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| Is it a good time now to get into bond funds? |
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| engineheat:
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? |
| bdunham7:
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. The average Fed funds rate for the past 50 years is 5.42% and the highest is 20.00%. We're still well below the average and 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/ |
| Wallace Gasiewicz:
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 up Another 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. |
| jonpaul:
About 10..20 years aog.... US Treasury iBonds, TIPS. https://www.treasurydirect.gov/ |
| jpanhalt:
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. |
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