BND Bears

[gavinsiu]

Treasuries are easy - the market is vast, highly liquid, has narrow bid-ask spreads and diversification to reduce risk is not really an issue. For most other bonds, such as those making up much of total bond, these are not true.

I don't mean that it would be difficult to buy an sell treasuries, but what are the mechanics of managing the bonds. In a bond fund, the duration of the bond fund is maintain by the fund manager, who buy and sell bonds to maintain that effective duration. However, becuse they don't hold the bond to maturity, there is a possibility that principal will be loss.

If you replace it with individual bonds, you would essentially be doing the bond fund manager's job. However, you might be able to avoid the principal loss by setting up a bond ladder where you would allow each rung to reach maturity. This works fine if bonds were your only investment in your portfolio, but let's say you have to reblance it with other assets.

Let's say you want a 60/40 stock/bond and now your portfolio is 70/30 and you want to rebalance it. You can sell 10% of your stock and then buy a rung for each of ladder. However, let's say the reverse happen and you now end up with 50/50, If you attempt to rebalance by redeeming the bonds, you might end up selling bonds at a loss just like in a bond fund. Would you basically just rebalance wth funds from the bottom rung that has matured?

[feh]

It's hard with the current yield curve, even money market is yielding more than BND. I'm staying in short-term treasury and will build a TIPS ladder for longer duration as I get closer to retirement.

The SEC yield of BND is currently 4.00%

[burritoLover]

Curious as to what I am missing. Over the last 5 or so years, the
"traditional" 3 fund portfolio including an asset allocation to BND has become taboo as a general consensus around these parts. The BND allocation has become TIPS, munis, treasuries, money markets, etc with many calling for a moratorium on BND due to interest rate environments, recent returns, and performance chasing.

It would seem with the recent 15% drawdown of BND due to interest rates being pushed higher by the feds to cause economic slowdown and decrease inflation, it would be a perfect time for folks to claim they were omnipotent and jump back on the bandwagon of BND given a high likelihood of stabilizing in rates and a potential for recession to drive us back into a deflationary period.

I have held firm with BND/target date funds given my outlook on investment returns is longer than a 2 year CD maturity, but curious as to why BND hasn't made a comeback in the eyes of those who went a different direction.

Are they chasing past performance? Or does everyone feel there is a decade ahead of higher interest rates than today's rates?

They are performance chasing, pure and simple. Pre-2021, "you don't need TIPS" was a common phrase uttered - "just go with BND" (and then Taylor would post up his chart of BND gains/losses by year). High inflation hits and all of sudden everyone is TIPS-happy and duration shy. When inflation comes back to "normal" levels for a period of time - many of these same investors will be chomping at the bit to go back to nominals.

[dbr]

Curious as to what I am missing. Over the last 5 or so years, the
"traditional" 3 fund portfolio including an asset allocation to BND has become taboo as a general consensus around these parts. The BND allocation has become TIPS, munis, treasuries, money markets, etc with many calling for a moratorium on BND due to interest rate environments, recent returns, and performance chasing.

Don't forget Point One for all discussions on this Forum: "The less something matters the more it will be discussed."

I would not take all the blather about bonds on this forum these days all that seriously. What there may be is a lot of teaching about how bonds work, though.

[Tom_T]

Inflation is still around 6.5 percent.

No it isn't.

The annual inflation rate for the United States is 6.5% for the 12 months ended December 2022 after rising 7.1% previously, according to U.S. Labor Department data published Jan. 12. The next inflation update is scheduled for release on Feb. 14, 2023, at 8:30 a.m. ET.

That tells me nothing about what inflation is, only what inflation was. In fact, annualized inflation for the last six months has only been about 1.8%.

This.

[PersonalFinanceJam]

Treasuries are easy - the market is vast, highly liquid, has narrow bid-ask spreads and diversification to reduce risk is not really an issue. For most other bonds, such as those making up much of total bond, these are not true.

I don't mean that it would be difficult to buy an sell treasuries, but what are the mechanics of managing the bonds. In a bond fund, the duration of the bond fund is maintain by the fund manager, who buy and sell bonds to maintain that effective duration. However, becuse they don't hold the bond to maturity, there is a possibility that principal will be loss.

If you replace it with individual bonds, you would essentially be doing the bond fund manager's job. However, you might be able to avoid the principal loss by setting up a bond ladder where you would allow each rung to reach maturity. This works fine if bonds were your only investment in your portfolio, but let's say you have to reblance it with other assets.

Let's say you want a 60/40 stock/bond and now your portfolio is 70/30 and you want to rebalance it. You can sell 10% of your stock and then buy a rung for each of ladder. However, let's say the reverse happen and you now end up with 50/50, If you attempt to rebalance by redeeming the bonds, you might end up selling bonds at a loss just like in a bond fund. Would you basically just rebalance wth funds from the bottom rung that has matured?

It’s been pointed out already in a couple different threads, but it’s sometimes hard to figure out where in the lifecycle of investing a given poster may be. Case in point, my TIPS ladder is for providing future income in real dollars. There is no rebalancing. This is a reasonable strategy discussed here for people gliding into and in retirement. It’s probably not appropriate for someone closer to the start of the accumulation phase. However, reading through the different threads on this doesn’t always make that clear.

[ocman]

I would not take all the blather about bonds on this forum these days all that seriously. What there may be is a lot of teaching about how bonds work, though.

I left my crystal ball in the other room, but I think it said, "bonds will struggle until the end of 2024."

Am I allowed to spread hearsay?

[N.Y.Cab]

It's hard with the current yield curve, even money market is yielding more than BND. I'm staying in short-term treasury and will build a TIPS ladder for longer duration as I get closer to retirement.

The SEC yield of BND is currently 4.00%

While Treasury Money Market (VUSXX) is at 4.31%

[feh]

It's hard with the current yield curve, even money market is yielding more than BND. I'm staying in short-term treasury and will build a TIPS ladder for longer duration as I get closer to retirement.

The SEC yield of BND is currently 4.00%

While Treasury Money Market (VUSXX) is at 4.31%

Today.

Think it's gonna stay there for years? I don't.

[gavinsiu]

It’s been pointed out already in a couple different threads, but it’s sometimes hard to figure out where in the lifecycle of investing a given poster may be. Case in point, my TIPS ladder is for providing future income in real dollars. There is no rebalancing. This is a reasonable strategy discussed here for people gliding into and in retirement. It’s probably not appropriate for someone closer to the start of the accumulation phase. However, reading through the different threads on this doesn’t always make that clear.

One of the other poster appears to be saying that it’s possible to buy your own treasuries and rebalance so I wanted some idea how this can be done.

[PotashDoggerd]

Theoretically, nominal U.S. treasuries and/or TIPS are better diversifiers to a stock-heavy portfolio than a "hybrid" like BND, which contains corporate bonds, MBS, etc.

Studies which I have been unable to re-locate at the moment suggest that most individual investors who wish to diversify from equities should heavily weight their fixed income portfolios towards TIPS or TIPS funds.

[billaster]

At the risk of appearing to put words into his mouth, I'll quote from Bill Bernstein's Nov-22 article "Playing Inflation Russian Roulette in Retirement" at https://www.advisorperspectives.com/art ... retirement

The most obvious losers were the folks who in 2021 reached for yield by extending maturities, or who decided it was a good time to defease their future consumption with TIPS. This is best illustrated at the short end of the nominal Treasury curve: In mid-2021, the three-month yield stood at 0.16%, while the five-year note offered all of 0.29%. In other words, one got 13 bp more yield by extending out 4.75 years. At the risk of being overly harsh, that wasn’t a yield curve, it was an IQ test. But this suggests another group of winners: those who kept their maturities short and can now extend those maturities at a much higher yield or defease their future consumption at a much lower cost.

My interpretation is that it is reasonable to look at market valuations and to decide to shift from BND with a duration over 6 years to shorter maturity holdings.

It's interesting that Bill Bernstein advocates market timing bonds based on valuations. I wonder if he also advocates market timing stocks based on valuations. Why or why not?

[gavinsiu]

Theoretically, nominal U.S. treasuries and/or TIPS are better diversifiers to a stock-heavy portfolio than a "hybrid" like BND, which contains corporate bonds, MBS, etc.

Studies which I have been unable to re-locate at the moment suggest that most individual investors who wish to diversify from equities should heavily weight their fixed income portfolios towards TIPS or TIPS funds.

Interesting, why would that be since treasury would be a less diversified asset. Is is due to lower correlation? Would a treasury fund then serve the same role as individual treasury assets?

[N.Y.Cab]

It's hard with the current yield curve, even money market is yielding more than BND. I'm staying in short-term treasury and will build a TIPS ladder for longer duration as I get closer to retirement.

The SEC yield of BND is currently 4.00%

While Treasury Money Market (VUSXX) is at 4.31%

Today.

Think it's gonna stay there for years? I don't.

Agreed. Money market yield should drop below BND. But if BND yield is still going up, that's a 6.5% drop in price for every 1% increase.

[feh]

Today.

Think it's gonna stay there for years? I don't.

Agreed. Money market yield should drop below BND. But if BND yield is still going up, that's a 6.5% drop in price for every 1% increase.

No, the price doesn't drop as a result of the BND yield increasing. It would drop if interest rates in general increase.

Most people are not expecting that, but regardless, you shouldn't buy/avoid BND because of changes in NAV. You buy it for the yield it provides. You also don't buy it for money you need in less than 5 years, and thus the short term NAV changes are not relevant.

[BitTooAggressive]

Today.

Think it's gonna stay there for years? I don't.

Agreed. Money market yield should drop below BND. But if BND yield is still going up, that's a 6.5% drop in price for every 1% increase.

No, the price doesn't drop as a result of the BND yield increasing. It would drop if interest rates in general increase.

Most people are not expecting that, but regardless, you shouldn't buy/avoid BND because of changes in NAV. You buy it for the yield it provides. You also don't buy it for money you need in less than 5 years, and thus the short term NAV changes are not relevant.

Yes yield vs risk. With the duration of BND it can take many years to recover. In addition the Fed still holds about 50% of US long term and intermediate term debt and has stated they wish to unwind. That is also a risk. IMO many that were holding BND would have been better off holding some short term bond fund in addition to BND. It has been a long time since we have been in a rising interest rate environment and people had a recency bias to forget or downplay BNDs duration risk.

[feh]

Yes yield vs risk. With the duration of BND it can take many years to recover. In addition the Fed still holds about 50% of US long term and intermediate term debt and has stated they wish to unwind. That is also a risk. IMO many that were holding BND would have been better off holding some short term bond fund in addition to BND. It has been a long time since we have been in a rising interest rate environment and people had a recency bias to forget or downplay BNDs duration risk.

I agree with you regarding diversification - I am not a 2/3 fund portfolio person. I've used CDs, short term bond funds, treasuries and bank loan funds as part of my fixed income holdings over the years. Use an investment that matches your time horizon.

That being said, there seems to be lots of folks that look at 2022 and are now saying "total bond funds stink". They are being very short sighted, IMO.

[toddthebod]

No, the price doesn't drop as a result of the BND yield increasing.

Yield and price are interrelated. You can't change one without the changing the other.

[feh]

No, the price doesn't drop as a result of the BND yield increasing.

Yield and price are interrelated. You can't change one without the changing the other.

Sorry, I wasn't exact in my wording...what I meant is that the distribution yield of BND can (and will) increase without the price necessarily changing.

[dbr]

No, the price doesn't drop as a result of the BND yield increasing.

Yield and price are interrelated. You can't change one without the changing the other.

That's true for sure. I guess the question would be do investors price bonds to get a yield or do they set a yield to get a price. Probably it is the former while the yield is set by the entire combination of needs and incentives in the financial market, also including government interference.

[Gennaro Dillinger]

If there has been a shift away from recommending BND, it's because of a recognition that BND was chosen for simplicity, not optimality, and that the kind of people who are regularly posting here are generally not afraid of a little complexity, and in fact are chasing a few more dollars in returns. Min-maxers we call them in the video game world.

Bogleheads Investment Philosophy section 2.2:

Invest with simplicity
Main article: Three-fund portfolio
Watch the video

Simplicity: A three fund portfolio
Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one.

— Investing With Simplicity, John Bogle[11]
It is not necessary to own many funds to achieve effective diversification. A single total stock market index fund contains thousands of stocks, including all styles and cap-sizes. A total bond market index fund contains thousands of bonds of various types and maturities. In his Little Book of Common Sense Investing, Mr. Bogle recommends a simple portfolio of only two funds for many investors: Vanguard Total Stock Market Index Fund and Total Bond Market Index Fund.[12]

A simple portfolio has many advantages. It almost always lowers costs (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, a simple portfolio allows you to spend more time with family and friends, and less time managing your finances.

A portfolio held by many Bogleheads forum members is the three fund portfolio, which allocates investments among a U.S. Total stock market index fund, a Total International stock market index fund, and a U.S Total bond market index fund. Many Bogleheads extend the bond portion of this portfolio to include a fourth asset class, U.S. inflation-indexed bonds. The Vanguard Target Retirement and LifeStrategy funds add international bonds as a fourth asset class.

As Bogleheads author William Bernstein says in reference to the three fund portfolio: "Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."[13]

If your entire portfolio is in a tax-advantaged account, you can simplify even further by owning a single Target Retirement or LifeStrategy fund. Each of these "all-in-one" funds combines four underlying index funds into a single fund with a specified stock/bond ratio, so you can select a fund with the appropriate amount of risk. The Target Retirement funds have the additional benefit of a low, $1,000 minimum investment, making it even easier for you beginners to get started with a simple, low-cost, highly diversified mutual fund. Some Bogleheads use more than three or four funds in their portfolios, but as with all investment decisions, you should be aware of the risks and costs before doing so.

Exactly! I am a 3-Fund Boglehead passive investor. Stay the course. I cannot count how many times I watched Jack Bogle speak to this very issue.

[watchnerd]

As a risk asset, I think BND is fine.

I think where people get into trouble is when they forget BND is a risk asset.

[bikechuck]

As a risk asset, I think BND is fine.

I think where people get into trouble is when they forget BND is a risk asset.

I agree and that makes it risky to hold BND as the sole fixed income investment for retirees who have reached the deaccumulation phase.

Soon to be 70 I have diversified the fixed income portion of my portfolio so it consists of a ten year TIPS ladder, some guaranteed funds yielding a blended average of 4.7% and BND.

Each component serves a purpose. I am currently taking interest only payments from my guaranteed funds whose NAV does not fluctuate with interest rates. I will spend the rungs on my TIPS ladder as they mature. I will use my BND to rebalance with my equities to maintain my desired asset allocation.

If/when we get a year where equities grow substantially I will use some of that growth to extend my TIPS ladder.I am much more comfortable with this approach than I would be if BND were my only fixed income holding.