Some basic questions about bond index funds

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ibhhvc
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Some basic questions about bond index funds

Post by ibhhvc » Sun Apr 15, 2018 11:15 am

I like the Buffet-ism to “never invest in a business you can’t understand.” But if I'm honest, I still don't understand the mechanisms of a bond index fund even though I have a lot invested in them. I'd appreciate some help understanding these basics:
  1. Stock index funds are market cap weighted. Is there a similar mechanism for a bond index fund?
  2. Are bonds in a bond index fund held until maturity? If not, who makes the decision when to buy and sell?
  3. Is the share price of a bond index fund determined by the market, by the fund managers, or by some other mechanism? Let's say interest rates have remained steady for a long time. I do some research into a bond index fund and find that its average coupon is 2% and its yield to maturity is also 2%. Then suddenly interest rates go up. The average coupon for new bonds is now 3%. I would expect the following to occur:
    1. The share price of the bond index fund drops.
    2. The yield to maturity of the bond index fund immediately increases to 3%.
    3. The average coupon of the bond index fund slowly increases over time as old bonds are replaced by new, higher interest rate bonds.
    4. Eventually, the average coupon and the yield to maturity converge at 3% (assuming interest rates don't go up again).
    Is this correct? If so, what drives the price of the fund down to bring its yield in line with new interest rates? Does the market just "know" what the new price should be?
  4. To add to that previous question, does speculation affect the price of a bond index fund? With stocks, Company A might be highly profitable and might pay a large dividend but its stock price might still be low because investors expect it to perform worse in the future. Does the price of a bond fund reflect expectations of future increases in interest rates? Or does it merely reflect interest rate changes that have already occurred? In other words, is the price per share of the bond fund directly tied to interest rates or is it also set by the "mood" of the market?
Thanks in advance!

alex_686
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Re: Some basic questions about bond index funds

Post by alex_686 » Sun Apr 15, 2018 11:27 am

1. Yes, it is by market weight as well. For example, when the Fed implemented Quantitative Easing it dumped lots of long treasuries on the market. Total Bond indexes started to skew towards long government bonds.

2. Yes and No. I assume you are not talking about a Intermediate Bond Index which holds bonds between 4 to 7 years. Once a bond has less than 4 years to maturity it gets kicked out of the index. There is a problem with bond indexes in that they only track the liquid market, which is about 10%. If a bond has not been traded for a week who knows what price it is? In that case the index provider kicks out that bond and replaces it with a comparable bond.

For more information on #1 and #2 go to the index provider's web page. They will have a thick white paper on their methodology.

3. The market determines the price of the bond and thus the fund's NAV. Fund managers don't set the price. The process is a bit more complex than what you outlined by you have the broad strokes. Bond pricing theory is well developed and highly mathematical.

4. Prices for both stocks and bonds are forward looking. If a company might declare bankruptcy its price falls. Expected future interest rate changes are priced in. Here is a link to the Chicago Board of Trade and the expected moves and impact of the Fed.

http://www.cmegroup.com/trading/interes ... -fomc.html

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dm200
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Re: Some basic questions about bond index funds

Post by dm200 » Sun Apr 15, 2018 11:32 am

Be aware that, unlike stock index funds, bond index funds almost certainly will have very significant turnover - as bonds are sold and bought to maintain tracking the index.

ibhhvc
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Re: Some basic questions about bond index funds

Post by ibhhvc » Sun Apr 15, 2018 11:38 am

alex_686 wrote:
Sun Apr 15, 2018 11:27 am
The market determines the price of the bond and thus the fund's NAV. Fund managers don't set the price. The process is a bit more complex than what you outlined by you have the broad strokes. Bond pricing theory is well developed and highly mathematical.
Thank you, that's extremely helpful.
dm200 wrote:
Sun Apr 15, 2018 11:32 am
Be aware that, unlike stock index funds, bond index funds almost certainly will have very significant turnover - as bonds are sold and bought to maintain tracking the index.
It's hard to see how this is different than an actively-managed fund. Doesn't this require constant action, and judgement calls, by the fund managers?

anil686
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Re: Some basic questions about bond index funds

Post by anil686 » Sun Apr 15, 2018 11:43 am

ibhhvc wrote:
Sun Apr 15, 2018 11:38 am


It's hard to see how this is different than an actively-managed fund. Doesn't this require constant action, and judgement calls, by the fund managers?
Except with actively managed bond funds - they seek to outpace the index and thus may use lower quality bonds (with higher yields - more risk) or longer duration (increased interest rate risk) in order to justify its much higher expense ratio (the outperformance will likely be sapped by the increased fees) - unless the risks turn negative and then the actively managed bond fund falls short of the index - JMO though...

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Re: Some basic questions about bond index funds

Post by livesoft » Sun Apr 15, 2018 11:46 am

ibhhvc wrote:
Sun Apr 15, 2018 11:38 am
It's hard to see how this is different than an actively-managed fund. Doesn't this require constant action, and judgement calls, by the fund managers?
My impression is that a robot could do it because most of the action is NOT a judgement call since I think it mostly has to do with the duration of the bonds in the index. For instance, the short-term corporate bond index fund is not going to have long-term corporate bonds when they are issued, but will have to buy those bonds after a few years when they get closer to their maturity date. Also, some of the short-term bonds in the fund will age and have too short a duration, get called, or even mature.

I also wanted to add a note about your #4 and speculation. The answer is definitely Yes! Human beings are setting the prices of the bonds in the bond index funds. One can see the volatility and speculation if one is watching the prices of bond ETFs intraday around big news announcements, such as the FOMC press conferences.
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Re: Some basic questions about bond index funds

Post by jalbert » Sun Apr 15, 2018 12:16 pm

1. Yes, it is by market weight as well. For example, when the Fed implemented Quantitative Easing it dumped lots of long treasuries on the market. Total Bond indexes started to skew towards long government bonds.
Quantitative easing, as the term is used by the financial media, involved printing money electronically and using it to buy treasuries longer than the t-bills the Fed traditionally holds on its balance sheet, and also to buy mortgages. Why would that have an effect on the makeup of the total bond index?

Because of job losses during the credit crisis, income tax receipts were down, and the govt passed an infrastructure spending bill to stimulate the economy. I think these combined to require issuing new debt/bonds at a faster rate for a some years.
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longinvest
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Re: Some basic questions about bond index funds

Post by longinvest » Sun Apr 15, 2018 12:58 pm

Ibhhvc,
ibhhvc wrote:
Sun Apr 15, 2018 11:15 am
1. Stock index funds are market cap weighted. Is there a similar mechanism for a bond index fund?
Yes, there are cap-weighted bond index funds.
ibhhvc wrote:
Sun Apr 15, 2018 11:15 am
2. Are bonds in a bond index fund held until maturity? If not, who makes the decision when to buy and sell?
What we usually call "bonds" should more accurately be called "bonds and notes", but almost nobody does that. "Bonds" are securities with a maturity higher than 10 years. "Notes" are securities of maturity higher than 1 year and at most 10 years. "Bills" are securities of 1-year or less. Bills are usually called "cash". The key thing, here, is that what we usually call a bond becomes cash as soon as its maturity gets down to one year.

In a total-market* bond index fund, bonds are held until they become cash, in other words, they're sold when a single year is left until maturity.

* Total, here, means all bond maturities in the market. It doesn't include all types of bond. It excludes inflation-indexed bonds (TIPS) and floating-rate bonds, for example.

There will be some transactions due to new bond being issued, in the market, or bonds gaining or losing an "investment-grade" status. But, generally, the turnover in a total-market bond index fund should be mainly caused by the selling of bonds one year prior to maturity and reinvestment of the capital into newly issued bonds hitting the secondary market.
ibhhvc wrote:
Sun Apr 15, 2018 11:15 am
3. Is the share price of a bond index fund determined by the market, by the fund managers, or by some other mechanism?
Each bond, in a bond index fund, has a current market price. The unit price of a bond index fund is determined by the market price of the bonds it contains, exactly like the unit price of a stock index fund is determined by the market price of the stocks it contains.

The price of a single bond is set by the market (e.g. the price at which a buyer and a seller agree to transact), exactly like the price of a single stock.

Price and yield** are just a mathematical mirror of one another. Some people say that the price depends on the yield. But, it would probably be more accurate to say that the yield depends on the price, because, in the end, it's the transaction price of a bond that determines its initial yield for the buyer.

** Yield, when unqualified, means Yield to maturity. It is what I mean by yield in this paragraph.
ibhhvc wrote:
Sun Apr 15, 2018 11:15 am
4. Does the price of a bond fund reflect expectations of future increases in interest rates? Or does it merely reflect interest rate changes that have already occurred?
Because a bond is a contract to pay specific payments on specific dates, there is more certainty about the future payments of a bond than those of a stock. As a consequence, the opportunity for wild speculation is reduced. But, yes, many things can affect the pricing of a bond. Here's an example.

An insurance company might need to buy a set of securities to cover a big liability in exactly 17.5 years. To do so, it might seek to buy bonds which mature at that point or a few weeks before. This can increase the demand for that specific 17.5 year maturity, causing an increase in price (and therefore a reduction in yields) for that exact maturity.

All kind of "weird" things, easily explained by "supply and demand" can happen to the pricing of bonds (and, therefore, to yields).

The fluctuation in value of a bond is mostly limited by its duration (e.g. the weighted-average maturity of all its payments, including coupons and principal). A bond maturing in 2 years will fluctuate very little in price, because we know exactly how much money will be paid back in 2 years. Would someone pay $200 for a bond that matures at $100 in 2 years? No. Would a seller sell this same bond for $50? No. There's just no place for much speculation with short-term bonds. The price of a 30-year nominal bond, on the other hand, can be quite volatile.

Luckily, the weight of long-term bonds in a total-market bond index fund is relatively low, and the weight of short-term bonds is high. The average duration of the U.S. nominal bond market is approximately 6 years. So, the unit price of a total-market bond index fund won't fluctuate much.
Last edited by longinvest on Mon Apr 16, 2018 4:38 pm, edited 16 times in total.
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SeeMoe
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Re: Some basic questions about bond index funds

Post by SeeMoe » Sun Apr 15, 2018 1:00 pm

I don’t know which comes first, The mood of the bond market or the pricing for bond index funds. In that regard we have both the total bond index fund(0.05% ER) and managed intermediate investment grade bonds(0.10% ER) as well as some high yield bonds (0.12% ER)for diversity.. so far, so good for the bond folios ..

SeeMoe.. :wink:
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Re: Some basic questions about bond index funds

Post by alex_686 » Sun Apr 15, 2018 3:37 pm

jalbert wrote:
Sun Apr 15, 2018 12:16 pm
Quantitative easing, as the term is used by the financial media, involved printing money electronically and using it to buy treasuries longer than the t-bills the Fed traditionally holds on its balance sheet, and also to buy mortgages. Why would that have an effect on the makeup of the total bond index?

Because of job losses during the credit crisis, income tax receipts were down, and the govt passed an infrastructure spending bill to stimulate the economy. I think these combined to require issuing new debt/bonds at a faster rate for a some years.
That is not the way that I remember it. Congress was very slow to act and had minimal impact.

IIRC, holdings in reserve accounts are not counted as part of free float while holdings in trading accounts are counted. With QE, bonds got shifted from the banks reserve accounts to the Fed's trading account. So while the number of government issued was fixed the weight in the index increased.

If not exactly on point, you can go back and look at the index between 2006 and 2010. The increase in government bonds can only be partially be explained by new issues.

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Re: Some basic questions about bond index funds

Post by jalbert » Sun Apr 15, 2018 5:02 pm

That is not the way that I remember it. Congress was very slow to act and had minimal impact.
I suppose military intervention in the Middle East ($1 trillion in Syria alone) contributed more to the national debt than a $780B infrastructure bill that passed in congress in 2009. The effect of the Fed on free float is interesting. What percentage of treasuries bought by the Fed would have been in reserve accounts?
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Re: Some basic questions about bond index funds

Post by ibhhvc » Mon Apr 16, 2018 2:37 pm

longinvest wrote:
Sun Apr 15, 2018 12:58 pm
What we usually call "bonds" should more accurately be called "bonds and notes", but almost nobody does that. "Bonds" are securities with a maturity higher than 10 years. "Notes" are securities of maturity higher than 1 year and at most 10 years. "Bills" are securities of 1-year or less. Bills are usually called "cash". The key thing, here, is that what we usually call a bond becomes cash as soon as its maturity gets down to one year.

In a total-market* bond index fund, bonds are held until they become cash, in other words, they're sold when a single year is left until maturity.
Thank you, this was extremely informative.

What I'm still not clear on is, how does a note "become" a bond and then "become" cash?

If I bought a EE series treasury note in 1990, it would have a maturity of 30 years and yield something like 4%. If I sold that note today, it would have 2 years to maturity but it would still yield the same 4%. But when I look at long-term bond funds vs. short-term bond funds, the former hold bonds with higher average yields and higher average coupon rates, while that latter holds bonds with lower yields.

If the short-term bond fund is actually just holding long-term bonds that are closer to maturity, why are the short-term bond fund yields and coupon rates lower? I (incorrectly) thought the short-term bond fund held bonds that were originally issued as short-term bonds...

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Re: Some basic questions about bond index funds

Post by longinvest » Mon Apr 16, 2018 2:52 pm

Ibhhvc,
ibhhvc wrote:
Mon Apr 16, 2018 2:37 pm
longinvest wrote:
Sun Apr 15, 2018 12:58 pm
What we usually call "bonds" should more accurately be called "bonds and notes", but almost nobody does that. "Bonds" are securities with a maturity higher than 10 years. "Notes" are securities of maturity higher than 1 year and at most 10 years. "Bills" are securities of 1-year or less. Bills are usually called "cash". The key thing, here, is that what we usually call a bond becomes cash as soon as its maturity gets down to one year.

In a total-market* bond index fund, bonds are held until they become cash, in other words, they're sold when a single year is left until maturity.
Thank you, this was extremely informative.

What I'm still not clear on is, how does a note "become" a bond and then "become" cash?
I'll answer using an analogy. A human start as a "Baby", then becomes a "Child", then a "Teen", then an "Adult".

NOTE: I modified the post in red, below, to avoid a semantics debate.

A 30-year bond works similarly, but in reverse. Such security starts as a "long-term bond", then becomes an "intermediate-term bond", then a "short-term bond", then "cash". There's nothing special about it; it's always the same debt security. We just give it a different name depending on its remaining maturity. In other words, a bond becomes cash when its maturity gets down to one year.
ibhhvc wrote:
Mon Apr 16, 2018 2:37 pm
If the short-term bond fund is actually just holding long-term bonds that are closer to maturity, why are the short-term bond fund yields and coupon rates lower? I (incorrectly) thought the short-term bond fund held bonds that were originally issued as short-term bonds...
A short-term bond index fund holds bonds which mature in 1 to 5 years, according to market weighting. Some of these bonds were issued as long-term bonds, but others were issued as intermediate-term or short-term bonds. Looking at the distribution by effective maturity of Vanguard's Total Bond Market Index Fund (VBMFX) can give us an idea of how the market is currently structured:

Code: Select all

Under 1 Year	0.5%
1 - 3 Years	23.5%
3 - 5 Years	19.1%
5 - 10 Years	39.6%
10 - 20 Years	3.9%
20 - 30 Years	12.8%
Over 30 Years	0.6%
There are far more short-term bonds (maturity 1 to 5 years) than long-tem ones (maturity 10 to 30 years). This means that many short-term and intermediate-term bonds are issued. It follows that a short-term bond fund will contain many lower-coupon bonds because they were issued with intermediate or short maturities.
Last edited by longinvest on Mon Apr 16, 2018 4:57 pm, edited 12 times in total.
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Re: Some basic questions about bond index funds

Post by lack_ey » Mon Apr 16, 2018 3:01 pm

longinvest wrote:
Mon Apr 16, 2018 2:52 pm
I'll answer using an analogy. A human start as a "Baby", then becomes a "Child", then a "Teen", then an "Adult".

A bond works similarly, but in reverse. Such security starts as a "Bond", then becomes a "Note", then a "Bill". There's nothing special about it; it's always the same security. We just give it a different name depending on its remaining maturity. In other words, a bond becomes cash when its maturity gets down to one year.

To avoid ambiguity, I've used quotes and a blue color for the "formal" names of the security (Bond/Note/Bill) that very few people use. I've bolded the usual names of the security (bond/cash).
Wait, is that actually right?

I thought bond/note/bill designations were really only for US Treasury securities and not the terminology necessarily used elsewhere.

Also, I thought that the names were static and did not change. i.e. a 30-year Treasury bond is still called a bond when 29.5 years after being issued, 6 months from maturity. Those are the names I see on the secondary market when looking at Treasury securities. Look up for example CUSIP 912810EB0.

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Re: Some basic questions about bond index funds

Post by longinvest » Mon Apr 16, 2018 3:04 pm

lack_ey wrote:
Mon Apr 16, 2018 3:01 pm
Wait, is that actually right?

I thought bond/note/bill designations were really only for US Treasury securities and not the terminology necessarily used elsewhere.

Also, I thought that the names were static and did not change. i.e. a 30-year Treasury bond is still called a bond when 29.5 years after being issued, 6 months from maturity. Those are the names I see on the secondary market when looking at Treasury securities. Look up for example CUSIP 912810EB0.
ADDED: OK, I should have used the names "long-term bond", "intermediate-term bond", "short-term bond", and "cash". I've modified my post accordingly.

Let me explain:


A long-term bond fund won't keep bonds after their maturity drops below 10 years. An intermediate-term bond fund will, in part, buy bonds which were issued with a 30-year maturity but which will mature in 10 years or less. (It will also buy bonds that were issued with shorter maturities, of course, as long as the remaining maturity is within the target of the fund).

Here's the distribution by effective maturity of Vanguard's Long-Term Bond Index Fund (VBLTX):

Code: Select all

Under 1 Year	0.0%
1 - 3 Years	0.1%
3 - 5 Years	0.0%
5 - 10 Years	1.1%
10 - 20 Years	22.2%
20 - 30 Years	73.2%
Over 30 Years	3.4%
It has 1.2% of bonds with maturities below 10 years. It's not because the U.S. Treasury and U.S. corporation didn't issue 30-year bonds between 1988 and 1998! It's simply because the fund doesn't consider them as "long-term bonds" anymore.
Last edited by longinvest on Mon Apr 16, 2018 4:52 pm, edited 5 times in total.
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alex_686
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Re: Some basic questions about bond index funds

Post by alex_686 » Mon Apr 16, 2018 3:13 pm

Bill / Note / Bond are for Treasuries. Corporate obligations are Commercial Paper (short term) and Bonds.

Once a bond always a bond. A 30 year old bond with a day left to maturity is still a bond. It says so right there in its name. Check the annual report SOI of your choice.

Lastly, a newly issued 1 year treasury and a 29 year old 30 year treasury will have the same yield. They may not have the same coupon. It is the "No Arbitrage Principe". If they did not have the same yield I could buy one and sell the other and get free money. Bonds will sell in the secondary market as a "discount bond" or "premium bond" so the yields match.

The definition of cash varies depending on usage. Usually anything that is liquid, loss of principle is low, and has a maturity of less than a year.

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Re: Some basic questions about bond index funds

Post by Taylor Larimore » Mon Apr 16, 2018 3:18 pm

Bogleheads:

Having been involved for many years in public agencies that issue bonds, I can tell you: "The more I know about bonds the more I know how little I know.

Example:

* I was a Director for the Dade County (Miami) Housing Authority which issues municipal bonds. . Directors quickly learned that a regular bond expert was not enough. We had to hire a "Housing Bond Specialist." Listening to him was like listening to another language.

* Very few bond holders know that a bond issuance requires an Indenture that can often run 50 pages or more of legalize spelling out the rights and obligations of the issuer and bond buyer. Very few bond owners have read their bond Indentures.

In my opinion, bonds are much more difficult to understand than stocks (which is difficult enough).

The solution: Stick to any diversified, good quality, low-cost, short- or intermediate-term bond fund, and you will do just fine.

Best wishes.
Taylor
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Re: Some basic questions about bond index funds

Post by longinvest » Mon Apr 16, 2018 3:21 pm

alex_686 wrote:
Mon Apr 16, 2018 3:13 pm
Bill / Note / Bond are for Treasuries. Corporate obligations are Commercial Paper (short term) and Bonds.

Once a bond always a bond. A 30 year old bond with a day left to maturity is still a bond. It says so right there in its name. Check the annual report SOI of your choice.

Lastly, a newly issued 1 year treasury and a 29 year old 30 year treasury will have the same yield. They may not have the same coupon. It is the "No Arbitrage Principe". If they did not have the same yield I could buy one and sell the other and get free money. Bonds will sell in the secondary market as a "discount bond" or "premium bond" so the yields match.

The definition of cash varies depending on usage. Usually anything that is liquid, loss of principle is low, and has a maturity of less than a year.
OK. I was trying to help a Bogleheads member understand why funds drop bonds when they reach a state when they don't qualify as "bond" for including into a "bond fund", and why this wasn't because of an "active" decision. For practical purpose, debt securities with a remaining maturity above 1 year are usually called "bonds" and those with a shorter maturity are usually called "cash". The actual real name, written on the security contract, doesn't change and it isn't necessarily "Bond", "Note", or "Bill". A debt security can have various formal names.

Added: I fixed my previous post to avoid a semantics debate.
Last edited by longinvest on Mon Apr 16, 2018 4:27 pm, edited 2 times in total.
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Re: Some basic questions about bond index funds

Post by longinvest » Mon Apr 16, 2018 3:56 pm

Taylor Larimore wrote:
Mon Apr 16, 2018 3:18 pm
Bogleheads:

Having been involved for many years in public agencies that issue bonds, I can tell you: "The more I know about bonds the more I know how little I know.

Example:

* I was a Director for the Dade County (Miami) Housing Authority which issues municipal bonds. . Directors quickly learned that a regular bond expert was not enough. We had to hire a "Housing Bond Specialist." Listening to him was like listening to another language.

* Very few bond holders know that a bond issuance requires an Indenture that can often run 50 pages or more of legalize spelling out the rights and obligations of the issuer and bond buyer. Very few bond owners have read their bond Indentures.

In my opinion, bonds are much more difficult to understand than stocks (which is difficult enough).

The solution: Stick to any diversified, good quality, low-cost, short- or intermediate-term bond fund, and you will do just fine.

Best wishes.
Taylor
Thank you, Taylor.
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Re: Some basic questions about bond index funds

Post by ibhhvc » Mon Apr 16, 2018 5:20 pm

--- Duplicate post removed ---
Last edited by ibhhvc on Mon Apr 16, 2018 5:24 pm, edited 1 time in total.

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Re: Some basic questions about bond index funds

Post by ibhhvc » Mon Apr 16, 2018 5:23 pm

longinvest wrote:
Mon Apr 16, 2018 3:21 pm
OK. I was trying to help a Bogleheads member understand why funds drop bonds when they reach a state when they don't qualify as "bond" for including into a "bond fund", and why this wasn't because of an "active" decision. For practical purpose, debt securities with a remaining maturity above 1 year are usually called "bonds" and those with a shorter maturity are usually called "cash". The actual real name, written on the security contract, doesn't change and it isn't necessarily "Bond", "Note", or "Bill". A debt security can have various formal names.
Yes, that was very helpful. It sounds like the fund managers aren't making judgement calls to buy and sell bonds as they mature, they just buy/sell them when they reach/leave a maturity range that fits the bond index.

Taylor Larimore wrote:
Mon Apr 16, 2018 3:18 pm
Bogleheads:

Having been involved for many years in public agencies that issue bonds, I can tell you: "The more I know about bonds the more I know how little I know.

Example:

* I was a Director for the Dade County (Miami) Housing Authority which issues municipal bonds. . Directors quickly learned that a regular bond expert was not enough. We had to hire a "Housing Bond Specialist." Listening to him was like listening to another language.

* Very few bond holders know that a bond issuance requires an Indenture that can often run 50 pages or more of legalize spelling out the rights and obligations of the issuer and bond buyer. Very few bond owners have read their bond Indentures.

In my opinion, bonds are much more difficult to understand than stocks (which is difficult enough).

The solution: Stick to any diversified, good quality, low-cost, short- or intermediate-term bond fund, and you will do just fine.

Best wishes.
Taylor
Thanks Taylor. So basically you're saying: no one understands bonds (let alone bond funds) but it's still a good idea to invest in them anyway.

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Re: Some basic questions about bond index funds

Post by dbr » Mon Apr 16, 2018 5:35 pm

ibhhvc wrote:
Mon Apr 16, 2018 5:23 pm

Thanks Taylor. So basically you're saying: no one understands bonds (let alone bond funds) but it's still a good idea to invest in them anyway.
Yes, Boglehead advice is to never invest in anything you don't understand except Vanguard low cost diversified mutual funds.

That is not a sarcastic comment but rather testimony to the fact that consistency is not the be-all and end-all of practical behavior.

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Do we need to know everything about our investments?

Post by Taylor Larimore » Wed Apr 18, 2018 7:29 am

Thanks Taylor. So basically you're saying: no one understands bonds (let alone bond funds) but it's still a good idea to invest in them anyway.
ibhhvc:

Most of us own a car. How many of us understand everything about our car? In my opinion, few of us (including me) know everything about our investments. Anyhow, it is not necessary.

Best wishes.
Taylor
Last edited by Taylor Larimore on Wed Apr 18, 2018 8:09 am, edited 2 times in total.
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Socal77
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Re: Do we need to know everything about our investments?

Post by Socal77 » Wed Apr 18, 2018 8:04 am

Taylor Larimore wrote:
Wed Apr 18, 2018 7:29 am
Thanks Taylor. So basically you're saying: no one understands bonds (let alone bond funds) but it's still a good idea to invest in them anyway.
ibhhbc:

Most of us own a car. How many of us understand everything about our car? In my opinion, few of us (including me) know everything about our investments. Anyhow, it is not necessary.

Best wishes.
Taylor
It's not that no one understands bonds. Different types of individual bonds have different factors that affect their price and yield. ie. Treasuries vs. Corporates, vs. Agency Bonds, etc.

So when you bundle them and try to model all the interrelating factors you could say you don't have a complete understanding of how they work in aggregate.

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