I think a larger problem with bond and loan ETFs is equity-like liquidity for an underlyer that is inherently illiquid. A lot of these are unproven in times of market stress and bad things can happen very quickly with how the market is right now.
Don't necessarily agree with your assessment on rates but yeah hard to get excited about bonds right now.
I've had a thought recently that bonds are quirky in that - unlike other investments - they behave like a utility. I've just seen that expressed in your comment.
You didn't say you were chasing a particular return, but that you were chasing safety. Bonds have a special property in that they combine being very flexible and are considered to be very safe. I think this creates a demand for them due to that combination, rather than due to their return on investment.
I don't see the evidence that they are that safe. Certainly, history shows many examples of governments which have spiraled into debt and inflated or defaulted.
But so long as there's a population that acts along this logic, it would seem that bonds will function as a nice, flexible store of value.
> ETFs make it relatively easy now.
I suspect some of them are vulnerable to the same flaws as the financial system. For example, some ETFs don't keep physical holdings of the asset they represent, and have positions that are exposed to counterparty risk. For example, I read about an ETF that allowed people to borrow its stock for shorting.
If I was investing in that sort of ETF, I'd be concerned about upside. Holding commodities can be nice in a black swan event. But ETFs with counterparty risk may themselves fall over at such a time.
I feel like I'm taking crazy pills. I said you make a rate based on the market return (as stated on the treasury site). I also said the additional return you get is based on having it be non-transferrable, and in the case of the annualized 3.5%, 20-year term, severely illiquid asset. That's also true. I think the risk of illiquidity is major risk, and I don't at all agree they are decent investments for that reason. I realize this is a zombie thread but can't help but reply. Just because there are other, also terrible, low risk debt products in today's market doesn't make this one reasonable. The value of an investment has to be measured based on what you're getting out of it, not just relative to other investments. That's why I remarked on being better to be in cash than bonds: bonds have a huge actualized and opportunity risk relative to their yield.
Like bonds? When we talk about liquidity, aren't something like questrade ETF's for bonds like VAB.TO for example pretty liquid? I can just sell them any day fairly easily. Then again, the interest rate of my bank is probably more than that right?
Talk to any face to face financial advisor and they will tell you to buy bonds not bond funds. (You never hear this in the financial press, funny...). The issue is that bond funds don't behave much at all like bonds do because they are always trading to keep the maturity distribution constant. This in turn throws off the logic behind the idea that at age X you should have Y percent of bonds and Z percent of stocks.
If you are doing the "put $50 a week in your IRA" thing, you can't even buy bonds because the denominations are way too large period, but it is even worse if you want diversity.
I'd love to see some kind of ETF with an expiration date that would behave like a bond, give diversity against default risk and be denominated to be a tool for the ordinary investor.
Trouble is it is hard to get anybody excited about bonds today and if interest rates ever go up, bond funds will be a bloodbath -- PIMCO will lose more money for investors than anyone in history, not because they did anything wrong but just because that is how the cookie crumbles.
With that backdrop it might be 25 years before people will buy a new debt product.
As long as interest rates keep rising is it a mistake to buy something like TLT? I'm looking into these products and am a bit lost. I am thinking a managed bonds fund is better than an automatic ETF bonds fund in this time. A manager could wait for interest rates to peak, but the ETF just mindlessly keeps buying treasuries. Is that a fair assessment?
You can't get good returns in the bond market with interest rates this low, so there's a lot of money out there looking for better returns even if it means higher risk.
The problem is that there's not a clearly viable alternative. Even if we're in a period where the market is going to underperform (likely), will it still underperform cash? Bond yields are so low that they're a questionable inflation hedge as well.
Bonds were not a good idea because rates were historically low. If you can't time the market then why bonds should not be 20-40 percent of a portfolio?
Bonds are a horrific investment in today's market. Rates are lower than they have been since WW2 when they were fixed by the government! The principal and interest risk for owning bonds is essentially at an all time high. You'd literally be better off in cash in rates rise even somewhat in the near future.
The taxes are small, just like the returns. I can’t really see bonds as a an indiviy investment in an era of low interest rates. And they only go down in value if interest rates start going up.
Yeah, this has been my impression for quite some time now. Future projection for company equity seems fine enough, though quite obviously overvalued (but good luck betting against uncapped QE).
Corporate debt on the other hand has been scary for a few years and is getting ridiculous. Your point lowest possible bond ratings is a solid one, I think, and one I hadn't considered.
The chaining effect of some failures will be significant given how much leverage is inherent in the system. I think bond market spreads will become quite large as liquidity dries up.
I think part of the problem is established dogma (and regulatory regime) that believes bonds offer diversification from stocks. However this seems to have broken down post 2008, as they have become increasingly correlated.
Imho it's healthy to expect that market regimes change, especially since we do not operate in free market, but a semi-intervined market (where the Fed sets the price of money which is an incredibly important input to the global economy).
I also think it's important to not think of diversification in terms of asset classes anymore, but in terms of alpha source.
I know this is much harder to do because, as far as I know, only by actively trading can you isolate and quantify alpha sources like this.
This is overblown, because there are cases where you do want bond funds and bond ETFs. Was just reading this article today [1], which presents some of their benefits.
- More convenient than individual bonds.
- Can't estimate future liabilities perfectly and therefore won't be able to perfectly duration match using individual bonds.
- If we hit a recession and interest rates drop, you'll get a nice price bump from your bond funds when your stocks are dropping.
That being said, I do agree that the dangers and risk of bond funds and ETFs don't get talked about often enough, and that you should know what you're doing before buying them. If you have a short-term need for the money (e.g. need 100k for downpayment in 12 months' time), you should not buy a bond fund with a duration longer than 12 months. That is when you will hit the danger parent brought up where you will get a NAV drop and won't have enough money at the end of 12 months to meet your liabilities. In that case, you should really duration match [2] with individual bond that matures in 12 months.
At that point wouldn't bonds make more sense? Seems like the risk vs. reward balance is skewed the wrong way if you own a piece of stock that stays flat.
One issue I've run into when I looked into strategies like this is that bonds have been an incredible investment over the last ~40 years. Sure, they haven't beaten the S&P500 straight up, but their volatility and max drawdown has been so good that you could have used leverage with them and gotten a portfolio that easily beats the S&P500 with as good or better volatility.
The problem for me going forward is that these returns for the last 40 years have been do to falling interest rates. Can the rates keep falling? A little bit more. Will they go negative like some other countries? Maybe? But at some point I have to wonder if this strategy is still viable.
Don't necessarily agree with your assessment on rates but yeah hard to get excited about bonds right now.
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