Why are bonds falling?

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thx1138
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Re: Why are municipal bonds down 5% today?

Post by thx1138 » Fri Mar 13, 2020 2:52 pm

Irisheyes wrote:
Fri Mar 13, 2020 2:38 pm
As for Idiosyncratic risk....I can't think of anything except massive earthquake. Even then the endowment would be safe and rebuilding would get a big hand from their many billionaire alums..
The next Larry Nassar...

Anyway, not saying it is a bad investment. Quite possible a better risk adjusted return than treasuries too. But overall lower risk of default is a fantasy.

FactualFran
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Re: Reason for Treasury Bonds going down ?

Post by FactualFran » Fri Mar 13, 2020 3:25 pm

SmyleBogle wrote:
Fri Mar 13, 2020 2:24 pm
I found this one explanation http://archive.is/a2qDY, but would love to learn what your perspective is.
That look like a good explanation, including:
“I am massively worried that institutions are panicking and are unwinding positions at will,” said Tom di Galoma, a managing director at Seaport Global Holdings, an investment bank.
There was enough of a panic that sellers were more concerned about getting out of their positions than about the price.

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Re: Why are municipal bonds down 5% today?

Post by Blue456 » Fri Mar 13, 2020 3:27 pm

Beliavsky wrote:
Thu Mar 12, 2020 1:07 pm
As I write MUB (muni bond ETF) is down 5.45% with TLT (Treasury bonds) up 3.73%. Their correlation of daily returns is 0.33 over 09/10/2007 - 03/11/2020 according to Portfolio Visualizer. What is going on?
Municipal bonds safety is probably not much better than corporate bonds. Although I had people argue in here that they are all AAA and better than corporate bonds in that aspect. But honestly I think both corporate bonds and municipal bonds both have inherit risk of relevant party declaring bankruptcy.
If you want safety keep treasuries. Better yet tips. During sever government strain, US government could just print more money and inflate any profits out of short term treasuries. They can’t do that with TIPS.

rkhusky
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Re: Reason for Treasury Bonds going down ?

Post by rkhusky » Fri Mar 13, 2020 3:36 pm

People are realizing they were stupid for selling all their stocks and now are selling all their Treasuries to buy back stocks?

hudson
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Re: Why are municipal bonds down 5% today?

Post by hudson » Fri Mar 13, 2020 3:43 pm

Blue456 wrote:
Fri Mar 13, 2020 3:27 pm
Beliavsky wrote:
Thu Mar 12, 2020 1:07 pm
As I write MUB (muni bond ETF) is down 5.45% with TLT (Treasury bonds) up 3.73%. Their correlation of daily returns is 0.33 over 09/10/2007 - 03/11/2020 according to Portfolio Visualizer. What is going on?
Municipal bonds safety is probably not much better than corporate bonds. Although I had people argue in here that they are all AAA and better than corporate bonds in that aspect. But honestly I think both corporate bonds and municipal bonds both have inherit risk of relevant party declaring bankruptcy.
If you want safety keep treasuries. Better yet tips. During sever government strain, US government could just print more money and inflate any profits out of short term treasuries. They can’t do that with TIPS.
Municipal Bonds aren't all AAA. They range from AAA to BBB- under two major rating agencies....about 9 steps.
AAA and AA bonds have had an extremely low default rates including during the Great Depression. Many bond issues are thoroughly vetted through state rating agencies. The vetting agencies won't bless bond issues for local governments that don't have the ability to repay. Many munis are pre-funded or backed up with treasuries. The safest munis are backed up by a state or local government's ability to tax. AAA/AA munis are considered almost as safe as treasuries. Local governments always want to keep from going bankrupt. If they go bankrupt, they can't borrow any more money, or the interest rates would be prohibitive. Usually if a local government gets into trouble, some kind of arrangement is worked out so that the bond holders get paid.

I'm writing this from memory and with no research. What did I miss.
Last edited by hudson on Sat Mar 14, 2020 9:49 am, edited 1 time in total.

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WoodSpinner
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Re: Reason for Treasury Bonds going down ?

Post by WoodSpinner » Fri Mar 13, 2020 3:46 pm

Now this has me worried since I hold Short/Intrmdt Treasuries to help stabilize and protect my retirement.

The financial system is incredibly complex! I kinda wish these Relative Value Traders were better regulated so they could not disrupt the market like this. Of course I never realized this was happening in the first place and don’t know if they are Beneficial to the system or parasites.

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Re: Why are municipal bonds down 5% today?

Post by drk » Fri Mar 13, 2020 4:22 pm

Beliavsky wrote:
Thu Mar 12, 2020 1:07 pm
Their correlation of daily returns is 0.33 over 09/10/2007 - 03/11/2020 according to Portfolio Visualizer.
I'm confused by your mention of this. That's a very low correlation. Most of the time, we should expect these two funds to be uncorrelated.

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Time to exit conventional Bond funds?

Post by stocknoob4111 » Fri Mar 13, 2020 6:24 pm

By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).

We carry these funds with the expectation that they will serve as a safe asset class, it's concerning to know that there is a possibility that these funds can blow up as well. What are the risks here? I was told (by some others not on this forum) to ditch these types of funds and go for a pure Treasury fund in this environment due to high risks of Corporate debt defaults that could cause sharp corrections in these Bond funds. How likely is this to happen and should I be worried about losing say 10% in the next few months?

Triple digit golfer
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Re: Time to exit conventional Bond funds?

Post by Triple digit golfer » Fri Mar 13, 2020 6:31 pm

Phrases like "time to" and "in this environment" don't belong in an investment strategy.

You and the others have no idea what the future will bring. Stay diversified.

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firebirdparts
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Re: Time to exit conventional Bond funds?

Post by firebirdparts » Fri Mar 13, 2020 6:48 pm

A lot of folks here didn’t use them to start with for just that reason. Risk and reward you can pick and a lot of folks here have a strong philosophy on these. You can be one of those people if you want to. Like for instance Bill Bernstein has a very simple philosophy on bonds and he just holds a single item. There is good and bad to what he holds, and there is no diversification at all, but it’s pretty safe.

Anyway, there will be some companies going bust. It happens.
A fool and your money are soon partners

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Phineas J. Whoopee
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Re: Reason for Treasury Bonds going down ?

Post by Phineas J. Whoopee » Fri Mar 13, 2020 6:54 pm

It's the institutional market, and there have been serious liquidity problems in the past week or so. That's why the Fed injected half a trillion yesterday, another today, and said it will do it again Monday. It isn't quantitative easing. It isn't giving anyone money for free - there's an obligation to repay. It's solving a liquidity problem that came up just now.
PJW

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Re: Time to exit conventional Bond funds?

Post by stocknoob4111 » Fri Mar 13, 2020 7:19 pm

Triple digit golfer wrote:
Fri Mar 13, 2020 6:31 pm

You and the others have no idea what the future will bring. Stay diversified.
I have a 6 month Emergency Fund in cash but if things get catastrophic then it may not be enough.. i'm looking at my bonds as a worst case Tier 2 access to liquidity. I have enough in there for 3-4 years so I can sleep at night. now I am getting nervous that my bonds may go up in flames as well. I don't want to incur heavy losses in my Bond position.

When a bond fund falls 2.5% in a day that is just concerning!

Just trying to understand the risks here.

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Re: Time to exit conventional Bond funds?

Post by Triple digit golfer » Fri Mar 13, 2020 7:23 pm

stocknoob4111 wrote:
Fri Mar 13, 2020 7:19 pm
Triple digit golfer wrote:
Fri Mar 13, 2020 6:31 pm

You and the others have no idea what the future will bring. Stay diversified.
I have a 6 month Emergency Fund in cash but if things get catastrophic then it may not be enough.. i'm looking at my bonds as a worst case Tier 2 access to liquidity. I have enough in there for 3-4 years so I can sleep at night. now I am getting nervous that my bonds may go up in flames as well. I don't want to incur heavy losses in my Bond position.
I doubt they'll go up in flames. I'd you have 3-4 years and they go down 10% just as you need them after a catastrophe, then you lose a few months. Highly unlikely scenario in all respects.

If you must, move a bit more of them to cash or short term bonds. But know you'll be giving up some return. I wouldn't move all of my bonds to Treasury funds. That's just me. I sleep well at night with Total Bond. Look at its return since the market started to fall. It's done its job.

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Re: Time to exit conventional Bond funds?

Post by nisiprius » Fri Mar 13, 2020 7:26 pm

Why do you think 2.4% is a "staggering" loss for a bond fund? What are your expectations? That's not a rhetorical question, I'd like you to state in your own words the amount of risk you personally are willing to accept in the bond portion of your portfolio.
Last edited by nisiprius on Fri Mar 13, 2020 7:27 pm, edited 1 time in total.
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Triple digit golfer
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Re: Time to exit conventional Bond funds?

Post by Triple digit golfer » Fri Mar 13, 2020 7:26 pm

Total Bond did not fall 2.5% in a day. VBTLX is down about 1.5% in the last 2 days.

thx1138
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Re: Time to exit conventional Bond funds?

Post by thx1138 » Fri Mar 13, 2020 7:28 pm

Many people, including some on these forums and at Boglehead conferences, have always advocated keeping fixed income as treasuries and CDs precisely because these assets behave differently in a crisis than corporate and even municipal bonds. Paired with this is usually increasing the equity allocation slightly for the same expected return. This is sometimes explained as making sure you take all your corporate or equity like risk in only your equity assets and not mixing it into your fixed income. It is an extension of avoiding junk bonds and following the phrase “don’t chase yield” to its more extreme conclusion.

A diverse bond fund is still way less volatile than an equity fund so I don’t think this is something to obsess about. Furthermore swapping from corporates to pure treasuries in a crisis is akin to selling low. You might wait for less interesting times to make that change.

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Re: Time to exit conventional Bond funds?

Post by abuss368 » Fri Mar 13, 2020 7:37 pm

stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).

We carry these funds with the expectation that they will serve as a safe asset class, it's concerning to know that there is a possibility that these funds can blow up as well. What are the risks here? I was told (by some others not on this forum) to ditch these types of funds and go for a pure Treasury fund in this environment due to high risks of Corporate debt defaults that could cause sharp corrections in these Bond funds. How likely is this to happen and should I be worried about losing say 10% in the next few months?
Vanguard had the YTD return of Total Bond at 2.69% as of yesterday. That is doing the job of providing safety and income to a portfolio. At some point I am rebalance into stocks.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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hagridshut
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Re: Time to exit conventional Bond funds?

Post by hagridshut » Fri Mar 13, 2020 9:00 pm

BND (Total Bond Market) briefly lost 10% during the 2008 Financial Crisis, but rebounded quickly.

Bond funds can easily lose value. The magnitude of their volatility is a lot lower than stocks though.

The "time to exit" was months, years, or even decades ago. There are many Bogleheads who don't want the volatility of corporate bonds in their portfolios, and they chose Treasuries instead when they set their asset allocations. Making drastic changes to a portfolio AFTER the horse has left the barn, is not wise. I saw people do this in 2009: exit completely out of stocks after the crash. That was probably the worst financial decision one could have made.
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Re: Time to exit conventional Bond funds?

Post by Jebediah » Fri Mar 13, 2020 9:06 pm

VTEB (Vanguard intermediate muni) was down around 4% yesterday.

Before this situation is done, I think we'll see BND and VTEB correct in a stock-like fashion, i.e. -20% or more. Debt toxicity will reach up into the AA realm.

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Re: Time to exit conventional Bond funds?

Post by averagedude » Fri Mar 13, 2020 9:15 pm

This sounds crazy, but my bond portfolio has 70% total bond, 20% Interm corportate bond, and 10% high yield. I suspect that total bond will outperform in this environment due to a rush to safety. I plan to rebalance in the future and I will most likely be selling some total bond to buy Interm corporate and high yield. This is the beauty of a slice and dice bond portfolio. You sell high, buy low, while seeking slightly higher returns with slightly higher risk. Of course there is no real free lunch here though, because I am taking on more risk to achieve a risk premium. Hey, even Jack Bogle thought that total bond didn't have enough corporate in it.

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Re: Time to exit conventional Bond funds?

Post by palanzo » Fri Mar 13, 2020 9:22 pm

abuss368 wrote:
Fri Mar 13, 2020 7:37 pm
stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).

We carry these funds with the expectation that they will serve as a safe asset class, it's concerning to know that there is a possibility that these funds can blow up as well. What are the risks here? I was told (by some others not on this forum) to ditch these types of funds and go for a pure Treasury fund in this environment due to high risks of Corporate debt defaults that could cause sharp corrections in these Bond funds. How likely is this to happen and should I be worried about losing say 10% in the next few months?
Vanguard had the YTD return of Total Bond at 2.69% as of yesterday. That is doing the job of providing safety and income to a portfolio. At some point I am rebalance into stocks.
Sure. And IT Treasury Index had a YTD return of 4.70%. That is doing the job of providing safety and income to a portfolio.

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Re: Time to exit conventional Bond funds?

Post by rerod » Fri Mar 13, 2020 9:30 pm

nisiprius wrote:
Fri Mar 13, 2020 7:26 pm
Why do you think 2.4% is a "staggering" loss for a bond fund? What are your expectations? That's not a rhetorical question, I'd like you to state in your own words the amount of risk you personally are willing to accept in the bond portion of your portfolio.
Because it took a year to make those gains. To much risk for to little reward.

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Re: Time to exit conventional Bond funds?

Post by whodidntante » Fri Mar 13, 2020 9:56 pm

I think it's reasonable to completely exit VG TBM if another investment meets your needs better. I have.

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Corporate Bond Implosion?

Post by justsomeguy2018 » Fri Mar 13, 2020 9:57 pm

I've seen some comments about corporate bonds potentially being the next subprime due to the coronavirus economic contraction.

Is it time to move out of Total Bond for your Bond allocation and into a pure Treasuries play, and if so, does anyone have any ETFs or any Fidelity Mutual funds they recommend to move into? Do you do long-term, short-term, intermediate term, STIPS, LTIPS, Stable Value, Money Market, some combination of all of the above?

I think the corporate bond risk makes sense so wondering if it time to move to something safer. Are treasuries even safe at this point??

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Re: Time to exit conventional Bond funds?

Post by CoastalWinds » Fri Mar 13, 2020 9:59 pm

whodidntante wrote:
Fri Mar 13, 2020 9:56 pm
I think it's reasonable to completely exit VG TBM if another investment meets your needs better. I have.
Tease. Please elaborate on your fixed income holdings 😁

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Re: Time to exit conventional Bond funds?

Post by BolderBoy » Fri Mar 13, 2020 9:59 pm

stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).
Go to Morningstar.com and enter VBTLX. Have the website show you a graph (chart) of what that fund did from 2007-2010. Pay particular attention to 2008. Now add in VTSAX and you'll appreciate the mitigation that a VBTLX bond position provides to a stock-bond portfolio when the market is plummeting.

In particular you'll notice that - just as now - VBTLX started a downward trend for a short time, recovered and weathered the Great Recession quite well.
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Re: Time to exit conventional Bond funds?

Post by stocknoob4111 » Fri Mar 13, 2020 10:02 pm

I hold VBILX, it holds 25% in Baa (BBB as rated by S&P) debt which is one level above Junk... if we have a economic crisis, which seems increasingly likely to me due to widespread drop in consumption a large percentage of this debt will probably default. Say 80% of this debt defaults, this fund could lose 20%? That would be horrific not just for me but for a LARGE number of people who have thought that these type of Bond funds are safe.

The way it was explained to me elsewhere this non Treasury debt is highly risky tied to highly leveraged companies and also the oil sector teetering on the brink of collapse, if I wanted risk I would invest in equities not diversify into Bonds... I am asking this question here to get other opinions on it. I guess I did not fully understand BBB risk.

To rate something "investment grade" that is in reality "almost junk" is ludicrous in my opinion, but then again I am not surprised... such debt was similarly highly rated during the 2008 subprime crisis. Probably a repeat of that cycle.

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Re: Time to exit conventional Bond funds?

Post by Elysium » Fri Mar 13, 2020 10:20 pm

If you don't like the small risk of corporate bond exposure in funds like VBTLX and VBILX, then you have couple of different options. One is to go for Treasury Bonds, of various duration, you may like Intermediate Term (VFITX) since the duration is similar to the other two funds listed. Second option is to go for GNMA fund (VFIJX), also have similar duration to TBM (but the duration gets more tricky for this fund, more on it later), often not recommended here because of the exclusive Mortgage Back Security investments that isn't well understood (or not liked) here. '

Both Treasury Bonds and GNMA are backed by the full faith of the US Govt and hence should hold up better than VBTLX or VBILX in flight to safety situations. With both options you get lower yields than a bond fund with corporate bonds, but the GNMA fund is more closer to TBM in yield because of the higher yield from MBS. It does have some other risks like negative convexity which one need to understand and accept before considering it. Here is a primer on Negative Convexity. GNMA are a good option for some investors as a compromise because you get the full faith of US Govt with higher yields compared to Treasuries.

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Re: Time to exit conventional Bond funds?

Post by abuss368 » Fri Mar 13, 2020 11:20 pm

palanzo wrote:
Fri Mar 13, 2020 9:22 pm
abuss368 wrote:
Fri Mar 13, 2020 7:37 pm
stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).

We carry these funds with the expectation that they will serve as a safe asset class, it's concerning to know that there is a possibility that these funds can blow up as well. What are the risks here? I was told (by some others not on this forum) to ditch these types of funds and go for a pure Treasury fund in this environment due to high risks of Corporate debt defaults that could cause sharp corrections in these Bond funds. How likely is this to happen and should I be worried about losing say 10% in the next few months?
Vanguard had the YTD return of Total Bond at 2.69% as of yesterday. That is doing the job of providing safety and income to a portfolio. At some point I am rebalance into stocks.
Sure. And IT Treasury Index had a YTD return of 4.70%. That is doing the job of providing safety and income to a portfolio.
Treasuries always pull ahead during market pullbacks.
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Re: Time to exit conventional Bond funds?

Post by watchnerd » Fri Mar 13, 2020 11:43 pm

firebirdparts wrote:
Fri Mar 13, 2020 6:48 pm
A lot of folks here didn’t use them to start with for just that reason. Risk and reward you can pick and a lot of folks here have a strong philosophy on these.
I'm one of those.

I chose to forego the extra performance of TBM in favor of the slightly better safety of Treasuries.

I chose to take my business risk on the equity side.

But....

I don't think other approaches are wrong.

I think what the OP is describing is mostly an education issue.
Last edited by watchnerd on Fri Mar 13, 2020 11:55 pm, edited 2 times in total.
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Re: Time to exit conventional Bond funds?

Post by watchnerd » Fri Mar 13, 2020 11:45 pm

whodidntante wrote:
Fri Mar 13, 2020 9:56 pm
I think it's reasonable to completely exit VG TBM if another investment meets your needs better. I have.
Me, too.

(my holdings in sig).

But I also don't think most people should hold what I hold.
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Re: Time to exit conventional Bond funds?

Post by palanzo » Fri Mar 13, 2020 11:57 pm

abuss368 wrote:
Fri Mar 13, 2020 11:20 pm
palanzo wrote:
Fri Mar 13, 2020 9:22 pm
abuss368 wrote:
Fri Mar 13, 2020 7:37 pm
stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).

We carry these funds with the expectation that they will serve as a safe asset class, it's concerning to know that there is a possibility that these funds can blow up as well. What are the risks here? I was told (by some others not on this forum) to ditch these types of funds and go for a pure Treasury fund in this environment due to high risks of Corporate debt defaults that could cause sharp corrections in these Bond funds. How likely is this to happen and should I be worried about losing say 10% in the next few months?
Vanguard had the YTD return of Total Bond at 2.69% as of yesterday. That is doing the job of providing safety and income to a portfolio. At some point I am rebalance into stocks.
Sure. And IT Treasury Index had a YTD return of 4.70%. That is doing the job of providing safety and income to a portfolio.
Treasuries always pull ahead during market pullbacks.
I am well aware of that. My point is that there are other funds apart from TBM that provide safety and income to a portfolio.

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Re: Time to exit conventional Bond funds?

Post by watchnerd » Sat Mar 14, 2020 12:02 am

You can choose one of the following...

1. Better performance during bad markets

or

2. Better performance during normal markets


...but you can't have both.
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Re: Time to exit conventional Bond funds?

Post by whodidntante » Sat Mar 14, 2020 12:18 am

CoastalWinds wrote:
Fri Mar 13, 2020 9:59 pm
whodidntante wrote:
Fri Mar 13, 2020 9:56 pm
I think it's reasonable to completely exit VG TBM if another investment meets your needs better. I have.
Tease. Please elaborate on your fixed income holdings 😁
Ha! Not teasing. I just didn't think anyone would care since the best course of action depends on one's situation.

For approximately a year, in the (formerly?) incredibly expensive market with low yielding bonds, I've had a hobby of prepaying my mortgage. I sunk about 35 grand into it, on top of the regular payments, and while continuing to max tax advantaged accounts. Since a mortgage is a short position on fixed income, this had the effect of reducing my portfolio risk similar to a high quality bond purchase, but had a favorable yield spread compared to buying bonds. Looking back, this reduction in risk had a pretty nice result.

My fixed income is in my stable value fund in my 401k. That's because the yield is significantly better than TBM.
I used to go 50/50 SV/TBM. And I also have 35k earning bank bonuses in taxable accounts. I got that money by selling equities before the market got all crashy.

But maybe the joke's on me. It is currently possible to borrow at less than 1% in the options market, so I might "refinance" my mortgage pretty soon to some investor. I just haven't bothered to enable portfolio margin anywhere and place the trade.

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Understanding bond funds -- why VWIUX dropped 5% in 3 days?

Post by chicagoperson78 » Sat Mar 14, 2020 1:19 am

hello,

I am trying to better understand bond funds. I am trying to understand why VWIUX -- a position that I hold dropped 5% in 3 days. I had read the bond rates have been constantly going down so shouldn't the fund go up? Why did it have a sudden drop off? It didn't go up in such a steep manner?


thanks

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Re: Understanding bond funds -- why VWIUX dropped 5% in 3 days?

Post by BoggledHead2 » Sat Mar 14, 2020 1:23 am

How Bond Funds Can Lose Money [link formatted by admin LadyGeek]

kcxie
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Re: Understanding bond funds -- why VWIUX dropped 5% in 3 days?

Post by kcxie » Sat Mar 14, 2020 1:26 am

My understanding is that lots of bond holders need money or cash for emergencies when the stock market crash They rush to sell bonds to cause drop of the bond price.
I could be wrong.

All Seasons
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Re: Time to exit conventional Bond funds?

Post by All Seasons » Sat Mar 14, 2020 1:36 am

There are many intelligent voices that say you should not take credit risk in the bond side of your portfolio and just hold Treasury securities. This is often, though not always, said in tandem with "take your risk with equities." Larry Swedroe was one of these people.

Overall, yes, I would have to agree with Larry and others. Ditch the total market funds and just own Treasury bonds. If you want more return just add stocks. That's much more efficient from a risk-return perspective.
The market portfolio is always a legitimate portfolio.

rerod
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Re: Time to exit conventional Bond funds?

Post by rerod » Sat Mar 14, 2020 5:21 am

BolderBoy wrote:
Fri Mar 13, 2020 9:59 pm
Go to Morningstar.com and enter VBTLX. Have the website show you a graph (chart) of what that fund did from 2007-2010. Pay particular attention to 2008. Now add in VTSAX and you'll appreciate the mitigation that a VBTLX bond position provides to a stock-bond portfolio when the market is plummeting.
In particular you'll notice that - just as now - VBTLX started a downward trend for a short time, recovered and weathered the Great Recession quite well.
The main difference is what the fed's interest rate was before the bear market.

Oct 31 2007 4.5%.. GDP = 1.9%, Unemployment = 5.0%, Inflation = 4.1%

Aug 1 2019 2.25%.. GDP = 2.1%, Unemployment = 3.5%, Inflation = 2.3%

Beginning in 2008, the fed dropped rates 4.25% which helped boost bond funds value.

Today, rate cuts of that magnitude aren't possible, so bonds will lose more value.

In other words, its the end of a 40 year bond bull imo
All Seasons wrote:
Sat Mar 14, 2020 1:36 am
Overall, yes, I would have to agree with Larry and others. Ditch the total market funds and just own Treasury bonds. If you want more return just add stocks. That's much more efficient from a risk-return perspective.
Oh yeah, Treasury bonds look like a great buy after you click on Max.
https://www.google.com/search?client=fi ... -d&q=VUSTX

onourway
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Re: Time to exit conventional Bond funds?

Post by onourway » Sat Mar 14, 2020 5:40 am

Thus far, all of these assets are performing exactly as expected. Nobody has ever claimed that the Total Bond Fund is perfectly safe or that it will not vary in value at all during turbulent times. Their “safe” behavior is relative to other assets you likely hold that are far more volatile in comparison.

Last year VBILX returned over 10%. VBTLX nearly 9%. VSIGX just over 6%. This year returns to date are 2.6%, 2.2%, and 4.7%, respectively. As I say, everything looks to be behaving exactly as expected.

I suspect you chose VBILX in good times over the Total Bond or Intermediate Treasury because 10 year growth charts show that it typically earns more money. Growth rate on these charts is nearly always directly correlated with risk - and thus volatility.

Like stocks, if you can handle that volatility during the rough times, you will be handsomely rewarded during the good.

If you are concerned about losing 10% of your safe assets during an extremely turbulent time, please answer @nisiprius’s question from earlier in the thread - what are your expectations?

tombonneau
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Re: Time to exit conventional Bond funds?

Post by tombonneau » Sat Mar 14, 2020 6:17 am

stocknoob4111 wrote:
Fri Mar 13, 2020 10:02 pm
I hold VBILX, it holds 25% in Baa (BBB as rated by S&P) debt which is one level above Junk... if we have a economic crisis, which seems increasingly likely to me due to widespread drop in consumption a large percentage of this debt will probably default. Say 80% of this debt defaults, this fund could lose 20%? That would be horrific not just for me but for a LARGE number of people who have thought that these type of Bond funds are safe.

The way it was explained to me elsewhere this non Treasury debt is highly risky tied to highly leveraged companies and also the oil sector teetering on the brink of collapse, if I wanted risk I would invest in equities not diversify into Bonds... I am asking this question here to get other opinions on it. I guess I did not fully understand BBB risk.

To rate something "investment grade" that is in reality "almost junk" is ludicrous in my opinion, but then again I am not surprised... such debt was similarly highly rated during the 2008 subprime crisis. Probably a repeat of that cycle.
OP, I was same as you had my my bond in VBILX but towards the end of last year started reading up on bonds (Swedroe & Swensen) and the logic of avoiding corporate for 100% Treasuries so you could take on a little more risk on your equities made completely and total sense to me.

Unfortunately, I never got off my butt to make the switch until Monday when I saw the corporates in VBILX doing exactly what S&S said it would do in times of high market stress. So market timing be damned I swapped them out and am glad I did. IMO, corporate is going to get worse before it gets better.

I don't pretend to be some sort of Nostradamus, but I'm not sure you need to be to see that taking on debt to buyback shares can't go on forever. At some point the wind is going to knock down the Potemkin village of a lot of this BBB debt.

It was like when I was working at Countrywide in the mid-2000s seeing people making less than me (and I wasn't making a ton) getting $500-600k mortgages with zero down. Something doesn't add up.

My point is OP, your thinking/decision may be prompted by current market circumstances, so I see why you are getting some market-timey feedback, but your instincts are also grounded in very solid logic. Now in 20 years will VBILX outperform ITT? It's highly likely, it's the riskier asset. But will a 70/30 stock/VBILX outperform a 75/25 Stock/ITT? That's the questions to ask.

Call_Me_Op
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Re: Time to exit conventional Bond funds?

Post by Call_Me_Op » Sat Mar 14, 2020 6:18 am

stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
By that I mean extremely popular Total and Intermediate Bond funds such as VBTLX and VBILX, munis such as VCADX (Vanguard California Muni) etc. These funds have significant exposure to BBB Corporate debt and in the last few days we saw some wild effects - while Treasury yields fell these funds actually dropped, some more than others. VCADX for instance dropped a staggering 2.4% (for a Bond fund).
And you are surprised that bonds that are 1 grade away from junk are more volatile than treasuries?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

hudson
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Re: Time to exit conventional Bond funds?

Post by hudson » Sat Mar 14, 2020 6:30 am

stocknoob4111 wrote:
Fri Mar 13, 2020 6:24 pm
in the last few days we saw some wild effects -

We carry these funds with the expectation that they will serve as a safe asset class,
Why did the funds NAVs (Net Asset Value) drop?
Did they drop because the underlying holdings were suspect?
Or did they drop because owners wanted to escape any investment that was declining?
Did they drop because some large owners need to dump the funds at any price because they needed cash?

In 2008, inflation protect bonds were dumped by a large company or companies (I speculate.) because they were trying to raise cash to keep from going bankrupt. The underlying holdings were solid.
some data to back this up....viewtopic.php?f=10&t=307282&p=5090445#p5090445

All Seasons
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Re: Time to exit conventional Bond funds?

Post by All Seasons » Sat Mar 14, 2020 6:37 am

rerod wrote:
Sat Mar 14, 2020 5:21 am

Oh yeah, Treasury bonds look like a great buy after you click on Max.
https://www.google.com/search?client=fi ... -d&q=VUSTX
Why did you default to long treasury, and what is your point?
The market portfolio is always a legitimate portfolio.

hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: Understanding bond funds -- why VWIUX dropped 5% in 3 days?

Post by hudson » Sat Mar 14, 2020 7:20 am

kcxie wrote:
Sat Mar 14, 2020 1:26 am
My understanding is that lots of bond holders need money or cash for emergencies when the stock market crash They rush to sell bonds to cause drop of the bond price.
I could be wrong.
I agree with kcxie. Also many small holders of the bonds panicked when they saw stocks and bonds tanking. They just bailed and moved to cash.
The same exact thing happened in 2008. Bond funds with solid holdings dropped because of panic or a need for cash.

Here's some data from 2008: viewtopic.php?p=5090039#p5090039

jrbdmb
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Re: Total Bond Market Down >4%

Post by jrbdmb » Sat Mar 14, 2020 7:50 am

vineviz wrote:
Fri Mar 13, 2020 9:41 am
tarheel wrote:
Fri Mar 13, 2020 9:16 am
Super helpful column. Thanks.

My only question then is the ETF/fund gap typically larger in bonds than equities?
Not as a rule.

For one thing, there "typically" is not any significant gap: on the vast majority of days, mutual fund NAVs can be accurately set in a way that accurately reflects market conditions.

And on atypical days, like yesterday, unusual volatility and/or liquidity can lead to mismatches in the gap between NAV and ETF pricing for either equity OR bond ETFs. Which gap is larger just depends on what's going on in the market.

Finally, remember that stale pricing in mutual fund NAVs cuts both ways. Anyone selling bond mutual funds yesterday got a great deal, but everyone buying got a raw deal.

Anyone buying or selling ETFs got a fair deal. Personally, I'm okay with that.
Considering how bond ETFs snapped back on Friday, I'd say that anyone who sold these ETFs on Thursday got hosed. Those depressed prices were clearly due in large part to an illiquid market, not a collapse in NAV.

FBN2014
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Why are bonds falling?

Post by FBN2014 » Sat Mar 14, 2020 8:30 am

Aren't bond values supposed to go up as interest rates fall? Can someone explain why that is not happening now?
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

jdilla1107
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Re: Why are bonds falling?

Post by jdilla1107 » Sat Mar 14, 2020 8:39 am

Look at this page, which shows historical treasury yields: (interest rates)

https://www.treasury.gov/resource-cente ... data=yield

Do you see that interest rates have been both falling and rising at various times over the last 2 weeks? The bond market is also very volatile right now (relative to normal times in the bond market). Bonds went up a lot starting around Feb 21th and then went down starting around March 6th.

It's simply not true to say that "interest rates are falling". Interest rates are volatile right now.

jjwpls
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Re: Why is BND going down?

Post by jjwpls » Sat Mar 14, 2020 8:57 am

watchnerd wrote:
Fri Mar 13, 2020 10:17 am
jjwpls wrote:
Fri Mar 13, 2020 9:45 am
Hi Watchnerd,

Could you explain why you selected long Treasuries + short TIPS to construct your bond portfolio?

Was the decision process like this:

Goal is to hold 70% of portfolio in stocks -> Use long Treasuries to offset equity risk -> Since long Treasuries are portfolio already, avoid adding other long-term bonds (otherwise interest risk too high), so choose short TIPS which also protects against inflation.

And was splitting equally (15% each) between long Treasuries and short TIPS just arbitrary, or based on your experience/research?

Thanks so much.

That's pretty close to the initial framing.

The split was not arbitrary, but driven by trying to balance two questions:

1. How much long Treasuries do I need to hold to cut reduce stock volatility by about ~50%, looking at MVO?

2. How much short Treasuries do I need to hold to get the weighted average duration of the barbell close to Intermediate Treasuries?

Why #2?

Well, aside from just avoiding duration risk, 70/30 (Int Treasuries) advances the Efficient Frontier and has a higher expected return, with almost the same Sharpe ratio, vs 60/40 (TBM).

Why short TIPS?

Short TIPS exhibit more pure CPI exposure in their movements, whereas longer TIPS have more duration noise mixed in.
Hi Watchnerd,

Your explanation made a lot of sense to a lay person like me--much appreciated.

jjwpls

Tenesmus83
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Re: Total Bond Market Down >4%

Post by Tenesmus83 » Sat Mar 14, 2020 9:04 am

newbie question here. I thought if fed fund rate goes down, net asset value of bond index go up?

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