Short or Intermediate-term bonds?

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50ismygoal
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Short or Intermediate-term bonds?

Post by 50ismygoal » Wed Apr 06, 2016 6:49 am

My IRA is exclusively bonds, split almost evenly between BSV (short term bond ETF) and BIV (intermediate term bond ETF.) I'm 49 so I can't touch the money for ten years, and probably won't touch it for longer than that.
The short-term portion thinking is that if inflation occurs or if the much talked about hike in interest rates happens, short term will help. But for simplicity's sake, part of me wants to just move everything to intermediate term.
Any input on keeping it split or just going with BIV would be appreciated.

livesoft
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Re: Short or Intermediate-term bonds?

Post by livesoft » Wed Apr 06, 2016 7:00 am

I'm trying to read through the lines on this one, but I can't.

My bonds* are a mix of Total Bond Index and Short-term corporate bond index. I market time the relationship between them and have almost all in Total Bond nowadays. When something like AGG or BND goes up by 0.5% in a single day, I sell some and buy equities. When it goes down by 0.5%, I sell some equities and buy some more bond fund shares. This does not happen very often.

*Plus some TIAA traditional annuity.
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50ismygoal
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Re: Short or Intermediate-term bonds?

Post by 50ismygoal » Wed Apr 06, 2016 7:20 am

Thanks, Livesoft. I always enjoy reading your take on bonds.

Quark
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Re: Short or Intermediate-term bonds?

Post by Quark » Wed Apr 06, 2016 7:25 am

Conventional wisdom would be to have longer bonds for a longer horizon.

The possibility of increased rates or inflation are rather well known and prices and yields should reflect those risks.

Absent unusual circumstances, for a longer term horizon a bond portfolio in the overall intermediate range seems fine.

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Re: Short or Intermediate-term bonds?

Post by Quark » Wed Apr 06, 2016 7:28 am

livesoft wrote:I'm trying to read through the lines on this one, but I can't.

My bonds* are a mix of Total Bond Index and Short-term corporate bond index. I market time the relationship between them and have almost all in Total Bond nowadays. When something like AGG or BND goes up by 0.5% in a single day, I sell some and buy equities. When it goes down by 0.5%, I sell some equities and buy some more bond fund shares. This does not happen very often.

*Plus some TIAA traditional annuity.

Why ST corporate rather than ST investment grade or another ST bond fund?

A big move (or RBD) strategy seems odd to me. If you're going to market time, why not have a yield trigger or a comparison of equity metrics (p/e or yield) to bond yield?

50ismygoal
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Re: Short or Intermediate-term bonds?

Post by 50ismygoal » Wed Apr 06, 2016 7:31 am

Thanks, Quark!

livesoft
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Re: Short or Intermediate-term bonds?

Post by livesoft » Wed Apr 06, 2016 7:33 am

OK, I sense some cognitive dissonance or desire to market time here. Let's use this thread to get this out in the open.

It is a fact that BIV has a YTD total return of 4.55%

Total Bond Index is up 3.5% over the same time period.

Everybody knows that intermediate-term bonds average less than 5% total return per year over the last 10 years.

Nobody thinks that BIV will get 4.55% every quarter in 2016 for a total return of over 18% for 2016.

One can conclude that BIV is not going to perform the same for the rest of the year.

Therefore, since most of the expected gain for 2016 of BIV has already occurred, why not sell it and do something else with the money?

Isn't that what you really wanted to know? At least I hope it is not the opposite: Expecting that BIV will continue to perform at this pace for the rest of the year, so one should buy more.

Further note: BIV went up over 2% in the past 30 days alone. Staid bond funds are not supposed to be this volatile.

BUT, ...

In 2015, Total Bond returned only 0.4% and BIV only 1.04% (VCSH was up 1.26% woo-hoo!), so the intermediate bond funds have/are reverting to their mean performance. That is, the gains YTD are really being measured from a drop in 2015 due to interest rates going up.
Last edited by livesoft on Wed Apr 06, 2016 7:44 am, edited 1 time in total.
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abuss368
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Re: Short or Intermediate-term bonds?

Post by abuss368 » Wed Apr 06, 2016 7:38 am

50ismygoal wrote:My IRA is exclusively bonds, split almost evenly between BSV (short term bond ETF) and BIV (intermediate term bond ETF.) I'm 49 so I can't touch the money for ten years, and probably won't touch it for longer than that.
The short-term portion thinking is that if inflation occurs or if the much talked about hike in interest rates happens, short term will help. But for simplicity's sake, part of me wants to just move everything to intermediate term.
Any input on keeping it split or just going with BIV would be appreciated.


Hi 50ismygoal,

In my opinion any low cost and diversified short or intermediate term bond fund will provide safety and income to a portfolio.

That said, we have invested in Total Bond Index for many years and it does the job. We are very happy with the investment and plan to stay the course.

Best.
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Re: Short or Intermediate-term bonds?

Post by Quark » Wed Apr 06, 2016 7:45 am

livesoft wrote:... At least I hope it is not the opposite: Expecting that BIV will continue to perform at this pace for the rest of the year, so one should buy more.

Further note: BIV went up over 2% in the past 30 days alone. Staid bond funds are not supposed to be this volatile.

A return above the yield suggests a price movement and bond prices move due to changes in the relevant interest rates. In other words, if YTD total return is higher than the YTD yield, it's because the price has increased due to a drop in interest rates (ignoring changes in credit quality). A lower interest rates foreshadows a lower return, absent a further drop in rates. For long term bond investors, this higher total return is therefore a bad thing.

Yield (technically yield to maturity) has been the best predictor of bond returns (just as earnings yield has been the best predictor of stock returns). Predicting anything else requires predicting interest rates, which is a fool's errand.

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Re: Short or Intermediate-term bonds?

Post by livesoft » Wed Apr 06, 2016 7:50 am

Quark wrote:Predicting anything else requires predicting interest rates, which is a fool's errand.

That is true, but it is also true that

Predicting anything requires predicting the behavior and psychology of market participants.

50ismygoal is a market participant. I am a market participant. You are a market participant.
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50ismygoal
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Re: Short or Intermediate-term bonds?

Post by 50ismygoal » Wed Apr 06, 2016 9:14 am

Livesoft, could you clarify "why not sell it and do something else with the money?" This is my bond/safe portion of my 50/50 portfolio.

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Re: Short or Intermediate-term bonds?

Post by livesoft » Wed Apr 06, 2016 9:21 am

Quark wrote:Why ST corporate rather than ST investment grade or another ST bond fund?

Easy answer:

ST Investment grade is not an ETF and admiral shares have a high minimum. VCSH is a no-commission ETF at my brokers. Other ST bond funds do not have the risk of VCSH and I want to trade interest-rate risk for credit risk, so I want the riskiest ST bond fund.

I like the intra-day price swings of an ETF, too. Have you looked at what happens intraday on FOMC meetings? Sometimes a large price change comes and goes, but the charts and mutual fund share owners will never see it.

Also, if I am going to buy equities on RBDs, then I need to sell a bond fund to get the cash to do so, bond ETFs are easy to sell intraday and are usually up on an RBD for equities.
Last edited by livesoft on Wed Apr 06, 2016 9:25 am, edited 1 time in total.
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Re: Short or Intermediate-term bonds?

Post by midareff » Wed Apr 06, 2016 9:22 am

I seem to recall reading something from Larry Swedroe indicating that 20-25 bps of yield per year of duration was what they looked at. Hope I'm remembering correctly.

livesoft
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Re: Short or Intermediate-term bonds?

Post by livesoft » Wed Apr 06, 2016 9:22 am

50ismygoal wrote:Livesoft, could you clarify "why not sell it and do something else with the money?" This is my bond/safe portion of my 50/50 portfolio.

Sure, something else could simply be "buy a CD" or I-bonds or TIAA traditional annuity or ....
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Re: Short or Intermediate-term bonds?

Post by ruralavalon » Wed Apr 06, 2016 9:33 am

50ismygoal wrote:My IRA is exclusively bonds, split almost evenly between BSV (short term bond ETF) and BIV (intermediate term bond ETF.) I'm 49 so I can't touch the money for ten years, and probably won't touch it for longer than that.
The short-term portion thinking is that if inflation occurs or if the much talked about hike in interest rates happens, short term will help. But for simplicity's sake, part of me wants to just move everything to intermediate term.
Any input on keeping it split or just going with BIV would be appreciated.

We use only intermediate-term bond funds. I don't try to predict inflation rates or the timing of interest rate hikes.
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magneto
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Re: Short or Intermediate-term bonds?

Post by magneto » Wed Apr 06, 2016 10:36 am

Thanks 'livesoft' for that insight.

Have always regarded stocks as the main driver for the profits of the porfolio.
Bonds and Cash as a temporary resting place when stock valuations higher, which incurs stock greater downside risk and lower expected returns.

The one thing not wanted from bonds is for them to be down when stocks are down (I.E. hoped for -ve correlation does not show up)!
Therefore we tend to lowest possible volatilility, rather than income, leading us to short bonds wherever possible.
Cash is in this scenario particularly attractive as the lowest volatility asset, but unfortunately eroded by inflation.

As less comfortable with bonds than with stocks, will be watching this thread with great interest!

Thanks
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patrick013
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Re: Short or Intermediate-term bonds?

Post by patrick013 » Wed Apr 06, 2016 11:30 am

I don't think the market has fully priced in a rate increase. Why ?
The information is just technically "imperfect". It's all guess
work whether a rate increase will happen or not. Plus a flight
to quality is occurring, robust bond sales confirm, a seller's market
at the seller's price. That trumps alot of other market forces
which should be somewhat bearish concerning bond prices.

Reading this morning where the futures market has priced in a 30%
chance of one rate increase this year, leaving 2 increases alone.

My final decision, 30% Short Term Corp Bond fund, 70% Interm Bond
Index fund for bond allocation. Probably a good AA for many years.

I was never one to pass up a cap gain of several per cent on bonds either.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Short or Intermediate-term bonds?

Post by Quark » Wed Apr 06, 2016 12:24 pm

livesoft wrote:I like the intra-day price swings of an ETF, too. Have you looked at what happens intraday on FOMC meetings? Sometimes a large price change comes and goes, but the charts and mutual fund share owners will never see it.

The press release almost always causes a big swing (which often reverses later). It's entertaining to listen to the press conference and watch real time market quotes react to the Fed Chair's answers.

FWIW, I'm a mutual fund type who almost never trades. No ETFs for me.

50ismygoal
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Re: Short or Intermediate-term bonds?

Post by 50ismygoal » Thu Apr 07, 2016 1:57 pm

Livesoft, for this portion of my portfolio (IRA, about 25% of total portfolio), I'd like to either split it between short-term and intermediate-term bonds, or go 100% intermediate-term.) I can't touch the money for at least 11 years, and I probably won't start withdrawing until more than 11 years.

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Re: Short or Intermediate-term bonds?

Post by livesoft » Thu Apr 07, 2016 2:12 pm

That's fine, but if you didn't want to do any market timing, then you should just go 100% intermediate-term bonds and rock-n-roll.
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50ismygoal
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Re: Short or Intermediate-term bonds?

Post by 50ismygoal » Thu Apr 07, 2016 2:18 pm

And that's what I shall do, thanks!

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Re: Short or Intermediate-term bonds?

Post by abuss368 » Thu Apr 07, 2016 2:26 pm

Vanguard has noted in a lot of their research material that intermediate term bond funds are the "sweet spot".
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