No, Mr. Gross, Bond Funds Are Still Not In Free-Fall

Bozo | Feb 11, 2018 | 1,375 posts since 2011

Although Poster Me1004 did "school me" on the trap of bond funds in a rising-rate environment, I had to go back and check my VBTLX to see what, exactly, has happened since rates have spiked.

Background: VBTLX is a very low-cost, intermediate-term bond fund. It is (in my view) the "goldilocks" of bond funds. It is impacted by rising interest rates, but not too much. It throws off a modest dividend monthly, but not too much. It is totally liquid.

History: When the market began to get well over its ski-tips in October of 2017, I sold a tad of VTSAX (Vanguard's Total Stock Admiral) and moved it to VBTLX. In a sense, I was curious about the impact of rising interest rates on VBTLX.

Analysis: In October of 2017, I whacked off $60,000 of VTSAX and moved it into VBTLX. With dividends and capital gains, (drumroll) that holding is now worth $59,000. Trust me, I just looked it up.

Granted, my IRA CD ladder performed much better over the same period, but the death watch on bond funds is premature.

5

Bozo | Feb 13, 2018 | 1,375 posts since 2011

From Investopedia: "Normally, if interest rates change by 1%, a fixed income security's price is likely to experience an inverse change by approximately 1% for each year of duration."

Example: Let's assume the FED raises rates four times. Twenty-five bps each time. That's 100 bps, or 1%. Your particular bond fund has a duration of "6". You should expect the NAV on your bond fund to decrease by 6%. Off-setting this decrease, of course, will be bond dividends. Let's assume roughly 2.5%. The "net" decrease would arguably be close to 3.5%. While unpleasant, such a decrease would pale in comparison to volatile stock market swings, or the swoon a decade ago.

Are bond funds an optimal investment in a rising-rate environment? No. Are many investors in 401K plans offered an alternative for fixed-income? You tell me.

2

RJM_Willy12 | Feb 13, 2018 | 149 posts since 2016

Of course, this also applies to CDs. That you don't bother to calculate the value of a CD does not mean it does not change value.

In other posts, you also ignore that CDs have a built in put option, the early withdrawal penalty. If one is in fact allowed to terminate the CD.

And, Gross has described the current market for bonds as a decaffeinated bear market. Which seems absolutely correct, for the past 6 months.

3

Bozo | Feb 13, 2018 | 1,375 posts since 2011

Itserich, a retail CD does not fluctuate. It is what it is, so to speak. In addition, I've yet to see a CD's EWP fluctuate up or down with prevailing interest rates. Bond funds, on the other hand, can and do fluctuate, often daily. Retail CDs are, by definition, "zero-duration" fixed-income products.

Now, theoretically, a savvy financial institution might try to ease you out of a high-rate CD by lowering the EWP. But why would anyone fall for that?

1

RJM_Willy12 | Feb 14, 2018 | 149 posts since 2016

Retail CDs, or wholesale or brokered or any other type of CD normally sold by banks and credit unions, and fixed income in general, definitely have a calculable duration.

I have no idea what you think you mean about lowering the penalty to try and get a customer to terminate a CD early. You sound very confused.

The early termination penalty is a put option, when rates are rising. It is so very basic.

4

Bozo | Feb 14, 2018 | 1,375 posts since 2011

Itserich, brokered CDs are more "bond-like" than retail CDs. Brokered CDs have a secondary market. They are absolutely impacted by fluctuations in interest rates. If you want to sell them before maturity, the market will let you know. Retail CDs, on the other hand, are totally immune from fluctuations in interest rates. As there is no secondary market, what you bought is what you have. EWPs are basically irrelevant, as they do not adjust to interest rates.

Wisdom Tree (among others) offers "zero duration" products. Sort of an inside joke. Folks with CD ladders (IRA or otherwise) already have zero duration.

PhD candidates will argue a $100,000 CD at 2% is worth less than a $100,000 CD at 2.3% I would agree. That said "worth less" does not mean the NAV of the CD has decreased.

1

RJM_Willy12 | Feb 14, 2018 | 149 posts since 2016

Bozo, a person doesn't have to have an advanced degree to understand this stuff.

You ramble: "Folks with CD ladders (IRA or otherwise) already have zero duration."

This is absurd. With CDs yielding under 3%, the duration is roughly equal to the maturity of the CD. If you own equal amounts of a 1, 3 and 5 year CD, the duration is going to be 3, not zero.

And your prior comment "Retail CDs are, by definition, "zero-duration" fixed-income products." is similarly nonsensical.

3

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.