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Participant ○○

Should We Reduce Bond Duration?

Due to extremely low interest rates we are worried that our bond duration is too long. We are thinking of shortening it.

Right now we are using 50% Intermediate Term US Treasury ETF + 50% Intermediate Term US Corp Bond ETF.

Duration = 7.4 yr. Yield = 1.66%.

We are thinking of using the Short Term version of each:

Duration = 1.9 yr. Yield = 1.17%.

We think this is a smart move. We reduce our bond yield by 30%. But we reduce duration by 74%.

Anybody think this is not a good idea?

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10 Replies
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Participant ○○

Re: Should We Reduce Bond Duration?

In monetary terms.

With $1M in bonds we lose $4,900 per year in yield. $408 per month. That's a lot of money (fun).

But if interest rates go up 1% our bonds lose $19K in NAV. That loss would "roll up" in 1.9 yr.

With the longer duration our bonds lose $74K in NAV. That loss would "roll up" in 7.4 yr.

I like equities. Bonds drive me CRAZY.

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Frequent Contributor

Re: Should We Reduce Bond Duration?


@galeno wrote:

In monetary terms.

With $1M in bonds we lose $4,900 per year in yield. $408 per month. That's a lot of money (fun).

But if interest rates go up 1% our bonds lose $19K in NAV. That loss would "roll up" in 1.9 yr.

With the longer duration our bonds lose $74K in NAV. That loss would "roll up" in 7.4 yr.

I like equities. Bonds drive me CRAZY.


Do you spend yield or value?  At any 'rate', how soon do you see interest rates going up?  The Great Bond Bull Market (falling interest rates) ended after a 40 year run!  As usual, the answer depends upon whether you use bonds in your portfolio for income, or ballast.  Short term ballast, long term (lower quality) income!  8-)

ElLobo, de la casa de la toro caca grande
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Contributor ○○○

Re: Should We Reduce Bond Duration?

Why not some of both. It is apparent to me interest rates will not be going up anytime soon with the virus looming and businesses teetering on bankruptcy. Watch for increasing inflation (not likely) and talk of rising rates. I do not like bonds that much either.


@galeno wrote:

Due to extremely low interest rates we are worried that our bond duration is too long. We are thinking of shortening it.

Right now we are using 50% Intermediate Term US Treasury ETF + 50% Intermediate Term US Corp Bond ETF.

Duration = 7.4 yr. Yield = 1.66%.

We are thinking of using the Short Term version of each:

Duration = 1.9 yr. Yield = 1.17%.

We think this is a smart move. We reduce our bond yield by 30%. But we reduce duration by 74%.

Anybody think this is not a good idea?


 

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Explorer ○○○

Re: Should We Reduce Bond Duration?

Hi.

What I know about bonds could be written on the head of a pin. But what I see from central banks is to keep interest rates low in order to "finance?" national debt. If this true, I do not see interest rates going up any time soon. Europe has been playing this game for a while now. Maybe I am crazy, but I think I will stay with equities.

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Frequent Contributor

Re: Should We Reduce Bond Duration?


@NuEnglander wrote:

Hi.

What I know about bonds could be written on the head of a pin. But what I see from central banks is to keep interest rates low in order to "finance?" national debt. If this true, I do not see interest rates going up any time soon. Europe has been playing this game for a while now. Maybe I am crazy, but I think I will stay with equities.


I don’t know why Some posters keep promoting investing in bonds when fed is going to keep interest rates lower forever with rates between 0 and 2% which will keep yields below the rate of inflation. I have replaced bonds with high yielding dividend stocks with yields of 4-7% taxed at cap gains rates which allows me to invest most of my assets in growth stocks such as FAANGS. Low interest rates will allow treasury to borrow $Ts a low rates. Interest rate of 1.25% on $1T will only cost $12.5B a year In interest.

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Participant ○○

Re: Should We Reduce Bond Duration?

We DON'T DARE go 100% equities.

We want BALLAST (US Treas = 20% of port) with a bit of YIELD (20% USD corp bonds).

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Frequent Contributor

Re: Should We Reduce Bond Duration?


@galeno wrote:

We DON'T DARE go 100% equities.

We want BALLAST (US Treas = 20% of port) with a bit of YIELD (USD corp bonds).


How much are you going to invest in Corp bonds? 

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Participant ○○

Re: Should We Reduce Bond Duration?

We have 20% of port (40% of FI) in corp bonds. The same weight we hold of US Treasuries.

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Frequent Contributor

Re: Should We Reduce Bond Duration?


@galeno wrote:

We have 20% of port (40% of FI) in corp bonds. The same weight we hold of US Treasuries.


You can buy Att preferred class C Stock with a 4.75% yield which is taxed at cap gains rates.

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Participant ○○○

Re: Should We Reduce Bond Duration?

I have disposed off all the IT or ST ballast bonds...which primarily was BND [US Aggregate Bond]. I see no purpose investing in it when the reward is too little and eventually risk is not little.

For me, cash is the fixed income. I achieve my AA with cash and stock funds [bond CEFs I count them as stock funds]. That simple.

Cash is zero-duration bond as you all know. 

Could there be some upshot in US agg bond if US ends up going to negative rates? possibly but the market is already anticipating it (so probably priced in) even though Chair Powell says it is not gonna happen -:)

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