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Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 10:52 am
by sonowwhat?
I have 60% of my investments in Bonds Specifically with following losses overnight and YTD:

VFIDX Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares => -1.93% YTD => -3.25%

VBTLX Vanguard Total Bond Market Index Fund Admiral Shares => - 1.62% YTD => -0.4%


Makes my nervous seeing an overnight decline in bond values especially since I was banking on safety and with rates declining them actually going up. Someone help me understand whats going on. Ive lost plenty in stocks and need to keep bond values preserved and was shocked to see such a quick decline. Are we at the point where overall bond market is pricing in significant default risk?

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 10:55 am
by rbaldini
Bonds are not risk free. They can and do decrease in value. While they are generally uncorrelated with stocks (approximately), there will be times when both drop at the same time. Generally, bonds are much less volatile than stocks - declines do occur but are relatively small.

If you *require* that the balance in your bonds does not decrease, then that money should not be in bonds. You should hold it in a savings account. Realistically, you might not actually require this.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 10:55 am
by willthrill81
A chunk of total bond market funds and 'investment grade' bond funds are made up of corporate bonds, and those are at risk right now.

This is why Larry Swedroe and others have long recommended to 'take your risk on the equity side' (e.g. using Treasuries, TIPS, savings bonds, CDs).

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 10:58 am
by sonowwhat?
So the losses are small now relative to stocks so would going to cash in these Bonds be crazy now? Its effecting my sleep factor!

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 10:58 am
by onourway
Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:00 am
by willthrill81
sonowwhat? wrote: Thu Mar 19, 2020 10:58 am So the losses are small now relative to stocks so would going to cash in these Bonds be crazy now? Its effecting my sleep factor!
If you wouldn't buy them, it probably doesn't make sense to hold them.

As I noted above, there are safer fixed income instruments than corporate bonds.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:01 am
by onourway
sonowwhat? wrote: Thu Mar 19, 2020 10:58 am So the losses are small now relative to stocks so would going to cash in these Bonds be crazy now? Its effecting my sleep factor!
What does your IPS say?

Bonds are expected to vary in value. They generally compensate you much better than cash due to the risk that holding them entails.

I would suggest you look back a few years and see how much you've gained in value by holding these bonds. If you'd held cash instead, you'd likely have a far smaller number to be worried about right now.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:05 am
by dbr
Intermediate bonds have an expected standard deviation of annual returns of maybe 5%-7% for Treasuries and 7%-9% for corporates. That means that under typical conditions, using 5%, returns might range between 0% and 10%. Under 2 SD conditions between -5% and 15% and under 3 SD conditions between -10% and 20% It is also a tendency for most investments to have wider tails than normal distributions meaning estimating risk by SD is probably an underestimate of extremes. So your losses so far YTD, given that we are in extreme circumstance might be expected. Note that stocks, with SD of maybe 20%, would have a two SD loss of 30% and a three SD loss of 50%. That old mantra about recognizing stocks can decline by as much as 50% probably makes sense.

To get less volatility the expected SD of annual returns for 1 month Tbills is closer to only 2%, but I think that mostly comes from reinvestment risk, meaning the interest rate available on a one month bill might range from 0% to 4%.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:06 am
by nisiprius
sonowwhat? wrote: Thu Mar 19, 2020 10:58 am So the losses are small now relative to stocks so would going to cash in these Bonds be crazy now? Its effecting my sleep factor!
It would not be crazy, because they are not down very far and your losses would not be very high.

Since the SEC yields are showing as 2.12% for VFIDX, and 1.82% for VBTLX, you might not want to put the money in a plain old savings account. You probably will have trouble finding anything as high as 1.82% or 2.12%, but you should for something not too much less. You might want to shop carefully and perhaps accept bank CDs, rather than perfectly liquid savings accounts.

And you should read more about what it means when people say bond funds are relatively safe. They are not as a safe as a bank account, and usually they have higher return in exchange for accepting that higher risk. You should never have believed bond funds would be safe on a day-by-day-by-day basis. Vanguard actually says this--go to the web page for VFIDX or VBTLX and click on the purple text under the diagram showing "risk potential 2:"
Vanguard funds classified as conservative to moderate are subject to low to moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (4 to 10 years).
Nothing is absolute, but the expectation that Vanguard is setting is that these funds should be reasonable safe when held for a holding period of four to ten years.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:09 am
by Kenkat
onourway wrote: Thu Mar 19, 2020 10:58 am Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?
Yes, if you had a vision in your sleep and moved everything to money markets exactly a year ago, you’d have less money than if you’d just stayed put. This includes the big drop over the past 10 days.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:10 am
by dbr
Kenkat wrote: Thu Mar 19, 2020 11:09 am
onourway wrote: Thu Mar 19, 2020 10:58 am Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?
Yes, if you had a vision in your sleep and moved everything to money markets exactly a year ago, you’d have less money than if you’d just stayed put. This includes the big drop over the past 10 days.
But that was a stupid investment. Long term bonds returned 30% last year.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:11 am
by Brianmcg321
There are millions of people that would kill for only -3% loss.

Stocks are down over 30% from their high.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:11 am
by Kenkat
dbr wrote: Thu Mar 19, 2020 11:10 am
Kenkat wrote: Thu Mar 19, 2020 11:09 am
onourway wrote: Thu Mar 19, 2020 10:58 am Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?
Yes, if you had a vision in your sleep and moved everything to money markets exactly a year ago, you’d have less money than if you’d just stayed put. This includes the big drop over the past 10 days.
But that was a stupid investment. Long term bonds returned 30% last year.
Which was a stupid investment?

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:19 am
by dbr
Kenkat wrote: Thu Mar 19, 2020 11:11 am
dbr wrote: Thu Mar 19, 2020 11:10 am
Kenkat wrote: Thu Mar 19, 2020 11:09 am
onourway wrote: Thu Mar 19, 2020 10:58 am Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?
Yes, if you had a vision in your sleep and moved everything to money markets exactly a year ago, you’d have less money than if you’d just stayed put. This includes the big drop over the past 10 days.
But that was a stupid investment. Long term bonds returned 30% last year.
Which was a stupid investment?
Total bond. Obviously one should have bought long bonds. :shock: I'm taking a jab at misunderstandings of risk in investing.

Re: Why are my safety bond funds going down?

Posted: Thu Mar 19, 2020 11:24 am
by Kenkat
dbr wrote: Thu Mar 19, 2020 11:19 am
Kenkat wrote: Thu Mar 19, 2020 11:11 am
dbr wrote: Thu Mar 19, 2020 11:10 am
Kenkat wrote: Thu Mar 19, 2020 11:09 am
onourway wrote: Thu Mar 19, 2020 10:58 am Bonds are expected to vary in value. Were you concerned last year when Total Bond gained nearly 9%?
Yes, if you had a vision in your sleep and moved everything to money markets exactly a year ago, you’d have less money than if you’d just stayed put. This includes the big drop over the past 10 days.
But that was a stupid investment. Long term bonds returned 30% last year.
Which was a stupid investment?
Total bond. Obviously one should have bought long bonds. :shock: I'm taking a jab at misunderstandings of risk in investing.
Ah, sarcasm missed by me :sharebeer