I track a number of bond funds on the soon-to-be extinct M* portfolio manager. These are all funds that were highly ranked with good returns in their various categories. Very few of these funds have achieved 5% returns over the past 15 years, and few hit 3% over the past 10 years. The average returns among various short and intermediate bond funds was 1.1% over 5 years, 1.56% over 10 years, and 3.79% over 15 years. Multi-sector bond funds fared slightly better — 1.3% over 5 years, 2.65% over 10 years, and 5.93% over 15 years. The best performing bond funds were high-yield or junk — 2.78% over 5 years, 3.58% over 10 years, and 7.06% over 15 years.
Here is my question: why bother with bond funds when you can currently lock CDs and Treasuries with yields above or approaching 5% over the next 3, 5, 10 and 20 years? I have sold a number of bond funds this year to set up CD and Treasury ladders extending out 5 years. However, I still maintain substantial holdings in several bond funds with good long term returns (but terrible returns over the past 5 years), in hopes that their future returns will rebound when yields finally stabilize or fall. Plus, selling now would just lock in my losses.
I’ll be 70 years old in January. I might not be alive in 10 years, or the time it takes for bond funds to recoup their losses. It’s different with stock funds because it’s not unusual for them to post large gains after bear markets and corrections. But bond funds? Do they ever have big years that make up for the terrible losses they’ve incurred over the past 2-3 years?
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The media is NOW saying that these are the best times to get into bonds. But many investors don't trust that.
Here is a chart showing Treasuries, core, core-plus and multisector bond funds (beneficiaries of HY); default is 1-yr, but can change timeframes to 2, 3 or other years.
https://stockcharts.com/h-perf/ui?s=IEF&compare=BND,FBND,PIMIX&id=p36003419830
There are many ways to construct a long term portfolio. Not everyone should own bonds or bond funds. They are likely to inject a drag into your overall performance. On the other hand, like all investments, they will probably do well over some shorter periods. If and when riskier assets like stocks, commodities and lower rated credit stumble badly, higher quality bonds / bond funds stand a chance to increase in value, evening-out your long term ride. Consider a bond fund a type of hedge inside a much broader more diversified portfolio. Some managers even use inverse funds (selling stocks or bonds short) for hedging purposes. Some buy gold for that purpose. Hedging does detract from long term performance - unless you are a terrific money manager and know exactly when to put your hedges on and take them off.
Suspect this is nothing you haven’t heard before. But just wanted to suggest the issue raised isn’t a “black and white” question - in my mind anyway. How often do we hear posters address / mention “portfolio construction”? If that’s not your primary focus than I’d say don’t own any bond funds. They’ve been losing money for a long time now. Why would anyone invest in them?
Many financial planners and experts say you can safely withdraw about 4% a year from a portfolio in retirement. I am unlikely to live 20 or more years, based on my family history, although my wife could. So, if I can buy a 20-year Treasury yielding 5.15%, that will pay more than my income needs for longer than my expected life span, what’s not to like? I have no intention in putting all of my portfolio in Treasuries, just a portion that would make up the long portion of a ladder.
I’m trying to decide whether to convert more of my bond funds into Treasuries. My bond funds are currently yielding close to 6% but continue to lose value. I know that at some point they will start increasing in value again, and selling now will lock in my losses, so I don’t plan to totally abandon them. But I no longer view them as low-risk investments to anchor my portfolio. I also plan to continue holding 40-60% of my portfolio in stock funds.
So, if I buy a 20-year Treasury that pays dividends semiannually, is that income compounded, or simply paid out in cash every 6 months? So far, the Treasuries I’ve bought are all zero-coupons that you buy at a discount and mature at full cash value. I haven’t bought any 5-year or longer Treasuries, so I don’t understand if the interest is compounded or simply paid out at regular intervals.
@Tarwheel - Sorry. I might have been more tactful in addressing your question.
One reason bonds are suffering badly is the ongoing dash-to-cash. Where does all that money running into cash originate? From bonds and equities being sold. As with any asset, when there are more sellers than buyers prices fall. Howard Marks speaks at length in “The Most Important Thing” about the investing ”pendulum”. That is: Asset valuations always run to the extreme. I merely suggest that we take that thought into consideration here. Cash is king right now. My only question (borrowed from a popular 70s hit) - ”Will You Still Love Me Tomorrow?”
(Numbers from M*)
"Relative Value Arbitrage
Relative value strategies seek out pricing discrepancies between pairs or combinations of securities regardless of asset class. They often employ one or a combination of debt, equity, and convertible arbitrage strategies, among others. They can use significant leverage and typically seek to profit from the convergence of values between securities. Funds in this category typically have low beta exposures to major market indexes due to their offsetting long and short exposures."
https://www.morningstar.com/funds/xnas/cvsix/portfolio
As an example, I’ve been invested in PIMIX, which M* shows a TTM yield of 7.49%. On it’s face, this would seem to be a valued investment. Well, if you’re only in it for the distribution and don’t mind the funds value continuing to decrease, all would be good, yes? If that were the case, I’d have invested in a CEF with higher yields. My bad. I should have believed the name, PIMCO “Income.”
Yes, my bond funds have left me a bit cranky. On a more positive note, I’m loving the Mmkt yield on VMFXX.
Yes, M* shows CVSIX to have only a small weighting in bonds. Looks like 15-20% on their pie chart. However, Lipper puts the bond holdings somewhat higher at 46%. Bonds & cash combined come out to 65-70%.
ALLOCATION (CVSIX)
Bonds 45.94%
Stocks 34.79%
Cash 21.56%
Other -2.29%
(Figures from MarketWatch / Lipper)
Now for bonds. I use mostly balanced funds. Of course they are struggling now since both stocks and bonds are struggling. I also hold two bond funds, both high-yield. You know they are not doing so well, but I am sticking with them. Each month the dividends buy more shares at a lower price, and I believe that later next year interest rates are going to start going down and the NAV will start going up. Don't ask me why I believe that, because I don't know. I just believe that in the long run the US market will be alright.
My best advise for you is to delete my post and do what you thing is right for you and your family.
Just another point of view.
I don't think I'd ever buy a zero-coupon bond or fund with a VARIABLE rate. Or an NAV which moves up and down. Kinda defeats the purpose. I bought a 10-year zero lotsa years ago. Predictable, steady. No surprises. The income every year was counted as taxable, though you see nothing "real" for 10 years.
This year, junky FR/BL have done the best. The Treasury FRN USFR is doing well too.
Treasury ZEROS may work for some who want built-in reinvestments and have some goals for specific years. There are lots of them available in the secondary market. Treasury strips are made out of regular Treasuries by separating the principal and interest payments. So, a 30-yr Treasury may become 1 huge "principal" piece and 30 smaller "interest" pieces. Because of this, Treasury ZEROs of variety of maturities are available. Yes, they are volatile but will pay 100% at maturity. Example - $100 10-yr 5% ZERO can be bought for $61.39 only; it will be volatile, but will pay $100 in 10-yrs. It may be difficult to buy CDs beyond 7-10 yrs.
SGOV 0-3m
SHY 1-3 yrs
IEI 3-7 yrs
IEF 7-10 yrs
TLH 10-20 yrs
TLT 20+ yrs
TFLO FRNs
GOVT Mixed
I'm disinclined to time markets. See thread: JP Morgan: do yourself a favor, don't overthink this one It's one thing to say that you're satisfied locking in 5% yields; it's another to move money around based on which market is better today.
As to what one might be missing: the dollar is currently strong. If/when it reverses, a declining dollar will help non-hedged foreign investments (debt and equity). https://www.fidelity.com/learning-center/trading-investing/strong-dollar
I asked similar questions on various threads on this site for a few months with varying results.
What I learned: Lots of investors just ain't interested in boring, guaranteed, insured rates of 5+% for the next 3 months to 5 years.
What I already knew: I am.
FWIW, I sold all of my bond funds (and all of the bond funds of other accounts I manage for friends and relatives) many months ago and now have CD ladders that guarantee as much or more TR than any of us either expected or hoped for LT from bond funds. We all still hold stock portfolios as well with some holding a sliver of bonds via Allocation funds.
When I was young, a favorite saying and/or dream was to have enough money to live off the interest. For many who have enough of a nest egg, that opportunity has been years in the making but is now smack dap in front of us. It won't be there forever. Act accordingly.
dAs far as I’m concerned, this is a great investing time for retirees. I’m perfectly satisfied with guaranteed 5% returns, particularly with bond funds losing value every day
The second way is don't fight the Fed. They have been telling us months ago that rates with go up for longer.
Check FAFRX for YTD against known funds.
https://schrts.co/hqRXKcpF