sell you pick the best at that time and rebalance next year.
This is basically what I do, except that I exclude the short treasuries and hold the other three. I use the three Vanguard bond index funds (VSIGX, VICSX, VSCSX).

I also have some PIMCO Total Return Institutional (PTTRX) in my 401(k) because it is the only bond fund available. It is not the product of a strategic choice. And I have some Vanguard OH Long-Term Tax Exempt in taxable (VOHIX), because it's a taxable account.

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Re: What mix of intermediate and short term bonds?

Post by Solo Prosperity » Mon Dec 11, 2017 4:51 pm

Blue Ears,

If you are in the spending phase you should be more concerned with inflation and maintaining purchasing power as opposed to total nominal returns with your bonds. Clearly there is a link between the two, but they are not the same. I would try to start thinking about your portfolio as something to protect, not necessarily as something that needs to squeeze out as much CAGR as possible, given the assumption you have saved enough.

I would suggest you look into TIPS in addition to any nominal bonds you are holding. My favorite method is to choose a number of years of spending into the future (3-10) and setup a TIPS ladder for that duration. I.E. You could setup a constant 5-Year TIPS ladder to cover spending needs for the next 5 years and then keep the rest of your investments in a more balanced portfolio (Something like 50/50...This is where the nominal bonds might be...duration answer/guess below). Every year, you can take your 5th year of spending out of the balanced portfolio and buy a 5-Year TIPS. Something to think about.

As far as choosing ST v IT for nominal bonds, I would honestly say it's a crap-shoot. Everyone has been saying yields will go higher since at least 2012 and yet LT Treasuries have beaten ST Treasuries by almost 3%/yr since then. If I "HAD" to choose ST or IT for the next 5-10 years, I would go ST but it is a guess based purely on the shorter term trend continuing. I still have many years ahead of me (hopefully) and have chosen a 5Yr duration for my small bond allocation and that will not chnage.

I think settling on a 3-5Yr maturity is a nice balance if you are struggling with the ST/IT decision. The fact is, even if rates rise, they would have to rise pretty dramatically for your bond losses to really start to hurt at anything less than a 5ish Yr duration.

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