I mean those who investment mostly in bonds rather than stocks. Or Bond Funds like PTTRX. I have never done bonds and when I go to explore I see depressing returns in the charts. How do people make money in bonds? Stocks seem much better, even just plain indexing.

Goodness no.

VTSAX and then a small amount of bond funds to make my asset allocation stable.

BombayAg said:

---

I mean those who investment mostly in bonds rather than stocks. Or Bond Funds like PTTRX. I have never done bonds and when I go to explore I see depressing returns in the charts. How do people make money in bonds? Stocks seem much better, even just plain indexing.

---

Stocks and bonds are completely different types of investments with entirely different risk levels.

BombayAg said:

---

I mean those who investment mostly in bonds rather than stocks. Or Bond Funds like PTTRX. I have never done bonds and when I go to explore I see depressing returns in the charts. How do people make money in bonds? Stocks seem much better, even just plain indexing.

---

Your problem might be that you are looking at historical returns. That can cause you to invest in recent trends, which can sometimes be already crowded.

We (family) are currently in about 50/50 in my liquid portfolio. Most of it is in municipal bonds and municipal bond funds, although we do have some high yield corporate bonds, treasuries etc.

At a Shiller CAPE > 30, the expected returns for stock seem to be less than 4%. Well, you can get an after tax return at about that much in the bond market. There is interest rate risk, but the talking heads on CNBC have overblown it. The 30 year treasury is still priced as if 10 year treasury interest rates wont stay about 3% for very long.

Plus, high grade bonds have a negative price correlation with stocks during a heavy market draw down. I have made and lost a good bit of money catching falling knives, so it is nice to have dry powder available to catch some more IF a downturn happens.

Do mostly individual tax-free bonds for about 40 of the portfolio. All are TX based govermental or school district entities. Several things come to mind:

- I am not a fan of bond funds. I hold bonds to generate a reliable base level portfolio return and not to play the yield game. Bond funds can be subject to some severve price swings during liquidity events. Put another way, to meet cash calls a fund will have to sell its assets; they will likely have to sell the highest grade securities in the portfolio in order to realize the highest amount of cash. That leaves the fund holders with the bottom of the barrel securities in such an event.

- Bonds will result in a new level of tax complications. Better learn about OID (original issue discount), market discount, amortization of bond premium, call features, yield to worst, etc

2wealfth Man said:

---

Bond funds can be subject to some severve price swings during liquidity events.

---

Very interesting. I cannot imagine this being the case for a large bond fund. Are there example funds that have had this issue? Before reading this I would have thought that the underline assets would be subject to the same or more volatility than a large diversified bond fund.

I am not much of a bond picker, but I do admit that bond managers tend to have a better shot at creating alpha these days than stock managers.

I never understood how bonds work in the market. A bond is essentially a loan from me to company X. Company X agrees to pay me back the loan plus interest. Why does the value of the bond - to me - change just because the market interest rate changes? And, why do I care what the value of the bond is when I still getting paid what I agreed to? One would think that the only thing I care about is that the borrower doesn't default.

Now, I guess I can see that my bond will become less attractive to others and thus lose value as rates increase. So I guess people look more at bonds as something that can be traded rather than the value of the contracted interest - kind of similar to a dividend on a stock.

Where are yall buying Texas based muni bonds? I have an older family member that's been liquidating real estate. They're the type that would rather let it sit in a savings account and anything with the word stock in it is the devil. Think I can talk them in to 100-200k in muni bonds. Where should we look? I have a good understanding but have never had the need.

queso1 said:

---

I never understood how bonds work in the market. A bond is essentially a loan from me to company X. Company X agrees to pay me back the loan plus interest. Why does the value of the bond - to me - change just because the market interest rate changes? And, why do I care what the value of the bond is when I still getting paid what I agreed to? One would think that the only thing I care about is that the borrower doesn't default.

Now, I guess I can see that my bond will become less attractive to others and thus lose value as rates increase. So I guess people look more at bonds as something that can be traded rather than the value of the contracted interest - kind of similar to a dividend on a stock.

---

Bonds are priced so that the yield-to-maturity on your bond equals the market interest rate of bonds with similar credit quality. As interest rates go up the price of your bond goes down. The metric to use to determine how sensitive your bond is to interest rate movements is called duration.

Quote:

---

The metric to use to determine how sensitive your bond is to interest rate movements is called duration.

---

I recently observed the problem with the metric duration is that it is misleading. Short term interest rates seem to react quicker to Fed tampering than longer term rates. Take a look at a yield curve 1 year ago compared to today.


If the market believes that the Fed will not be able to keep its conviction for very long, the 30 year bond hardly moves. The 10 year moves less than the 1 year etc. That is part of the reason that the yield curve flattens when the Fed starts increasing interest rates.


Duration would have you believe that you would be better off in a rising rate environment in a shorter term (duration) bond. That may not be the case.

Correct. How you play duration depends on your expectations of the interest rate curve. Right now the curve is in a bear flattener, meaning the sell off of the front end of the curve is causing short term rates to go higher (Fed action) while the long end doesn't move as much. In this scenario, it does seem counterintuitive, but extending duration is beneficial from a total return point of view. Extending duration will not work as well in a parallel shift in rates.

queso1 said:

---

Now, I guess I can see that my bond will become less attractive to others and thus lose value as rates increase. So I guess people look more at bonds as something that can be traded rather than the value of the contracted interest - kind of similar to a dividend on a stock.

---

While bonds are indeed contractual obligations, they are also a very liquid security and trade as such. The bond market is much larger than the equity market. I wouldn't think of them as "contracts" but more like active securities.

You are on the right track with how people value bonds. Let's look at a real world example. Yesterday, Conroe TX issued 10 year tax exempt bonds with a 5.5% coupon and a yield of 2.80%...that dollar price translates to $119.852 for each bond purchased. Buying 100m ("m" is for each bond with a par value of $1000) means you pay $119,852 for the 100 bonds. Now let's say that today's rates are higher and you need to sell. To keep it simple, let's say a similar bond prices at 3.00%. I'd rather buy that 3% bond than your 2.80% rate. If I was to buy yours, I'd want you to lower the price so that my yield would be 3.00%. For this specific Conroe bond, a yield of 3% would mean the dollar price would drop to $117.862...almost 2 points or about $2000 total for 100m. If the 10 year rate rose to 3.30%, you could expect a price of ~115.

All my bond holdings are 30 year treasuries.

I buy with 30 years to maturity and sell when 20 years to maturity.

Can also hold something like VGLT or VLGSX - pretty long avg maturity. Just have to pay the piper with an expense ratio, and buying and holding bonds is a no-fee game at almost every brokerage service.

PFG said:

---

All my bond holdings are 30 year treasuries.

I buy with 30 years to maturity and sell when 20 years to maturity.

Can also hold something like VGLT or VLGSX - pretty long avg maturity. Just have to pay the piper with an expense ratio, and buying and holding bonds is a no-fee game at almost every brokerage service.

---

Interesting. What do you usually get in the rate difference between 30 year and 20 year treasuries? 20 bps? I am going to have to do the math to see how much capital appreciation are getting.


I just looked, VGLT has an expense ratio of 0.07%. That is a reasonable piper.

AgBank said:

---

What do you usually get in the rate difference between 30 year and 20 year treasuries? 20 bps?

---

The current 20/30 year spread is only 10 bps.

Consider GMS Group for professional opinions.