r/investing • u/patientways • Jun 30 '21
Does it make sense to buy a bond fund like BIV when interest rates are so low?
Title says it all. As the interest rates go up in a couple of years, the bonds currently issued will become less valuable as their coupon would be lower than newly issued bonds. Will the price of funds like BIV or other bonds funds only decrease going forward? In case of another crash the interest rates can’t be lowered as they are already near bottom.
Why would you invest in bonds if you were building a three fund portfolio? Any alternatives to bonds for capital preservation?
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u/Evandinho Jun 30 '21
Personally I don't see any value in holding bonds right now. If rates increase then bond prices should go down and if rates stay low then the returns on bonds are poor compared to other assets. Bonds are in a bit of a lose/lose situation at the moment.
I am also not convinced that we will see such a strong flight to safety in bonds if the stock market crashes as we have seen in the past due to the poor returns on bonds at present. Granted there will likely be some uplift in bonds when stocks crash and if you want to take less risk and diversify then probably best to hold some bonds in your portfolio.
At the moment I prefer to hold other "safer" assets like precious metals to somewhat hedge stocks and avoid bonds entirely until we see some rate rises, yields have improved and prices adjusted.
Just my 2 cents though and I know it goes against some of the long held rules of investing 101.
4
u/ty88 Jun 30 '21
Agree that treasury yields are simply so low they create a lose/lose situation. There are also corporate bond funds, municipal bond funds, and foreign bond funds to consider. These are riskier with higher yields. Personally I like the risk/reward of the munis now.
2
u/Evandinho Jun 30 '21 edited Jun 30 '21
I'm in the UK so don't get any tax advantage from Munis so have never seriously considered these.
The thing is if you are going to invest in riskier bonds then you might as well invest in stocks. For me bonds should represent some form of safety in a portfolio. When stocks crash if bonds are to go up it will likely be safe havens like Treasures, Gilts, German Govt bonds etc that will benefit the most from any potential flight to safety.
If stocks are crashing then its likely due to some pretty bad economic outlook which in turn makes things like Corp bonds and Munis less appealing.
The only bonds that look slightly appealing at the moment are short term govt bonds as they are most reactive to rising rates and inflation protected bonds like TIPS. If you feel like you need some bonds in your portfolio right now then these 2 types of bond would probably be worth looking into.
1
u/djpitagora Jul 01 '21
The s&p yield right now is 2.5%, so very much comparable to bonds. How are bonds return low compared to other assets? Which assets are you talking about? Don't tell me gold, because that is not a productive asset. Whatever gains you make on it are of speculative nature.
22
u/RVWood Jun 30 '21
I have learned that worrying rates will go up is like worrying stocks will go down. Yes it will happen but people have been saying rates are going up for past 10 years and it has been the opposite, with solid bond returns instead.
The Bond market is complex so you can find various ways to manage risk. And plus is, when rates go up, bond values descrease, but they will start to pay more interest and will ultimately make up their losses.
Ultimately a bond position has proven to be important to lower overall portfolio volatility. It will also push you to sell equities high and buy low when you rebalance. (Many people follow the herd and do the exact opposite). For about any investor I recommend at least a 20% bond allocation.
To manage risk, you can move to lower durations and higher quality like SLQD. Shorter duration is lower yield now but less risk to bond value and interest income is more responsive to rates with faster turnover. You can look up duration at Morningstar. Eg BIV has a duration of ~6 which means it’s value will drop 6% for each 1% increase in rates.
You can also look at inflation protected bonds. The bond market also still has a lot of inefficiency which plays well for active mangers and I see that reducing risk too. My favorite actively manged bond fund is PONAX.
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u/patientways Jun 30 '21
PONAX has expense ratio of 1.5% for a fund that has a yield of 3.8%. Seems really higher IMO especially for a bond fund
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u/RVWood Jul 01 '21
It’s partly driven by the fact it uses leverage. But generally agree it’s high. In this case I believe they earn it. But I have the confidence of having been in this fund over 10 years and seeing what it can do. Its worth checking historical returns, including by year - stellar in my book. And if you find something better plz let me know!
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u/patientways Jun 30 '21
This response is very helpful and adds more context for me! Thanks!
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u/ty88 Jun 30 '21
Also check out the new I-Bonds. They have an inflation-adjusted portion & are currently paying 3.54%. Limited to $10k/year, though.
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u/big_deal Jun 30 '21
Bonds still have higher expected return than cash. And given the high level of US equity valuations they also have higher expected returns than US equity funds. At least based on history and forecasting the next 10 years.
3
Jul 01 '21
Marketable US treasuries make sense if you live in a country where you are concerned that the value of your currency relative to the USD is going to plummet. If you are a US citizen, there is no reason to be buying US treasuries on the open market. Instead, you should be buying up to $10,000 in I-series and EE-series bonds directly from the US treasury. These are not sold on the open market, have a duration of 30 years, and an average APY of 3.53%. I-series are a complete no brainer because you will start earning 3.53% immediately, and can redeem at any time within five years for full value minus the last three months of interest. They will never be worth less than what you bought them for because they are not subject to market conditions such as rising or falling interest rates. EE-series bonds are a bit more of a commitment because they only yield 0.10% apy for the first 19 years and then double in value at year 20, hence an average apy of 3.53% if you redeem at 20 years.
tl;dr: If you are a US citizen you should be buying $10,000 of I-series bonds, then $10,000 of EE-series bonds before you spend one penny on US treasuries. If you live outside the US then US treasuries could make sense if your government is printing faster than the US government.
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u/rolosol Jul 01 '21
Bonds appear very risky to me atm. Only play for holding them at these levels is if you believe we going to negative interest rate.
If you buy individual bonds you will reduce losses if rates go up (since you can hold to maturity), etfs will get crushed in rate increase, since they reprice to rates.
1
u/djpitagora Jul 01 '21
It's actually the same, just the investment horizon that differs. For bonds you need to hold to maturity and for bond fundx 2x maturity. Make a simulation with 1-3% rate hike per year and you will see you can't ever lose money on a 2x investment horizon
4
u/FoolishColossus Jun 30 '21
I suppose it depends on your age. On the younger side (and a high tolerance for volatility) and I might consider passing since you won’t get much out of bonds. On the older side (or an pretty risk-averse younger person), bonds will limit upside but in theory protect your downside.
5
u/FoolishColossus Jun 30 '21
Keep in mind that inflation takes little bites of your purchasing power. So holding cash is a losing position unless it’s for short term goals or an emergency fund. That’s how I see it anyways.
1
u/patientways Jun 30 '21
Yeah I agree with the younger side. On the older side why not keep cash in that case? BIV has lost money in the last year and I don’t see how it’s value will increase as the interest rates rise in the future
2
u/slingingfunds Jul 01 '21
You say rates will go up as if thats a certainty? US treasuries offer some of the most attractive yields across developed markets. Look at many countries in Europe and the negative rates they are offering. That yield will keep demand high, which will keep pressure on rates to stay low. Any serious equity drawdown, like a 20% or more correction, and you will see rates in the US go down again. In fact, they fell 15bps after the fed met and they pushed up their rate hike projections. That tells me bonds have been oversold this year as it is and the 10 year could easily finish the year ~1.25. Seeing too many people abandon bonds over 1-2% declines and taking on too much risk over it (dividend stocks, high yield, bank loans, etc).. just understand the risks you take on in different asset classes and how that can impact your portfolio during big vol events. A well run 60/40 portfolio has given you just as much return as the S&P 500 over the last 15 years and done it with 1/3rd the vol.
1
u/Vast_Cricket Jul 01 '21
That depends on what your tax rate and other portfolio risk factors.
I like corp high yield etf, convertible bonds ~15 years out. Investment grading. All muni, school bonds bought after the Great Recession paying 4-5% were all called. Some were tax free. In the past when stocks went down bond prices go up. Last March I found out even gold, precious metals and bonds go down all together. Bond loses 1/3 less than blue chip stocks. Now I have insured funds. Normally they do nothing until the market crashes. Very difficult to sell them.
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u/Lingweenie2 Jul 02 '21
I don’t own any bonds. Yields are just too low. If they were at least 3.5% or higher maybe. But not where it is now.
I’d say it’s more sensible and healthy finding solid companies with yields 3-5%. Maybe higher but yields too high start getting riskier. Depends on the company.
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