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M* Are Bond Funds 'Broken' as Diversifiers?

Christine Benz:

"In the early days of the coronavirus-driven market pandemonium, most high-quality bond funds performed exactly as one would have hoped: On down days for stocks, they gained a bit of value or at least held steady.

But as the market sell-off ground on, a disconcerting phenomenon unfolded. Despite a few days of head-scratching downdrafts, Treasury bonds stayed aloft amid a flight to quality, as previous examinations of asset-class correlations suggested would be the case. But high-quality corporate bonds fell in value, taking many bond funds down with them. Municipal bonds also dropped. And it almost goes without saying that lower-quality bond types--junk bonds and bank loans, for example--also plummeted, thanks to their economic and equity-market sensitivity."

Article

Comments

  • edited April 2020
    Hi guys, In following the markets I track a couple of Index funds. For the bond index I have it down a mere -2.2%. For the US stock index I have it down -25.2%. For the international stock index I have it down by -25.7%; and, for the real estate index I have it down -34.3%. These percent numbers are the percent off the fund's 52 week high.

    From my perspective bonds are a diversifier ... and, so is cash.
  • edited April 2020
    Indexes are one thing. Ditto large, passive ETFs. Transparent. US Treasuries.

    I read a Dave Nadig interview recently about bond pricing. He likens it to Zillow. Especially precarious with lightly traded assets in an open-ended vehicle that must sell to meet redemption, which we've now seen, with awful results.

    Last February, there were $6T in bond funds (about $4.5T in OEFs) and I understand in March, like $250B in redemptions.

    While the risks in equities are clear and present, rapid 30% fluctuations, the risks in bond funds are not ... the lack of volatility providing (for some funds) false sense of security; therefore, more shocking the surprise when a crisis happens, which makes bond investors not used to drawdown, head for the door.

    I see some bond funds like icebergs now.

    Doesn't help (going forward) that we have had literally 40 years of falling interest rates. Which way will rates go from here? Nowhere I expect for a while. But when rates rise and all those bond funds fall, watch out.

    And, when IG bond fund holding lots of BBB need to unload after downgrades in days/weeks ahead.

    And, what happens when Fed stops buying corporate bonds?

    So, sure, diversifier, but certainly not without their own set of serious risks (especially pricing risk) that probably needs to get more attention, likely more regulation. Glad financial media is talking more about it.

    It's a really important lesson for me and I'm still processing how to reengage and be better for it.
  • edited April 2020
    YTD in my IRA: FIPDX +3.47, FNSOX +2.38, TSBRX -.65, DODIX -.91, DBLSX -4.6, and BILDX -7.3.

    In my taxable: AZTYX -2.37, VWLUX -3.56, DMBIX -4.03, and VWALX -6.13.

    Wife's IRA, which is at a different place than mine: VAIPX +3.36, VFIJX +3.30, VSGDX + 2.42, FTHRX +.41, and PYSBX -1.96

    Not a picnic. But not a catastrophe. So far.

    I sure wasn't expecting any action from the TIPS funds.
  • Hi @Charles
    You noted: "So, sure, diversifier, but certainly not without their own set of serious risks (especially pricing risk) that probably needs to get more attention, likely more regulation."

    Bonds always having pricing risk, too; not unlike equity; similarly depends upon supply, demand and quality of the underlying asset.

    --- likely more regulation

    Regulation of what, relative to bonds?

    NOTE: I fully understand the disappointment, by many; in so many areas of investing, from a once in a lifetime event.

    Thank you.
    Catch
  • edited April 2020
    On regulation, there just seems too much dispersion on how things are priced. In the post-modem, if not regulation or in addition to it, a better mechanism to buy and sell bonds, more like equities.

    https://www.cnbc.com/2020/04/02/godfather-of-etfs-says-this-is-what-the-bond-market-needs.html
  • WABAC said:

    YTD in my IRA: FIPDX +3.47, FNSOX +2.38, TSBRX -.65, DODIX -.91, DBLSX -4.6, and BILDX -7.3.

    In my taxable: AZTYX -2.37, VWLUX -3.56, DMBIX -4.03, and VWALX -6.13.

    Wife's IRA, which is at a different place than mine: VAIPX +3.36, VFIJX +3.30, VSGDX + 2.42, FTHRX +.41, and PYSBX -1.96

    Not a picnic. But not a catastrophe. So far.

    I sure wasn't expecting any action from the TIPS funds.

    I've owned DBLSX and pretty disappointed with its performance over the past month.
  • I was so disappointed that I sold all my shares of DLSNX and redeployed to SNGVX and THIFX among others.
  • edited April 2020
    Some jumbled thoughts on bonds and portfolio construction:


    I swapped my pure corporate bond funds for a global bond fund about 3 years ago in my Roth account. Since the Roth can sit idle longer than my traditional 401k and therefore has longer to recover, I am comfortable taking more risk in the Roth. The Roth is more of a laboratory for me, to keep me from doing massively stupid stuff in my 401k (which is larger, and where I apply conventional strategies). That said, I retain vanilla corporate coverage (and the usual bond/stock splits) via balanced funds, which are 45% of my Roth.

    The global bond fund I hold (DODLX) in my Roth has dropped more than it's vanilla corporate cousin (DODIX) would have, and has performed worse over it's lifetime. I rebalance quarterly, and would like to think that I have gotten some portfolio gains vis-a-vis a medium duration bond fund given reasonable rebalancing and global's greater volatility. Time will tell.

    Having lived through 2008 early enough in my investment career (when during the early stages of the crashing the correlation between all assets was high), I would not have expected bonds to have done spectacular in our current situation. Indeed, they have largely performed as I would have expected. It makes sense to me that downturns and pullbacks are different than panics.

    I went into 2020 holding about 25% cash in my 401k since everything just seemed completely out of whack. I have been rebalancing into all asset classes (domestic large cap & small cap, international, domestic corporate and global bond). I will be shifting my cash hold to 18% for the foreseable future. I don't think I'll go below 10% cash matter what happens.

    Time will tell, "interesting times", etc.

  • WABAC said:

    I've owned DBLSX and pretty disappointed with its performance over the past month.
    Something from Payden, or Baird, would have been more sensible. Looking at our IRA's as a combined pool, it was small flyer in the total bond sleeve.

    I have no plans to sell it until it's at least back to par value. Then I'll re-examine their thesis, and see how I feel about it.


  • I think the simple, index, high quality bond fund like VBTLX worked fine and as expected in this black swan, after all, it's up 3.6% YTD. Even VBIIX about 50/50 Gov/Corp IG bonds worked too at 3% YTD
    Remember, Bogle believed in SP500 + US total bond index.

    The more you own stocks the more you need the above ballast indexes.
  • Hi @Charles ........not picking on you, as you have placed valuable thoughts with your posts, relative to "bonds".

    Your April 3 post: "On regulation..."
    From the article:
    “I think you need more transparency where bonds are trading real time, [to aggregate] where the prices are at and find a best bid, best offer [so that] there’s a lot of increased confidence where bonds are trading, just like you have in equities,”
    >>> I continue to try to imagine how the S.E.C. or any other regulatory group can "force" the bond market (which has many various sectors, yes?) to otherwise price to an "exact" in a marketplace (for price and NAV) where it has been noted that a $10 trillion bond market doesn't have a similar amount of daily trading (sells and buys), relative to the equity market.

    Also, from the other April 3 post, "Indexes are one thing."
    Last February, there were $6T in bond funds (about $4.5T in OEFs) and I understand in March, like $250B in redemptions.
    >>> My math indicates a redemption amount of about 4.17%. Doesn't really seem so bad, eh?
    And from where did these redemptions arrive? Corp. and HY bonds? I don't have supporting data.......just my guess.
    ..... the lack of volatility providing (for some funds) false sense of security; therefore, more shocking the surprise when a crisis happens, which makes bond investors not used to drawdown, head for the door.
    ..... I see some bond funds like icebergs now.

    >>> One thing that I am sure of, and hopefully; not writing/sounding like a smart ass, is that over the years here reading questions and comments; is that most folks relative to bonds somewhat understand the difference between AAA bonds and HY/junk bonds. Everything in between is a mystery. I replied too many times in the last several weeks to express why such and such bond fund is "down". I've posted more than once bond rating standards by S&P. A question arises as to why "person X's" bond fund is reacting poorly.
    The answer is to look at the last known holdings and to discover that more than 50% of the "strategic/total or magic" bond fund is invested in BBB (edge of good junk) and lower rated bonds. Investor "x" was overly happy with the higher than normal yield, versus a plain vanilla bond fund that held higher rated bonds with lower yields. The reflection of the high yield is related to risk of the asset, yes?

    My takeaway is that the most common wording related to investing are the words, "the stock market"; with a common question being, "Are you invested in the stock market?' I've mentioned in direct conversation, "Well, yes; but also the bond markets". This always gets the question mark face expression, a "huh". Bond investing awareness is thin.

    Are Bond Funds 'Broken' as Diversifiers? No !!!, depending where the bond monies are parked.

    It is easy to say after the fact, is that not all bond area investing areas are equal and that folks will attempt to continue to educate themselves about bonds. Never before has an unlimited amount of learning been available via the internet. A lack of curiosity and wanting to know are the major limiting factors.

    The watching process begins, relative to COVID-19; and the long thread from Feb. 22, related initially back to Jan. 21. Link here, if you choose to read again.

    I've run my typing mouth enough.
    Be well.
    Catch

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