What to do with bond funds now? (cash, dividend, mortgage rates)

[snowmountains]

I've had a long term bond fund in taxable account that I used to park my extra cash that's not needed in the next year or so. The NAV has been going down every day. Should I sell it now for tax loss, or hold it to continue earning the dividend (will the dividend decrease, too?). Any idea how much lower the NAV will continue to go, and for how long?

[pipsters]

Interest rates are at all time lows. There were no warning signs, over the past 12 months, that told you to sell?!?

Unless the economy collapses rates are going up which means bonds held prior to rate increases are going to get slaughtered.

[rjm1cc]

Sell
Long term bond funds will continue to lose value as interest rates increase.

You could move to funds with a 2 to 3 year duration but you could still lose money here.

I would look to CD's or buy and hold individual bonds and avoid the funds.

[snowmountains]

Thanks. How will the dividend change?

[mathjak107]

a lot of the damage for now may be already done and over . we had a rate rise over a 90 day period that only happened as bad once before. long term bonds lost a whopping 13% . total bond about 4% . i started speculating a bit by buying up some TLT and GLD since both gold and bonds got hammered .

a lot of portfolio's that used long term bonds bar-belled them . they split the money in 1/2 and put 1/2 in long term treasury's and the other half in cash instruments or 1-3 year bonds

the results are better than had you taken both 1/2's and threw it in a total bond fund yet duration is about the same . a 50/50 split of SHY and TLT will come about the same duration as a total bond fund but so far through this mess had better returns .

[Wells5]

If you have a capital gain that you wish to offset, then sell all or part of your long term bond fund, just enough to counteract the capital gain. Yellen will not increase the fed funds rate very much. She knows that increasing the discount rate more than 25 basis points will plunge this very fragile economy into recession. I remember that the discount rate went to 12% under Paul Volker in Oct. 1979 and mortgage rates went to 18%. That just about killed off the S&L business and bond prices went into the tank. That scenario won't happen now or in the future, even if inflation hits 15% and gold goes to $2500 per ounce.

[mathjak107]

short term rate increases have little to do with the bond market .

in fact most of the time the fed raised rates more than 1% in a year bonds went up .

bonds do not trade based on what the fed does as much as they do fear , greed and the perception of inflation .

except for 1994 bonds have not lost money the last 35 years when the fed funds rate was raised over 1% in a year .


rising short term rates can be a positive for the bond markets as it reigns in inflation .

the plunge we saw in bond rates ,especially the longer term had little to do with the fed's 1/4 point move .

the left is the amount the feds fund rate was raised - the right is what an intermediate term bond fund did that year .

[Petunia 100]

I'm not doing a darn thing with mine.

I shoot for 25% of my total portfolio in plain old Total Bond Market. I'm going to just keep right on doing that. Yes, it will take some hits as rates rise. But as issues mature and are replaced, there will be higher yielding bonds in the portfolio, which is a good thing.

[mathjak107]

the rising rates on bonds as they are replaced help but depending how long and how rates go you are well behind the curve . it can be far better to just bail and go a more profitable route as there are so many other types of bond funds that are far better choices as events play out .

a total bond fund is not even close to being total and it is missing pretty much all the segments of the bond market that those better choices would be represented by .

it has no floating rate bonds , no inflation protected bonds , no foreign bonds , no high yield bonds , no bonds linked to commodity index's , etc ,etc . .

rising rates and rising inflation fears go hand in hand . it may pan out better to link treasury's bonds and a commodity index or gold .

[TwoByFour]

Originally Posted by snowmountains

Any idea how much lower the NAV will continue to go, and for how long?

The rule of thumb for bond funds is the price (which is usually close to the NAV) will drop by an amount that matches the duration of the bond fund, for every 1% change in interest rate. I don't know what the duration is for your fund, but if it is a long-term US Treasury fund it could be 15 years or so. If so, the NAV will fall about 15% for every 1% increase in interest rate.

So, how much have rates changed? The rate for 30-year bond on 1/1/2016 was 2.98%. That fell to 2.1% in August. It is now up to 3.01%. The average maturity for your bond fund is not going to be 30-years, it will probably be close to the duration. So you have to look on the yield curve for that maturity to see how much interest rates have changed. The 10-year maturity point on the yield curve has gone up about 0.5% between July and November.

So, putting that all together, I would expect a long term bond fund with duration of about 15 years and average maturity of about 10 years to drop around 7% in value from July until now. As to how much further it will drop is an open question - depends on what happens to interest rates. As to how long before it recovers - unfortunately this is going to be a long time, on the order of the average maturity. That is the big risk in long-term bond funds, that they are rather unforgiving.

One other negative effect - inflation. It affects long bonds more than short bonds and the fear of rising inflation will put another whammy on your NAV. And inflation is rising, you can see its effect in the real yield curves for 2015 vs. 2016 for US Treasuries.

I would not be parking cash in a long term bond fund. IMO, they are an OK investment for buy-and-hold in which case you don't care about NAV and just want the interest payments. Personally they scare me too much and I stay away from long bonds.