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Participant ○○○

Why are people selling bond funds?

I thought in such time people rush to buy bonds but I am seeing quite a few posts about people getting out of bond funds.

Why?

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Follower ○○○

Re: Why are people selling bond funds?

The easy answer is that it is a good time to sell when the price is relatively high.  And there are ready buyers.

But there could be a lot of nuance in that.  Some people have observed that their funds monthly distributions have declined as the overall interest rates have declined.  That may lead them to think that they can realize a higher after-tax return from dividends as opposed to interest income.

Others might see the need to rebalance now, taking money from their winners (bonds) and buying the current losers (stocks).  This same behavior also might be because they really want to buy stocks at their distressed lows and are finding the money in their bond holdings.

In my case, I'm looking for cash (mostly for current spending).  I have a lot of bonds and they are doing relatively well right now, so I'm OK with reducing my bond positions (selling high) just to have cash on hand.

Good luck to all in these volatile times.

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Re: Why are people selling bond funds?


@waffle wrote:

I thought in such time people rush to buy bonds but I am seeing quite a few posts about people getting out of bond funds.

Why?


Hi waffle.

Great question...I am doing same, major selling out of bond funds.  Here's an explanation:

First,bonds go in these approx 33 year bull/bear market cycles.  This is now about year 39 in the current bull market.  A bull meaning when it started, interest rates were 15+% on treasury bonds...now 1%.  Bond prices RISE as rates fall.

But when stocks go to new highs, no-one knows how much they can grow.  Think Amazon.  But bonds are not growth assets; they are contractual instruments.  Loan $1000 for 5 years, at an  interest rate, and barring default, get $1000 back.  No growth in asset.

So what is happening now, as rates fall, is the underlying bond prices are selling above face value...above par.  So a $1000 bond at 3% interest, is better than the same new bond at 1% interest.  So the 3% one may sell today on the open market at $1100.  Bond fund NAV prices reflect this higher value.  HOWEVER, WHEN EACH BOND MATURES, YOU ONLY GET $1000 back.  A five year duration bond, selling for $1100, thus has about a built-in loss of approx 2% a year in price.

Unless you sell out of a bond fund, you don't realize any of this gain.  Many bond funds today are way above "par."  AND IF INTEREST RATES EVER GO BACK UP, BOND FUND PRICES WILL DECLINE!

Second, as rates get below 1%, you get almost zilch in interest earned each year.  For such a bond, with dividends reinvested, you will double your money in 72 years.  Oouch.  Do you not think prices will more than double in 72 years.  In my investing time, prices went up more than ten fold.

Lastly, unlike stocks, the maximum top is see-able in bonds.  It is at zero percent interest rates.  Yes, if we go to negative rates, NAV prices can go higher...but from the fed to Guru Gundlach, all say negative rates are not in the cards for the USA.  So rather than try to time or squeeze that last little bit of interest out, when the treasury 10 year got to about 0.4% rate recently, many sold.

So bonds have really become a poor investment.  Way overpriced, and rates that do not make sense.  So investors are selling, planning to eventually (or same day) move into stock funds such as Vanguard's VIG Dividend growth fund, that may soon yield 4% in dividends, dollar dividends that tend to grow each year, and the underlying companies can grow over time as well.

Is it not obvious which is better value?

Is there not an interest rate where you would say "no mas."...like 0%?

Best wishes...

R48

 

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Frequent Contributor

Re: Why are people selling bond funds?

R48 ....  For most investors bond funds will always have a role as a shock absorber to portfolio loss.  You are suggesting 100% stocks.  So you must be comfortable with a potential 50% drop in stock market and drop in PV.  That is not tolerable for most retirees.  Consider awful Black Swan, god forbid, if some terrorist group detonates a dirty bond in west coast and east coast harbors.  It will make Corona virus problem child's play.  I for one want to have brakes on my portfolio for the unimaginable.  That is why I am 50:50.  And cash is functional for spending and nibble investing but as an asset class it has no future.  

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Participant ○○○

Re: Why are people selling bond funds?

I see the logic. Bonds have been on rise and interest rate are low.

If bond funds manager sells his current bonds to buy new one he will buying new bonds at low yield. And if yield is already low to begin with there is not much bonds can rise and one gets low yield. So future total returns are going to be worse.

Would treasuries behave differently than say corp bonds and MBS?

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Re: Why are people selling bond funds?


@PaulR888 wrote:

R48 ....  For most investors bond funds will always have a role as a shock absorber to portfolio loss.  You are suggesting 100% stocks.  So you must be comfortable with a potential 50% drop in stock market and drop in PV.  That is not tolerable for most retirees.  Consider awful Black Swan, god forbid, if some terrorist group detonates a dirty bond in west coast and east coast harbors.  It will make Corona virus problem child's play.  I for one want to have brakes on my portfolio for the unimaginable.  That is why I am 50:50.  And cash is functional for spending and nibble investing but as an asset class it has no future.  


Paul, you misinterpret.

No, I am not suggesting 100% stock funds allocation.

--Money Market funds are technically bonds, but with a fixed NAV.  One can stay in these.

--Certificates of Deposit are a different type of asset...no price threat, but yields very low.  FDIC insured to an amount.

--Rental real estate is now where it has historically been...annual net returns in the 5-6% range, plus house price appreciation potential...and good inflation hedge.  Favorable tax treatment.  Disclosure: I own a rental real estate property in Florida.  Property manager does everything, for 10% fee.

--REIT Funds.  Technically these are not stocks/corporate ownership.  But ownership of individual rental properties.  checkout VNQ.

--One's own house.  If afraid of stocks and the market, pay down your mortgage, save 4-5%, instead of low rate in bonds.

--In 2009 financial crisis, money in a bank savings or checking account gets sometimes no interest, but you do get FDIC Insurance.  I used this in lieu of MM funds in 2008/9.

--Cash under a mattress provides "ballast or shock absorber", but huge risks, such as fire, or theft, or like the elderly couple who just threw away a mattress with $200,000 in it!

R48

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Participant ○○○

Re: Why are people selling bond funds?

"Rental real estate is now where it has historically been...annual net returns in the 5-6% range, plus house price appreciation potential...and good inflation hedge."

Interesting, I thought residential real estate prices are quite high and at/near peak. It could be because I am in CA and have strong local bias to my data.

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Frequent Contributor

Re: Why are people selling bond funds?

Credit risk can cause bond fund sell-off, which causes value to decline and more sell-off. Only high quality, usually treasuries, continue in increase as yield drops. The market circumstances make it hard to hold all but the highest credit, or shortest duration funds.

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Frequent Contributor

Re: Why are people selling bond funds?

R48 ...  What you are saying is not practical for most retirees.  I recall we had this discussion before.  If it works for you, great.  I want 1/3 of my money in bucket 1 relative safety.  If I go down your list, the only candidates for my bucket 1 is cash, MM funds, CDs, bank savings and checking accounts.  The banks I am familiar with as trustee for my mom give zero interest on savings and checking and relatively zero on MM funds.  Latest CD for 1 year is 1%.  Bonds did just fine last year.  If they have an off year, I can live with that.  They will eventually get their mojo back.  I would rather make my fund choices now for the long term and get on with my life instead of doing this and having to change it later.  This strategy will not maximize my long term return.  My mom has a lot of money tied up just the way you are suggesting and it causes me a lot time to manage and for not much return.  Sure, it is safe money, but I am willing to take a little more risk with bond funds.  

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Re: Why are people selling bond funds?


@waffle wrote:

"Rental real estate is now where it has historically been...annual net returns in the 5-6% range, plus house price appreciation potential...and good inflation hedge."

Interesting, I thought residential real estate prices are quite high and at/near peak. It could be because I am in CA and have strong local bias to my data.


What I meant by rental real estate being now where it has been historically, was not referring to home prices, but rather to the returns one can expect.

Rentals usually start at 8-10% of home price, as rent.  Subtract insurance, taxes and other related costs, one gets a net return of 5-6%.  This is traditional returns.  Bonds once got that much...not anymore.  1% Treasury yields.

So I place rental properties as ahead of bonds in returns going forward.

BTW retirees, before we had corporations and corporate bonds, real estate rental was the primary way one grew wealth.  Think England...Think Downton Abbey!

R48

 

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Re: Why are people selling bond funds?

I have always believed that bucket 1 should be cash. During the bond bull market, it was possible to speculate on yield with capital appreciation. Now the yield isn't available on bonds (or stocks) without huge risks.

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Frequent Contributor

Re: Why are people selling bond funds?

I'm already fairly aggressive compared to most "pre- retirees", about ~80-85% equity and 15-20% in cash/ bonds (safe stuff/ Bucket 1 if you will). I have NOT sold any bonds (yet), but I'm holding much more than "normal" in CASH VS. BONDS, as the yields in bonds are SO LOW, I get nearly the same w/ cash. Plus, it's available to go into equity IF we get more of a selloff. I just don't see much benefit to holding a big slice in bonds here. When I retire (in 2 years), I am hoping yields on bonds will be higher than current yields!!! 

I have not sold any bond funds yet, but I might "trim" some as I see them as very "overvalued" right now. Stocks have sold off and appear closer to "fair value" here. YES, I recognize that a high stock allocation (80%) could be VERY volatile, but I'm willing to take the higher volatility in exchange for higher long term returns. Seriously doubt I'd ever go to 100% stocks though. 

Win
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Frequent Contributor

Re: Why are people selling bond funds?

Hi Win ....  I offer an interesting read from Pimco as alternative thought.  I get a little nervous when I read your current thought but hey, you know you better than I.  Good luck and keep well.  

https://www.pimco.com/en-us/insights/viewpoints/research/optimal-asset-allocation-asset-location-and...

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Contributor ○

Re: Why are people selling bond funds?

@retiredat48 I agree with your assessment on the bond market and see this as a loss to investors. There are alternatives as you have posted but none of them are viable money makers on a large enough scale for the investor population. Rentals are a a limited supply, and everything else is little better than cash which I define as not being invested. It seems we are entering into an age where cutting risk will come at more of a cost when measured by reduced returns. To see my point, compare a 60/40 stock bond PF to a 60/40 stock cash one.

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Re: Why are people selling bond funds?


@FatKat wrote:

Credit risk can cause bond fund sell-off, which causes value to decline and more sell-off. Only high quality, usually treasuries, continue in increase as yield drops. The market circumstances make it hard to hold all but the highest credit, or shortest duration funds.


I believe this is the main factor.   High-yield debt markets were already in trouble before oil markets collapsed Sunday, and now comes the risk of rising credit defaults and downgrades that could increase borrowing costs for businesses across the board.  Bonds were not being sold until lately.  Notice treasury funds still going up while corporate and bond index funds(both corp and treasury) going down.

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Re: Why are people selling bond funds?

PaulR888,

Thanks! We're pretty fortunate in that I retired from teaching at a state medical school, have a state pension which alone covers about 1/3 to 1/2 of our needs, plus a fairly large portfolio (>5 million). Not to mention we'll have SS for both myself and wife, when we claim it in the future. So we're pretty "blessed". 

I'm "OK" with market volatility, and have been pretty comfortable over the years w/ volatility. Theoretically, we can stop working NOW and just live off dividends, so we're very fortunate. The approximate 17% I do not have in equity is split between cash and higher quality bonds right now, and I question whether I will sell the bonds. I have just turned off reinvestment. 

Win
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Re: Why are people selling bond funds?


@waffle wrote:

I thought in such time people rush to buy bonds but I am seeing quite a few posts about people getting out of bond funds.

Why?


The ONLY real reasons to buy, or sell, bond funds are:

  • To maintain your asset allocation, that is, to rebalance.  These last few weeks would seem to be an ideal time to sell bond funds, which are up, and buy stock funds, which are down.
  • Cover a retirement withdrawal

The reason you see/saw a rush to bond funds is a movement of cash from stock funds, which were sold whenever stock prices/fund NAVs fell.

ElLobo, de la casa de la toro caca grande
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Re: Why are people selling bond funds?


@PaulR888 wrote:

"R48 ...  What you are saying is not practical for most retirees.  I recall we had this discussion before.  If it works for you, great. "

My reply:  Why?  Individual retirees can certainly do these things.  Generally, any advice I give I expect only 10-15% of investors to do it.  It is how one remains a contrarian investor.  If 50% or more take my guidance, I recheck what I am doing!

So as an example of how retirees can do this, here is a message off-forum to me from a 60+ year old single lady, who moved her portfolio from a terrible advisor, to a DIY, doing it herself.  She has done well since.  She is a lurker re the forums.  Here's what she messaged last night (after reading my previous posts and the recent post):

"Darn you, R48.  You ruin my asset allocation.  I sold out of PIMIX, PDIIX, BAB, JMUTX, DSL over the last two days.  Probably more to go.  Darn you."

Retirees do not need to do things all at once.  Take baby steps in the right direction...sell some percentage of bond funds/then wait/then buy shares of stock funds, or keep money in lower risk short term bond funds or MM funds.  If it works, continue to do same.

BTW for some, this baby step is called "rebalancing".  But behavior is at issue here.  The best rebalancers are vanguard/Bogleheads types.  However, during the 2008/9 bear market, a survey of posters on boglehead.org showed clearly one third did not rebalance per their own plan.  Most were deer in the headlights.

This situation requires selling some bond funds BOTH from a rebalancing standpoint AND to exit bond funds from an overvaluation/not worth it standpoint.

Good luck.

 

R48

 

 


 

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Re: Why are people selling bond funds?

I have sell orders in for all three of my bond OEFs.  Partly because I don't understand how they will work in this new, almost zero rate environment, and partly to generate money to buy stocks.  I recently bought CAIBX and SCHD, and have several other stocks/funds in my sights.  

I know that CAIBX has a bond component, but the overall allocation is around 70/30.  And that will be it for my bond exposure.

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Re: Why are people selling bond funds?

Thanks Win for clarifying your situation.  My worry meter for you has been turned off.  Nice sleep well backstop for you is that pension and SS will about cover everything so now I understand high equity percentage.  We are not all as fortunate as you so added color of your situation is extremely useful and informative.  Take care and be well.  

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