Shifting from Intermediate to Short-term Bonds

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reisner
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Shifting from Intermediate to Short-term Bonds

Post by reisner » Thu Jul 12, 2018 1:44 pm

I am weighted 60/40, with the bonds portion mostly in Intermediate Index and Investment Grade, with a small holding in Short Term. About a third of the bonds make up my Roth account--traditionally a good place for bonds, but not these days. In the last couple of years Short Term has not lost as much as Intermediate. I am thinking of shifting a quarter or a third of the Intermediate in my taxable account to Short Term. I could harvest a modest loss and perhaps be safer in these precarious times, though I would lose some dividends. (I'm 72 and have a sufficient pension and SS and a paid-off house in coastal California.)

Any thoughts on the wisdom of such a shift?

shariron
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Re: Shifting from Intermediate to Short-term Bonds

Post by shariron » Thu Jul 12, 2018 2:51 pm

You'll be giving up a small amount of yield for a little less risk. In 60/40, the difference may be barely noticeable. Small enough change that it probably matters very little if you do it or not. The TLH may be more of a factor.

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Raybo
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Re: Shifting from Intermediate to Short-term Bonds

Post by Raybo » Thu Jul 12, 2018 2:56 pm

Losses on bonds are a near-term phenomena. That is, when interest rates rise, there is an immediate fall in a bond's value and a fund's NAV. But, the next day, the bond fund gets more money in, either via interest payments or new investment, and it buys more bonds in the marketplace at the new price and interest rate. Over time, that reinvestment raises the interest rate paid by the fund and the NAV rises accordingly. So, there is a feedback mechanism for when rates rise (or fall).

Shorter term bonds, which pay lower interest anyway, lose less when interest rates rise than longer term bonds. Obviously, you already know this.

Moving money from intermediate to short-term will decrease your interest payments but also have a lower volatility. You appear to say that you have enough money coming in so that the investments we are talking about aren't critical to your survival. In that case, what is the purpose of the money you have in bonds? Is it "dry powder?" Is it for heirs? Is it for long-term care self-insurance? Or something else?

In truth, money in bonds is relatively "safe" money, assuming little or no issuer risk is being taken in bond selection. Putting the money in treasury bonds removes issuer risk to 0.

If you are concerned about losing money in an interest rising environment, move money to a shorter duration. If you hope to use the bond money in the longer future, keep it in intermediate, as you will get more interest and the time frame is long enough for the feedback to work in your favor.

If you don't like the idea of "losing" money, buy CDs or use high-interest bank accounts.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

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vineviz
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Re: Shifting from Intermediate to Short-term Bonds

Post by vineviz » Thu Jul 12, 2018 3:15 pm

The best rule of thumb with bond funds is to hold the longest duration bonds you can as long as that duration is less than your investment horizon.

So short term bonds are okay for money you will need in the next five years. Any other bonds who be intermediate or long term.

venkman
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Re: Shifting from Intermediate to Short-term Bonds

Post by venkman » Thu Jul 12, 2018 10:19 pm

If a 1-2% loss over 6 months is enough to make you consider selling off those assets, then your 60% allocation to stocks is FAR too high...

Dude2
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Re: Shifting from Intermediate to Short-term Bonds

Post by Dude2 » Thu Jul 12, 2018 10:54 pm

Rising interest rates can be good for bonds (especially if rates are rising and inflation is not), but you may have to be patient to see this effect realized. Maybe that patience is better suited to a younger person. :happy

By all means move toward a shorter term index fund. People have been moving toward shorter term bond funds for years because the writing has been on the wall for years about interest rate rises. There was nowhere to go but up.

Probably you want to have the money you won't need for at least 3 years in the short term fund, and money you won't need for 6 years in the intermediate term fund. You could move a percentage (such as a tenth) annually from intermediate to short.
Last edited by Dude2 on Thu Jul 12, 2018 11:23 pm, edited 2 times in total.

aristotelian
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Re: Shifting from Intermediate to Short-term Bonds

Post by aristotelian » Thu Jul 12, 2018 11:12 pm

I am weighting ST right now while the yield curve is flat.

Dead Man Walking
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Re: Shifting from Intermediate to Short-term Bonds

Post by Dead Man Walking » Fri Jul 13, 2018 1:34 am

I've used short-term bonds in my bond allocation because I don't have to take risk. Bonds are for safety, and I choose to take risk on the equity allocation of my portfolio.

DMW

magneto
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Re: Shifting from Intermediate to Short-term Bonds

Post by magneto » Fri Jul 13, 2018 5:05 am

Depends on the purpose of the Bonds.
If purely defensive, then for Bonds, ST IG is the logical place to be at all times.
If speculative, then LT are of interest, but remember that -ve correlation with Stocks is not a given.
IT IG neither fish nor fowl ? Leads some investors to 'Barbell'.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Kalo
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Re: Shifting from Intermediate to Short-term Bonds

Post by Kalo » Sat Jul 14, 2018 5:43 pm

What's IT IG?

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

sambb
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Re: Shifting from Intermediate to Short-term Bonds

Post by sambb » Sat Jul 14, 2018 5:58 pm

I would keep intermediate term. Bonds are off their highs.

anil686
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Re: Shifting from Intermediate to Short-term Bonds

Post by anil686 » Sun Jul 15, 2018 3:55 am

Kalo wrote:
Sat Jul 14, 2018 5:43 pm
What's IT IG?

Kalo
Intermediate term investment grade...

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