Is it a good time now to get into bond funds? - Page 1
Forum section: electronics / general

author: engineheat
author_rank: Frequent Contributor
timestamp: March 19, 2023, 10:10:44 pm
content: I wonder how ETF like iShares Core US Aggregate Bond ETF would do in this environment of high interest rate if one were to get into it now. Especially compared to equities, like the SP500, particularly in the short term, like 2023.I know for a fact that if I buy individual bonds like US Treasury bill, I'm guaranteed a certain rate of return if I hold till maturity. But I'm not sure I understand how bond ETFs or bond funds work to be able to get an idea of what my estimated return would be for a particular year.Thoughts?

author: bdunham7
author_rank: Super Contributor
timestamp: March 19, 2023, 11:28:33 pm
content: I don't buy bond funds for various reasons, but probably the most convincing reason is that it is probably harder to understand a particular bond fund than it is to understand the bonds themselves. It is possible, of course, to lose money in bonds (just ask Silicon Valley Bank) but it is far easier to lose money in bond funds IMO. Just look at the past 20 years performance of AGG and the lack of any real stability given recent losses. Other reasons include fund expenses (you can buy your own almost expense-free, although I realize AGG is very cheap) and the fact that you can control your duration and tax consequences more precisely.To answer your question, the obvious answer (assuming default risk is not an issue or doesn't change too much) is that when interest rates go up existing bond prices go down and vice versa. So if you buy that fund, you'll be hoping that interest and inflation both decline slowly over the next 5 years so that you can get the increased yield as well as the capital appreciation--although you really can't get both if you think about it. Look at the duration of AGG and that of SVB's security portfolio-they're similar. Do you want to bet that they are done losing money and you are buying in at just the right time? The yield curve is inverted and I'd stay shorter and just rake in what you can. It's hard to predict what will happen, but one scenario I can see is that the Fed slows down or pauses at this point to prevent too many banks from imploding and as a result, inflation keeps on soaring and then later they have to jack up rates to the moon. TheaverageFed funds rate for the past 50 years is 5.42% and the highest is 20.00%. We're still well below theaverageand I really don't think we are anywhere near done with the consequences of mega-QE and ZIRP. Luxury cars are still flying off the lots, high-end restaurants are packed and the low-to-mid end of the labor market is so tight that McDonalds franchisees would recruit from Russian prisons if they could. And if all of that suddenly and violently collapses, maybe some of those 'investment grade' bonds in AGG will default. Look at their holdings, do you want to own some Credit Suisse bonds? AGG has them, they love banks.I don't know how much you are considering investing, but if you haven't already, buy some iBonds and read this newsletter.https://tipswatch.com/

author: Wallace Gasiewicz
author_rank: Super Contributor
timestamp: March 20, 2023, 12:28:28 am
content: There are funds that invest in short term or long term Treasuries.Pretty much the same as buying treasuries.If interest rates go up, bonds already issued go down, but if you are in it for short term bonds or short term treasuries, you wait the 3 mos to maturity and then buy higher interest treasuries. so, no big deal.I am with engineheat, interest rates are still low and can go upAnother bad thing about bond funds, especially long term bonds is that you get the coupon, (interest) and have to pay taxes on it even though your total investment can go down in net worth.

author: jonpaul
author_rank: Super Contributor
timestamp: March 20, 2023, 12:55:06 am
content: About 10..20 years aog....US Treasury iBonds, TIPS.https://www.treasurydirect.gov/

author: jpanhalt
author_rank: Super Contributor
timestamp: March 20, 2023, 09:58:08 am
content: I've been retired for awhile and have a little perspective on ETF's, bond funds, and bonds.If you do not need liquidity, then individual bonds that insure face value + interest are my choice. Note my retired bias for not losing capital. Currently, laddered treasuries with maturities from 6 months up are very attractive. One advantage to treasures is that they are generally non-callable, so you can lock in the current high rate. Municipal bonds are often callable (I had some 8%, double-exempt municipals during Carter. Guess what happened when rates went down.) Corporate bonds, even high grade, are more risky. The highest risk I have seen were corporate municipal development bonds. I got a little hit before knowing what they were. Once burned, twice shy.Bond funds give liquidity but at a much higher risk of losing capitals. Obviously, there is no such thing as holding them to maturity.ETF's and mutual funds are simply like investing in market indicators. It's hard to beat the market. I had some when considerably younger, but not anymore.Some brokerages make it easy to create laddered bonds and handle treasuries with no commission. I've been told my the firm I use that for treasuries, it doesn't even get an arbitrage.

author: jonpaul
author_rank: Super Contributor
timestamp: March 20, 2023, 11:18:24 am
content: Bonjour à tousAfter USA banks, SVB, silverGate and Sunday 19 March takeover of Credit Suisse, a 167 year old highly regarded Swiss Bank, the forth bank failure in just 10 days. Even the FED, US treasury, ECB, and Swiss government cannot stem the rising tide of bank runs and metastasizing loss of bank confidenceA natural.and long predicted result ofa, Fiat currencies with zero metallic backingb, Fractional réserve bankingc. sovereign debt explosion due to socialiste control of USA and EU budgetsd, impacted of rapidly rising énergie costs, inflatione "Black Swan" of Covid-19 and then Putin's Ukraine war.The extreme volatility in all markets, and régions and widespread market impact may Signal the start of a major turndown.Suggest to review your investments, and bank accounts and move to a non-fiat store of assets.Bon ChanceJon

author: jpanhalt
author_rank: Super Contributor
timestamp: March 20, 2023, 11:36:59 am
content: Quote from: jonpaul on March 20, 2023, 11:18:24 amI agree with your analysis, but I am not confident the solution is as simple as that. Land and other real estate can be seized by the government for the "public interest" (or personal/political gain). Precious metals can also be seized and were by President F.D. Roosevelt in the depression. He needed something to blame and "gold hoarders" were on his list. That restriction on the legal ownership of bullion lasted in the US from 1933 until 1974 -- long after that emergency. Corporate bonds, which presumably have first claim over stockholders in the event of bankruptcy and liquidation, were also made virtually worthless by President Obama in the bankruptcy of General Motors.Nothing is completely safe.

author: paulca
author_rank: Super Contributor
timestamp: March 20, 2023, 05:15:46 pm
content: Bonds and other FI have had negative value for quite some time.So investing in them is more of a lose less strategy and depending on "you" that might be what you want.Bond yield is usually fixed. Hence the asset class "Fixed Income."The reason they are considered a negative income is that when levelled against equities or pretty much anything else including property and inflation they are a loss maker.A bond rate of 3% sounds awesome, but not if the rest of the market it pumping at 8-10%.A bond rate of 5% is amazing, but what if inflation is running at 11%?At the same time however, a 1% bond rate sounds pretty good when levelled against a 0.017% savings account rate.

author: engineheat
author_rank: Frequent Contributor
timestamp: March 20, 2023, 05:40:05 pm
content: Quote from: paulca on March 20, 2023, 05:15:46 pmYes, I see it as "losing less". But where else should one put their money in this environment? What are the better alternatives? Real estate is at all time high. The stock market is still overpriced. I understand inflation is higher than the 4-5% that one gets from CDs or US Treasury bills now, but it's still better than -10% or -20% should the stock market crater like it did in 2022. Thoughts?

author: bdunham7
author_rank: Super Contributor
timestamp: March 20, 2023, 05:51:19 pm
content: Quote from: paulca on March 20, 2023, 05:15:46 pmAFAIK the only thing that causes anyone to consider a normal bond yield to be 'negative' is when inflation is higher than the bond, thus the term 'negative real yield'. Of course, you can also make that happen by paying too much for the bond. Bond yields being less than equities or real estate doesn't make them negative, just less positive. If you think that is a loss, try convincing the IRS of that. And the clear advantage of equities, etc of the past decade (provided you had the right equities) may not be so clear in the next decade, starting with 2022.

author: bdunham7
author_rank: Super Contributor
timestamp: March 20, 2023, 06:02:38 pm
content: Quote from: engineheat on March 20, 2023, 05:40:05 pmIt isn't really reasonable to expect a passive, liquid and 100% risk-free 'investment' to yield a return greater than inflation. As I posted earlier, iBonds (for taxable accounts), TIPS (for tax-deferred accounts) and if you go with other things, stay short term and go for the highest safe yield now. Unless you want a greater return in exchange for some risk, in which case I wouldn't want to give any advice and you probably shouldn't be looking for it here!

author: wn1fju
author_rank: Frequent Contributor
timestamp: March 20, 2023, 06:09:11 pm
content: For that part of your portfolio that you have dedicated to fixed income, open up a treasurydirect account and start laddering T-bills or 2-year T-notes. No state income taxes to pay, no FDIC insurance to worry about, no brokerage or fund fees to ream you. You want a safe, reliable, predictable return. You're not going to "beat the market" anyway unless you are very, very lucky or a financial criminal.All the above in my humble opinion.

author: bdunham7
author_rank: Super Contributor
timestamp: March 20, 2023, 06:24:35 pm
content: Quote from: wn1fju on March 20, 2023, 06:09:11 pmFidelity and Schwab charge very little or nothing (treasury and brokered CDs) and give you some additional options over TD. CDs and agency bonds (read up on how those work, they are typically callable) are yielding more than treasuries and are realistically just as safe if done right.

author: jpanhalt
author_rank: Super Contributor
timestamp: March 20, 2023, 07:22:39 pm
content: I believe Schwab may charge a little for brokered CD's but have been told it handles secondary Treasures without a charge. Roughly 4.7% has been the highest rate for short term for awhile. Some banks, e.g., Ally*, offer 11 to 13 month CD's (period varies) at 5%. Remember CD's are lumped with all accounts in the same name with that bank for FDIC insurance. IRA's are a different account type, so far as I know, and are not lumped with savings and checking accounts.*Check the "at risk" rating. Ally was listed as one, but FDIC will protect you under the applicable limits (i.e., "per depositor).

author: engineheat
author_rank: Frequent Contributor
timestamp: March 20, 2023, 07:45:26 pm
content: Speaking of US government bonds, what do you think will happen to it if they don't raise the debt ceiling and Uncle Sam go into default? If someone has $100k in US Treasury bills, does it just go to zero?

author: paulca
author_rank: Super Contributor
timestamp: March 20, 2023, 08:19:20 pm
content: I do not know the details of how things may or may not work in your part of the world, but in the UK. A lot of pension providers will allow you to open an investments ISA (Tax free*) saving account alone side it, invested into the same fund. If your pension is doing okay, it's an option. There are other options around self-investment pensions with less severe restrictions on pulling it down early. TIf you are willing to wait on your money two approaches.Put your savings into your pensions. In the UK you pay no tax on your pension contributions, they are "pre-tax" on the wage slip. You do get taxed on them when you draw on them as income. However the rate you pay now and the rate you pay then may not be the same. A lot of people I know have mentioned when they popped through the 40% bracket they asked for further raises to be deferred to their pension completely. Such that they do not pay any 40% band tax. As to raises, you have to wait on the Govt raising the 40% bar. You could have worse problems... at the other end of the spectrum.Or a little more exotic. Defer your mortgage to interest only. Especially if the interest on your mortgage (or any loans) is sub-inflations. There are ways to make money from debt. In times of inflation, take the arm off interest free or low interest loans.ISA savings you pay no tax on your capital gains. The money you put into the ISA has still been subject to income tax.**Seek financial advice. The above is NOT financial advise and is mostly parroted off sites like MoneySavingsExpert.com**Note. Deferring loans against inflation is "playing the darkside". It's basically short selling cash. It's about the only thing a normal individual consumer "can" short sell.If you borrow cash now, such that it's worth less in real value when you have to return it (accounting for interest). That is a successfully in and out short position.

author: jpanhalt
author_rank: Super Contributor
timestamp: March 20, 2023, 10:12:43 pm
content: Quote from: engineheat on March 20, 2023, 07:45:26 pmThe the US government defaults on its treasury bonds, money will also be worthless. Read what is written on every bill: "Federal Reserve Note." Silver certificates were destroyed a long time ago. One has to assume our military has contingency plans for that, but no one wants to talk about it.

author: SiliconWizard
author_rank: Super Contributor
timestamp: March 20, 2023, 10:21:51 pm
content: Quote from: jpanhalt on March 20, 2023, 11:36:59 amTrue. In the hands of politics, nothing is safe anyway.What is safer, though, is anything that can't be "seized".I'm not going to write a list of examples. Might either not be legal, or give ideas to politics.

author: jpanhalt
author_rank: Super Contributor
timestamp: March 22, 2023, 07:41:39 pm
content: The Fed just raised its rate 0.25%! Look forward to more potential failures as banks try to maintain liquidity after giving out much lower mortgage rates. Inflation hurts everyone, except the Federal Government. Benjamin Franklin had a pithy quote about that that I won't waste your time repeating.

author: SiliconWizard
author_rank: Super Contributor
timestamp: March 22, 2023, 07:49:52 pm
content: Quote from: jpanhalt on March 22, 2023, 07:41:39 pmYes, of course.

author: Kasper
author_rank: Frequent Contributor
timestamp: March 23, 2023, 08:32:00 pm
content: Hard to beat the market, but following some 'pros' could help. I know nothing about ETFs but this makes me want to start learning about them.Quote from:https://www.etf.com/NANCQuote from:https://news.yahoo.com/paul-pelosi-sold-google-stock-201811551.html

author: bdunham7
author_rank: Super Contributor
timestamp: March 23, 2023, 09:18:00 pm
content: Quote from: jpanhalt on March 22, 2023, 07:41:39 pmIt's difficult to draw a direct line that supports your theory since banks don't hold the mortages for the most part, they simply originate, sell and service them. Perhaps you could draw an indirect line for those banks that invest heavily in mortage securities (like SVB) but that isn't necessarily the norm.