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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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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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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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Participant ○

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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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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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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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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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.


@galeno 

So in other words: How can I keep the additional yield AND mitigate interest rate risk?

Here are two bond portfolio immunization strategies chosen from a group of many more. For each case, raise cash by selling 16.5% of both of your bond ETF's. You will raise 33% of your total bond sleeve in cash.

  1. Buy Investment-Grade FLOT.   FLOT is indexed to yield changes on the short end of the curve, and may not immunize for changes in NAV with your intermediate-term bond funds.  Not all yield changes are parallel.
  2. Buy iShares Investment-Grade Corporate-Bond Ladder and hold each rung to maturity.

This is a summary of each strategy. 

Immunization 1.jpg

Note: I assumed that you own Vanguard ETF's and used the most recent data.  

My preference is holding the Investment-Grade Ladder to maturity. This gives you the option of buying another rung, or using the cash to rebalance your bond portfolio as each rung matures.

My ladders are for mainly for retirement distributions, but there are other options. This is how I have "immunized" my bond portfolio for market risk.  You can ladder Treasury's, IG Corporate's, Municipal Bonds, or High Yield Corporate's.

This is a summary view of the iShares Investment-Grade Corporate Bond Ladder

Ladder 1.jpg

Ladder 2.jpg

 

Other Laddering Options:

Ladder 3.jpg

Your Ladder will hold a diversified portfolio of 3,482 individual bonds.

Good Luck,

Holiday

 

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