Help with bond allocation

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Parispundit
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Joined: Fri Sep 14, 2018 2:37 am

Help with bond allocation

Post by Parispundit » Fri Sep 14, 2018 2:44 am

I am trying to decide what form the bond portion of my AA should take. I am hesitating between Intermediate-Term Treasuries (under other circumstances I would probably consider long-term Treasuries, but not with the current yield curve) and High-Yield Municipal bonds, bearing in mind that the default rates on A-rated Municipals are equivalent to AAA Corporates. For, me, the tax status is a consideration, but only a relatively minor one, as I am in the lowest tax bracket. I have been trying without success to find a chart giving a long-term comparison, bot just in terms of total return, but in terms of volatility. Any thoughts?

PFInterest
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Joined: Sun Jan 08, 2017 12:25 pm

Re: Help with bond allocation

Post by PFInterest » Fri Sep 14, 2018 7:24 am

those are very different funds.
taxable account im assuming?

Parispundit
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Joined: Fri Sep 14, 2018 2:37 am

Re: Help with bond allocation

Post by Parispundit » Fri Sep 14, 2018 7:33 am

Yes, taxable account.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with bond allocation

Post by retiredjg » Fri Sep 14, 2018 8:28 am

Ordinarily a person in the lowest tax bracket would not consider tax-exempt bonds. Why are they on your radar?

Parispundit
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Re: Help with bond allocation

Post by Parispundit » Fri Sep 14, 2018 8:33 am

Because as of today the SEC yield of Vgd intermediate-term treasuries is 2.66, and Vgd HY municipals is 3.22, and of course I wouldn't object to saving 10 or 12% on taxes.

retiredjg
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Re: Help with bond allocation

Post by retiredjg » Fri Sep 14, 2018 9:02 am

Yes, but....the comparison is not apples to apples.

You are comparing a low risk bond fund (treasuries) to a high risk bond fund. The muni fund has more risk so it would be expected to produce more return.

Have you looked at a chart of what happened to the muni fund in the 2007-2009 downturn?

Parispundit
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Joined: Fri Sep 14, 2018 2:37 am

Re: Help with bond allocation

Post by Parispundit » Fri Sep 14, 2018 9:33 am

The point is that even High-Yield municipals, because they are municipals, have a lower risk than you would think by simply looking at ratings. But here is the comparison with Int. Treasuries in 2007-09

HY Muni Int TR

2007 1.57% 9.98%

2008 -10.45% 13.32%

2009 20.13% -1.69%

The 10 year return, so from Sept 2008 to now, is HY Muni 64%, Int. Term Treasury 35% I can't find a 30-yr comparison including income.

retiredjg
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Re: Help with bond allocation

Post by retiredjg » Fri Sep 14, 2018 4:06 pm

Parispundit wrote:
Fri Sep 14, 2018 9:33 am
The point is that even High-Yield municipals, because they are municipals, have a lower risk than you would think by simply looking at ratings.
Whether they are lower risk than I "would think" is not relevant. They are not lower risk than the treasury fund that you are comparing it to. At least that is what Vanguard and Morningstar both seem to think.

The High Yield muni fund may be appropriate for some situations - a portion of the bond allocation for people in high tax brackets who must or choose to hold bonds in a taxable account.

But that fund does not seem appropriate to me for an entire bond allocation, especially for a person in a lower tax bracket.

There are people here with much more bond knowledge than I have. Maybe you'll get some comments from them.

venkman
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Joined: Tue Mar 14, 2017 10:33 pm

Re: Help with bond allocation

Post by venkman » Fri Sep 14, 2018 9:49 pm

Parispundit wrote:
Fri Sep 14, 2018 2:44 am
I am trying to decide what form the bond portion of my AA should take. I am hesitating between Intermediate-Term Treasuries (under other circumstances I would probably consider long-term Treasuries, but not with the current yield curve) and High-Yield Municipal bonds, bearing in mind that the default rates on A-rated Municipals are equivalent to AAA Corporates. For, me, the tax status is a consideration, but only a relatively minor one, as I am in the lowest tax bracket. I have been trying without success to find a chart giving a long-term comparison, bot just in terms of total return, but in terms of volatility. Any thoughts?
Did someone say chart? :)

https://www.portfoliovisualizer.com/bac ... bol5=VTSMX

Since 1992, Vanguard's Intermediate Treasury fund (VFITX) and High-Yield Muni Fund (VWAHX) have been very close to each other, both in nominal return and standard deviation. The Muni fund had slightly higher return. along with slightly higher volatility.

BUT... that's only relevant if those are the only assets you plan to hold. If you're going to be invested in stocks, your bond allocation should complement your stock allocation, so that the overall volatility of your portfolio is reduced. With annual rebalancing in an 80/20 portfolio, the portfolio with intermediate treasuries had slightly higher performance and slightly less volatility than the portfolio with high yield munis.

https://www.portfoliovisualizer.com/bac ... tion5_2=80

Parispundit
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Re: Help with bond allocation

Post by Parispundit » Sat Sep 15, 2018 1:22 am

Thank you!

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