Bond Funds don't work in a crisis

[ge1]

I learned this lesson in the Financial Crisis and it's interesting to see that it is happening again: In a true crisis, you want your safe investments either in a money market account or US treasuries. Or own bonds outright. Diversified bond funds (such as VBMFX / ETF BND) or diversified Muni Bond Funds (VWLTX, VWITX) can see significant decreases in value. As of today, Total Bond ETF "BND" is down 9% from the peak it posted only 2 weeks ago and the long term Muni bond fund (VWLTX) is down over 9% as well. And this in an environment of rapidly falling interest rates, where bond funds should have increased in value. This has to do with the flight to safety and that market participants want to avoid any credit risk, even if it's minimal. So we see credit spreads widening, impacting high yield bond funds, all corporate bond funds and muni bond funds. If history is any guide, these declines can continue for a while longer.

[ukbogler]

amen to that, pilgrim

[Huygens]

Or you can consider owning bond funds constituted of various US Treasuries. Vanguard has at least three that I can think of.

[watchnerd]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

[Dovahkiin]

Owning bonds themselves doesn't insulate you from the drop. You'll take the same temporary NAV hit if you try to actually liquidate them. The bond fund represents the market price of the bonds themselves. It's a lot more annoying to liquidate individual bonds to rebalance too.

[ge1]

My Treasury bond funds (long nominal, short TIPS) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Agree, fair point. Should have said bond funds with credit risk.

[ge1]

Or you can consider owning bond funds constituted of various US Treasuries. Vanguard has at least three that I can think of.

Agree, good point.

[Steve Reading]

My Treasury bond funds (long nominal, short TIPS) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Agree, fair point. Should have said bond funds with credit risk.

No, should’ve said “credit risk” since owning the same bonds the fund does would’ve led to the same losses.

Your issue isn’t with funds at all, it’s with credit risk in bonds.

[JoMoney]

My belief has been that if you're using bond funds for your "safe" money / emergency fund, you need to use a fund (or mix of funds) that has a duration relative to your need of the money. High quality bond funds "work" just fine, as does a portfolio of individual bonds or CDs, as long as the relative maturity is close to matching your need of the money.
Buying a longer duration fund or bond, that you expect to be able to sell early if the market drops, has no assurances of working out well. It's just market timing speculation wrapped into some MPT MVO story... and these portfolio theories have failed in the past to provide their touted risk reduction, often when most needed.

[Randolph Mortimer]

Or...you can treat bonds (and bond funds) as long term investments, just like stocks, understanding that they can "lose money" like stocks but nonetheless behave differently and tend to be much less volatile. How much is the S&P500 down in that last 3 weeks? How much is the Barclays Agg Bond Index down?

How did bond funds perform in 2008 compared to stocks?

[stimulacra]

I disagree. My 3 bond funds (VBTLX, VICSX, VIPSX) are doing exactly what I would hope they would do.

They're letting me sleep at night and avoid making panic moves.

It has never occurred to me to sell off any equities during all of this, I'm actually directing new inflows to rebalance.

[HomerJ]

Vanguard Total Bond Index Fund is down 0.50% YTD (as of yesterday)

Vanguard Total Stock Market Index Fund is down 28% YTD (as of yesterday).

Bond Funds are doing exactly what they are supposed to be doing.

I'm sleeping very well at night because of my Bond Funds.

(You are not counting dividends, and you are measuring from the peak - which happened DURING the crisis on 3/6 - bond funds were going up before they went down)

[KlangFool]

OP,

I do not understand your point.

I have MMF, VBTLX (Total Bond Index Fund), and Intermediate-Term Treasury (VFIUX). My AA is 60/40.

A) My VFIUX went up and triggered my 5/25 band. I rebalanced my VFIUX into the stock index fund this week.

B) My VBTLX is above 20% of its targeted allocation. So, it is on the verge of triggering my 5/25 band. If it does, I will rebalance from the VBTLX into the stock index fund.

So, what do you mean by it does not work in a crisis? The stock goes down and the bond went up in allocation and cause a rebalancing. Aka, "Buy Low and Sell High". It works very well.

KlangFool

[SCV_Lawyer]

Owning bonds themselves doesn't insulate you from the drop. You'll take the same temporary NAV hit if you try to actually liquidate them. The bond fund represents the market price of the bonds themselves. It's a lot more annoying to liquidate individual bonds to rebalance too.

This was exactly my thought. Just because you don't see the price change of a bond, doesn't mean that if you tried sell it, you wouldn't experience a loss similar to the price of a bond fund that holds the same underlying bonds.

[columbia]

It’s easy to avoid corporate credit risk - just own treasuries.

[tc101]

My short term treasury index fund went down 0.15% yesterday, and down 0.5% in the last 8 days. That is not a big deal, but I don't understand it.

[montanagirl]

Vanguard Total Bond Index Fund is down 0.50% YTD (as of yesterday)

Vanguard Total Stock Market Index Fund is down 28% YTD (as of yesterday).

Bond Funds are doing exactly what they are supposed to be doing.

I'm sleeping very well at night because of my Bond Funds.

(You are not counting dividends, and you are measuring from the peak - which happened DURING the crisis on 3/6 - bond funds were going up before they went down)

My Total Bond is the only fund that still has a gain.

[BillyK]

Bonds may not be holding up real well, but they are holding up better than equities which is better than a kick in the teeth in these current market conditions. They still provide a source for rebalancing into equities and soften the fall somewhat.

[Kenkat]

Come on, good people - can we please take a longer view than the past 10 or whatever days? I know it’s been a crazy time, but:

Vanguard Total Bond Index VBLTX - down 0.29% YTD, UP 6.62% over the past 1 year

Vanguard IT Muni VWITX - down 2.77% YTD, UP 1.97% over the past 1 year

Down a little, a very little, in what is a history making world crisis we can tell our grandkids about is pretty good. I’ll take it.

[nedsaid]

I learned this lesson in the Financial Crisis and it's interesting to see that it is happening again: In a true crisis, you want your safe investments either in a money market account or US treasuries. Or own bonds outright. Diversified bond funds (such as VBMFX / ETF BND) or diversified Muni Bond Funds (VWLTX, VWITX) can see significant decreases in value. As of today, Total Bond ETF "BND" is down 9% from the peak it posted only 2 weeks ago and the long term Muni bond fund (VWLTX) is down over 9% as well. And this in an environment of rapidly falling interest rates, where bond funds should have increased in value. This has to do with the flight to safety and that market participants want to avoid any credit risk, even if it's minimal. So we see credit spreads widening, impacting high yield bond funds, all corporate bond funds and muni bond funds. If history is any guide, these declines can continue for a while longer.

Large parts of the bond market are not very liquid, even during more placid times. A lot of what you are seeing is volatility in municipals and corporates, lots of these are thinly traded. These will bounce back once there is clarity on the coronavirus crisis. You saw this volatility in 2008-2009 too in much of the bond market. Things like TIPS and Corporates rebounded pretty smartly then after having fallen 10-12 percent. Keep in mind also that the markets are in a panic mode, you will see weird things like this happen.

Dodd-Frank limited the amounts of bonds that banks could hold, banks are much less able to serve as a market maker for bonds than they were before. In another thread, I posted a couple of links to articles discussing this. We made the banks safer but the bond market more volatile.

[cashboy]

Vanguard Total Bond Index Fund is down 0.50% YTD (as of yesterday)

Vanguard Total Stock Market Index Fund is down 28% YTD (as of yesterday).

Bond Funds are doing exactly what they are supposed to be doing.

I'm sleeping very well at night because of my Bond Funds.

(You are not counting dividends, and you are measuring from the peak - which happened DURING the crisis on 3/6 - bond funds were going up before they went down)

this

[watchnerd]

I'm seeing multiple bond posts on similar lines. May be time for a thread merge.

It seems that many people didn't look inside their bond fund portfolios to see what they were buying.

[birdog]

I'm seeing multiple bond posts on similar lines. May be time for a thread merge.

It seems that many people didn't look inside their bond fund portfolios to see what they were buying.

Guilty. I was half BIV (inter bond index) and half VTEB (tax-exempt index) in my bond portfolio. If I had to do it over again I'd be something more like a third each of BIV, VTEB & VGIT (inter treas) or some other combination with less muni's and more treasuries.

[willthrill81]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Precisely.

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

[watchnerd]

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

Likewise.

I fail to see the wisdom in holding both ends of the business risk spectrum: owner/shareholder + lender/bondholder.

Pick one or the other.

[nisiprius]

If by "work" you mean "serve as a shield of invulnerability and never lose a penny," no, they haven't worked. But let's be realistic.

Look at the forest, not the trees. Here is the performance of several kinds of bond funds in 2008-2009, compared with a stock fund (yellow):

Blue, Total Bond.

Orange, VFITX, Vanguard intermediate-term Treasury; pure Treasury, you can see a small gain, presumably from a "flight to safety."

Green, VFICX, Vanguard Intermediate-Term Investment Grade, the closest thing to a "corporate bond fund" that Vanguard had at the time. Morningstar is showing an average credit rating of BBB, the one that worries Savage. This is how BBB-rated bond funds behaved in the last crash. Yeah, it went down, but it only went down about 10% while stocks were going down 50%.

Purple, PTTRX, PIMCO Total Return, at that time the world's largest mutual fund of any kind and very popular in 401(k) plans, an active fund, aggressively managed by then-famous "bond king" Bill Gross, and conspicuously beating Total Bond most of the time.

Source



Have fun arguing about exactly which kinds of bonds might do a little better or worse than others, or whether you'd be just as well off in a ladder of bank CDs as in a bond fund. Fine. Whatever. But to say they "don't work" in a crisis is wild exaggeration. Every one of these four different bond funds held up quite well during a time when stocks were falling -50%.

And recently?

[theorist]

I have noticed that my muni bonds in my taxable account (various CA specific funds, and VWITX) aren’t doing as well as the highest quality taxable bonds I have in tax protected accounts. Is there any alternative one can hold in taxable accounts that is even higher quality but still reasonable for a taxable account? (I am not complaining, the fluctuations in the muni bond values have been very marginal compared to what’s happening to my equity holdings — but it is worth knowing if I have options there.)

[Kenkat]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Precisely.

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

As I have pondered more on this, I don’t necessarily disagree with your or watchnerd’s approach but I think most investors will fail at implementing it.

When times are good, investors will look at the yield of the treasury funds and think “those stink, look how much better this corporate fund looks”. It happened even with Total Bond - it lags all these “better” choices.

Or when stocks recover and we get a little hint of inflation, interest rates rise and long term bonds fall. Then many investors will be saying “GET OUT NOW!!! - what are these things, short term bonds are where it’s at now”.

You guys I actually believe will stick with what you are doing. Others I have far less confidence that they will.

[tombonneau]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Precisely.

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

This can't be mentioned enough on this forum. I'm glad I finally thought for myself and shifted from Total/VBILX to Intermediate Treasuries.

[willthrill81]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Precisely.

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

As I have pondered more on this, I don’t necessarily disagree with your or watchnerd’s approach but I think most investors will fail at implementing it.

When times are good, investors will look at the yield of the treasury funds and think “those stink, look how much better this corporate fund looks”. It happened even with Total Bond - it lags all these “better” choices.

Or when stocks recover and we get a little hint of inflation, interest rates rise and long term bonds fall. Then many investors will be saying “GET OUT NOW!!! - what are these things, short term bonds are where it’s at now”.

You guys I actually believe will stick with what you are doing. Others I have far less confidence that they will.

You're basically saying that most investors will performance chase. If that's true of different kinds of bonds, it might also be true of stocks and bonds (i.e. people switching from bonds to stocks during the good times).

You're probably right. But I'm not sure that holding TBM is the right choice.

[birdog]

You're basically saying that most investors will performance chase. If that's true of different kinds of bonds, it might also be true of stocks and bonds (i.e. people switching from bonds to stocks during the good times).

You're probably right. But I'm not sure that holding TBM is the right choice.

Will, would you mind sharing your bond portfolio? Sorry if you already did elsewhere and I missed it.

[willthrill81]

You're basically saying that most investors will performance chase. If that's true of different kinds of bonds, it might also be true of stocks and bonds (i.e. people switching from bonds to stocks during the good times).

You're probably right. But I'm not sure that holding TBM is the right choice.

Will, would you mind sharing your bond portfolio? Sorry if you already did elsewhere and I missed it.

I don't have a dedicated bond portfolio. I'm a trend follower, but I no longer discuss the specifics of my strategy due to all of the personal attacks I've received from doing so in the past.

[HomerJ]

But I'm not sure that holding TBM is the right choice.

What's wrong with TBM? It's basically flat since January 1st. How is that bad in this environment?

[Triple digit golfer]

We've had a lot of these lately.

Total Bond and similar diversified intermediate term bond funds have done fine in equity bear markets. Nisiprius covered it nicely.

Vanguard Total Bond, since 1987, has only had negative returns in four calendar years, with the worst being -2.66%. The worst drawdown was 5.86%.

[willthrill81]

But I'm not sure that holding TBM is the right choice.

What's wrong with TBM? It's basically flat since January 1st. How is that bad in this environment?

It's not bad. But as Larry Swedroe and others have said for a long while now, TBM's exposure to corporate bonds means that during times of market downturn, it's likely to underperform an ITT fund, which is exactly what we've seen. It's not a big deal, but wouldn't you rather rebalance with a bond fund that's up almost 4% YTD versus one that's flat?

[Marlon Marlin]

But I'm not sure that holding TBM is the right choice.

What's wrong with TBM? It's basically flat since January 1st. How is that bad in this environment?

Agree. It's also the only low-cost bond fund choice for many, many workers' 401k.

[willthrill81]

But I'm not sure that holding TBM is the right choice.

What's wrong with TBM? It's basically flat since January 1st. How is that bad in this environment?

Agree. It's also the only low-cost bond fund choice for many, many workers' 401k.

I agree that you have to do the best you can with what you have.

[Jebediah]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

[RonSwanson]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

VTEAX is down less. Maybe the ETF will eventually match?
(*Corrected post VWIUX -> VTEAX)

[TomatoTomahto]

But I'm not sure that holding TBM is the right choice.

What's wrong with TBM? It's basically flat since January 1st. How is that bad in this environment?

If I were given a do-over, I’d have LT Treasuries in my portfolio rather than TBM. On the other hand, what’s affecting my sleep is my equities and not my TBM holdings. FWIW, my sleep is still pretty good, everything considered.

If TBM is not doing a perfect job, it’s still doing a sufficient job.

[Jebediah]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

VWIUX is down less. Maybe the ETF will eventually match?

"maybe" is the right word. that's the problem.

[abuss368]

I have invested in Total Bond and Intermediate Tax Exempt for a long time and they have provided safety and income to the portfolio. I think with bonds any short or intermediate investment grade grade bond fund that is low cost and diversified will do just that.

[abuss368]

I get the debate with Total Bond including mortgage back securities. Total Bond also includes a large allocation to Treasuries.

The past few years Mr. Bogle discussed adding Investment Grade to Total Bond for additional yield because of the large allocation to Treasuries lowering yield at the time.

[abuss368]

How many folks add a higher yielding bond fund to their portfolio?

With bonds higher yield almost always means higher risk.

[hudson]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

VWIUX is down less. Maybe the ETF will eventually match?

"maybe" is the right word. that's the problem.

VTEB and VWIUX are not linked.
It’s VTEB and something else

[RonSwanson]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

VWIUX is down less. Maybe the ETF will eventually match?

"maybe" is the right word. that's the problem.

VTEB and VWIUX are not linked.
It’s VTEB and something else

Oops my bad, it is VTEAX. Still VTEAX is doing better than VTEB from what I can see on Vanguard's website.

[Kenkat]

My Treasury bond funds (long nominal, short TIPS, see sig) are doing what I expected them to do.

So I wouldn't say bond funds don't work in a crisis.

Certain kinds of bonds don't do well in a crisis, but that's true whether they're in bond funds or not.

Precisely.

I hope that this helps BHs to understand that more 'diversification' is not necessarily better (i.e. more bonds of various kinds does not necessarily help an investor). Total bond market is not the be-all-that-ends-all. Larry Swedroe and others, yours truly included, have been saying that for a long while.

As I have pondered more on this, I don’t necessarily disagree with your or watchnerd’s approach but I think most investors will fail at implementing it.

When times are good, investors will look at the yield of the treasury funds and think “those stink, look how much better this corporate fund looks”. It happened even with Total Bond - it lags all these “better” choices.

Or when stocks recover and we get a little hint of inflation, interest rates rise and long term bonds fall. Then many investors will be saying “GET OUT NOW!!! - what are these things, short term bonds are where it’s at now”.

You guys I actually believe will stick with what you are doing. Others I have far less confidence that they will.

You're basically saying that most investors will performance chase. If that's true of different kinds of bonds, it might also be true of stocks and bonds (i.e. people switching from bonds to stocks during the good times).

You're probably right. But I'm not sure that holding TBM is the right choice.

I like TBM because it has some of everything.

If conditions favor short term bonds, it has those.

If conditions favor long term bonds, it has those.

If conditions favor corporates, it has those.

If conditions favor treasury and government securities, it has those.

I do worry people will switch around based on the current winds. Before all this happened, very few people advocated treasuries or long term treasuries as core bond holds. Some who understand the interactions did, yes. But most did not. So if you are going to make a case for a hold and forget, all weather bond holding, I think TBM is it.

[HomerJ]

Vanguard Tax-Exempt Bond Fund (VTEB) is down 13% year to date.

AA rated (average), same as VBTLX, and shorter duration.

The title of this thread is correct.

VWIUX is down less. Maybe the ETF will eventually match?

"maybe" is the right word. that's the problem.

ETF bond funds apparently don't work in a crisis. VTEAX is only down 2.71% (including dividends). And you're ignoring dividends on the ETF I think.

[simplesimon]

It will only be a matter of time before we see threads asking about adding corporates after they do well.

[palanzo]

We've had a lot of these lately.

Total Bond and similar diversified intermediate term bond funds have done fine in equity bear markets. Nisiprius covered it nicely.

Vanguard Total Bond, since 1987, has only had negative returns in four calendar years, with the worst being -2.66%. The worst drawdown was 5.86%.

As of yesterday the drawdown is -5.76% so almost the worst.