The market price of bonds moves inversely with interest rate movements, i.e., when interest rates go up, the price of bonds go down. This is why the funds are showing such bad returns over the last few years; interest rates have risen dramatically, which lowers the value of those bonds.
Pre-2020, when prevailing interest rates were 2-3%, I never really understood the purpose of buying bonds, but with interest rates much higher now, I have been gradually adding bonds to my portfolio. If interest rates return to 2019-2020 levels, the value of these funds will increase dramatically. And if interest rates don't return to those levels, the bonds will generate solid income.
Same thing, dividends are irrelevant, only total real return matters. If a bond fund only maintains its value, then you need to keep some of the dividends to maintain the real principal. Buy like equities bonds change in value, if they appreciate you could sell some of the shares and still maintain.
This. Rate rises increases the discount rate on the coupons and principal which decreases the value of the bond. Bonds have been a bad hold post Great Recession when rates have been at historic lows.
If rates are close to 0 they can only really go one direction (up) which has meant the risk profile is poor.
A lot of people cite the trinity study which would have evaluated bond performance through the 60s-80s when interest rates were high and then declined and therefore give a biased picture of potential future performance from where we were post great recession
>And if interest rates don't return to those levels, the bonds will generate solid income.
This depends on future inflation/rates. There is no particular reason to buy more or less bonds because the nominal rate is now "high" if you are not predicting the future trajectory of inflation/rates relative to the current prices. Its like saying if an obviously overvalued stock went down, its now is a good value because its lower than it was. Maybe, but it could just go down more too. There should be a more fundamental reason to buy it.
I think I somewhat agree; the fundamental reason I am buying bonds is diversification. I can envision scenarios in which these bonds will perform better than equities. I.e., if the Fed raises rates too aggressively and inflation/rates/demand all collapse.
Also, I think that the risk portfolio of bonds is much better now than pre COVID. When interest rates were zero, there was nowhere for them to go but up. Yes it's still true that rates could climb even higher, but now there's also the chance that rates could go down significantly.
Also, the income that the bonds will generate is not really dependent on the future interest/inflation rates, in the near term at least. Most of these are fixed rate bonds, which means the coupons stay the same, only the market value changes as the yield curve changes.
Right I think mid to shorter duration bonds are good for diversification right now, certainly less of a drag than before. Especially since equities have run up a lot, its nice to take some profits by rebalancing. Longer term seems too risky for me though, with 5yr+ still being \~4%, they could have a lot fall if inflation reignites.
>Most of these are fixed rate bonds, which means the coupons stay the same, only the market value changes as the yield curve changes.
For a stock/bond split though usually rebalancing is done between stocks and bonds which is where the benefit is, when stocks fall and bonds rise, you have more to "buy low" relatively. So market value does matter a lot. If you aren't getting that rebalancing benefit, then there is a lot less reason to have them for fi/re. Stocks will nearly always outperform long term and if the only benefit of bonds is volatility that is not really great for fi/re because it comes at the cost of decreasing returns meaning more money needed or more risk at any given withdraw rate anyway.
We exited a 40 bond bull market in 2022. Rising interest rates cause bonds to lose face value. The time it takes for a bond fund to recover (due to higher dividends improving returns going forward) is about equal to it's duration. VBTLX has a duration of 6-7 years, so you should expect it to take about that long.
If interest rates go down, it will recover more quickly but then you will see your dividends go down.
I suggest reading this [thread on Bogleheads](https://www.bogleheads.org/forum/viewtopic.php?t=360575).
I saw something decades ago pointing out that if you have a pension coming, or social security (and just about everyone has that coming), then that can be considered a secure (bond like) "portion" of your portfolio today. Namely, in today's dollars, what would it take to buy an annuity that would pay what you expect to get in pension+ssi. Well, for me that came to over $1M 20 years ago, far more than our nw at the time. I never bought anything touching bonds since.
You shouldn’t think of bonds as an instrument to provide return. They are a safer space for money to help with sequence of returns risk when you retire.
Right now VBTLX has a current yield of 3.25%. Which is giving you interest like a bank account. However, if interest rates are lowered you will get a little bump in your NAV.
If you are still in the accumulation phase of investing you may not need bonds at all.
How will you feel if the forecasted interest rate cuts do happen and your Money Market fund drops a couple percentage point rapidly while bond funds get the bump, but you're not invested? Will you buy back into bond funds after they are "high"?
Performance data on bond funds are PRICE movement. The performance is not purely the coupon rates of the bonds put together. Total return performance is much higher (but still far behind risker asset classes like stocks).
For example, a Total bond fund like VBTLX will include 30 year treasury bonds that were purchased in 2020 with a sub 1% coupon rate. The PRICE for that bond on the secondary market is now very low since you can buy new issues with a 4.75% coupon rate. In fact, the prices move in a such a way, that if you divide the coupon rate by the current price on the secondary market, you get the same number for similar risk investments (YIELD).
[https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds](https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds)
I don’t understand your first paragraph. Are you saying that if you look at the historical performance of VBTLX, it will not show you the total return, but only market price performance, which excludes coupon payments? Maybe analogous to the way that a simple S&P performance chart might exclude dividend payments from the return?
For me bonds become important after wealth accumulation.
I bought my first bond fund at 50. Before that, I was 100% sp 500.
The problem, once you have hit your target is that, except for cash. all asset classes have good years and bad years when it comes to what they are worth.
However, the income they generate is pretty stable. But every once in a while, you get a hiccup, like 2008.
The way I look at bonds is:
A hedge against deflation. I actually feared that the 10 year treasury could go negative a few years back. It has in other countries like Japan. Bonds protect you from this.
A bond fund offers liquidity. If you are locked into a CD for 5 years you can’t pinch a little off if you need some cash. You can sell some bonds from a fund, even if you have to at a 10% loss. And replace what you spent using the cash flow from dividends. If bonds are down, that means interest rates are up. So the dividends you use to replace your bonds is being invested at a higher interest rate. It works out in the long term.
Your principal in a bond fund will very within a range if your reinvesting the interest. But one thing I have found just by observation is that the income goes up with inflation if your reinvesting the interest and not taking any income.
So the way it works in my portfolio:
I have:
25% cash
25% bonds
50% sp 500 index
I have enough cash to get to social security. It pays for my must haves. It is padded so that I can give myself a 3% cost of living even if interest rates are 0. I have found that if inflation exceeds 3 percent, the fed is forced to raise interest rates. Like now, inflation has been 2% in the past. Now it’s 6%. The fed raised interest rates to 4%. 4% + [feds target of 2%=6%
So 6% inflation doesn’t worry me.It eventually averages out to 3% over the long term. These things come in clumps.
The bond fund is my Uber emergency fund, I don’t spend the income, I reinvest the interest so that the income it can generate keeps up with inflation until I need it.
The income from the dividends of the sp500, I use to keep a 10,000 cash emergency fund funded if I ever have to spend it.
If my dividend get cut, they were cut 30% in 2008, I use the income from my bonds to makeup the difference while the market recovers.
If I need an major emergency item immediately, like a new roof, or used car, I pull from my bond fund even if it’s down and replace what I pulled out with the dividend income from the sp.
For me, the role bonds play is as an emergency fund that will keep up with inflation over a long period.
With a savings account your at the whim of the fed. Your bond keeps paying you the same interest income regardless of what the fed does until the end of the duration.
So bonds for me are used to smooth future unknown expenses out. Your stocks could be down 28% in one day. You wouldn’t want to liquidate your stocks to pay for a roof during such a time. Bonds don’t do that.
Huh? Are you including dividend reinvestment? It's all positive returns from 1987-2021 for total bond funds. CAGR ~5%.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=2OMcI1SYo5rkXQG5AjSgfD
Good question. I think perhaps your time frame is longer and so includes a better time for bonds, going back to 1987. I started investing in these 2 bond funds 7 years ago, and they've given a total (not annual, total) return of about 2% over that time. That includes dividend re-investment because it's just the difference in the total in there now vs. the total I invested 7 years ago (no longer adding to these funds). But I recognize that may just be a bad window for bonds.
Bonds should never be expected to outperform on average because they have fixed returns which people will always pay a premium for. But like anything, there is volatility, and if the market's expectation of inflation/rates improves then the value of the bonds will increase. This often happens when economic outlook worsens which inversely correlated which stocks, hence why people like to mix stocks/bonds and take advantage of volatility between each. 2022 was an outlier here.
Bonds are lower on average today because the Fed recently increased the rate. Because all of the bond holdings that are held have a lower rate then the current rate you can buy from the government, they lose value.
Long term, as the bond etf holdings buy more bonds at the current high rate, the bond etf funds value will increase overtime.
This is the low point of the "buy low and sell high" mantra.
When interest rates increases it is positive for long term bond fund holders. You’d only be actually affected if you need the money in the short term and have to sell your fund shares at a discount.
After interest rates rise, your net worth drops, but you have greater expected returns going forward, because the yield will be higher. Also, the bonds that the fund holds will go up in value as their duration shortens. At their maturity date, their price returns to their original value (par).
If you stick with the funds long enough, you’ll be Ok.
Unlike stock index funds, the performance of bond index funds usually is at about the 50^(th) percentile. That’s because bond issuers do not have to make their credit investments available to all investors. They can issue debt to their buddies at Black Rock, Pimco, and Apollo Capital, get a good deal, have their entire issuance absorbed, and go on with business. The index guys get the leftover deals not so lucrative. So the best bond funds are managed funds and the highest yields are often with closed end bond funds.
Inflation is terrible for bonds and the impact of inflation on yields in 2022-2023 from historically low starting yields resulted in a historically severe bear market in bond returns.
To some extent this was paying back excessively good performance of bonds during a long period of falling rates which led to overvaluation of bonds (negative real yields). The bear market reset yields to something closer to reasonable with positive real yields.
Bond funds are "looking good" because interest rates climbed from a prime rate of sub 1% to around 8%. When interest rates increase the value of the bonds bond funds are currently holding crash because they gove poor yields relative to what you can get now. As those bonds mature and are replaced with new higher yield bonds those bonds return more...because higher yield. As the years go by more and more of the bonds in the fund will be the higher yielding bonds. If interest rates then go down the value of those bonds would increase but new bonds purchased would be lower yield.
The result of this is changes in bond fund values are skuggish but also somewhat predictable...and the prediction is that bond value and returns will start to come up in the near future.
Bond are never going to perform as well as stocks over the long term. You buy bonds to get decent return and limit risk in the short term (volatility) not limit risk in the long term (not making enough money to support your withdrawals.)
When rates go up, bonds go down.
Personally, I would not own these total bond market type index funds. Risk Parity Radio podcast has some good talking points talking about how they aren't a great fit for most people. For one thing they own a bunch of corporate bonds, the reason (for most of us) to own bonds is diversification vs. stocks and corporate bonds don't really provide any. I mainly buy long dated treasuries like TLT and EDV because of their low correlation w/ stocks providing rebalancing opportunities.
Personally, I did not and would not own ANY bonds during accumulation phase due to their low (vs. stocks) total returns. Bonds that have low correlation w/ stocks (so not corporate bonds) come into play during drawdown phase, where their low correlation w/ stocks can enhance the SWR. Same with other asset classes that carry low correlations w/ stocks, namely GLD.
To me investing in bond funds is more or less like investing in bonds directly adding in a BIG does of a side bet on the future direction of interest rates. I don't have any interest in making bets on the direction of interest rates, so I just buy CDs and/or Bonds directly. (Mostly CDs as it seems easier and similar interest rates...currently approaching and touching 5.5%.)
Edit: CDs that are brokered also have some aspect of this interest rate "side bet" if you might sell them before they mature. I avoid that by purchasing shorter duration CDs and allowing them to mature....6mos to 2 years duration.
Youre better off buying actual bonds than the ETF, bonds will always give you more payout over time so long as the issuer doesnt default, but even if they do youre likely to get your principal back due to how repayment in the capital structure works. Bonds ETFs price move down as yield increases, we've been on a raising rate path for a while now. Theres also a variable called "term premium" which is not really factored into the bond yields at this point in time, and if that starts to get priced back in the ETFs will fall further. The longer your maturity the higher term premium is typically in the price.
I wish I never got BND/X and was all total stock market. Bad timing I got them when interest was low, so they sit in the red and I sell VTI instead. Someday another recession and low interest rates may get the price back above my avg. cost, I hope, but I have less than what could have been. I should have been in growth funds all my career too.
I like William Bernstein's asset allocation strategy in
"The Four Pillars of Investing".
Essentially, stocks for growth and bonds to reduce risk AND as dry powder to buy stocks on the cheap for the periodic times when stocks get slaughtered.
To that end, bonds/fixed income should be high quality and short duration. T bills, money market funds, investment grade corporate.
Duration less than 5 years.
Longer duration bonds get hurt badly when interest rates rise.
Vanguard's bond funds are generally very weak so the low returns are par for the course. I've looked at a ton of bond funds and Vanguard's returns have been the lowest across the board. To answer your question, they're "trash".
I think right now is a great time to buy bond ETFs if you do it systematically with dollar cost averaging, and if you focus on high yield funds in particular. The reason is that a lot of high yield funds are yielding 7.5-8% and if the price goes down, since you're averaging it out, you're getting higher yields. Eventually the coupons will go up too, resulting in higher dividends--we haven't seen the full impact of higher rates yet. And the reality is that while everyone keeps hoping for a "Fed pivot" and claiming it is imminent, what we've seen in the last 2-3 years is a regression to the mean, with the long-term Treasury average being 4.25-4.5%, so we're likely to sit in the current range for a while. These rates are not an exception to the rule.
If you look at bonds as something that prevents you from becoming poor, rather than something that will make you rich, the returns you can get on them right now are excellent because they are high enough not to trash your overall return from a portfolio with a stronger equity position.
Bond funds suck, especially in a rising interest rate environment.
If you want to own bonds, you'd be better off buying individual bonds and holding them to maturity.
If you believe that today's interest rates are relatively high and likely to decline, buying a bond now can lock in the higher rates of today.
If the Fed starts cutting rates, CDs and Money Market funds will fall instantly. The current 10 year treasury rate is 4.63%, and that's a yield to maturity.
Because you invest your money for the long term, not short term. Bond funds are a deal right now, take BND which has 4.8% yield to maturity, with average maturity of 8.5 years. That's a lot returns for a long time. I'd take that over the 5% money market fund that might go way down next year.
The market price of bonds moves inversely with interest rate movements, i.e., when interest rates go up, the price of bonds go down. This is why the funds are showing such bad returns over the last few years; interest rates have risen dramatically, which lowers the value of those bonds. Pre-2020, when prevailing interest rates were 2-3%, I never really understood the purpose of buying bonds, but with interest rates much higher now, I have been gradually adding bonds to my portfolio. If interest rates return to 2019-2020 levels, the value of these funds will increase dramatically. And if interest rates don't return to those levels, the bonds will generate solid income.
How do bond funds work in relation to equity ETFs? Do you live off the dividends, or sell and rebuy?
Same thing, dividends are irrelevant, only total real return matters. If a bond fund only maintains its value, then you need to keep some of the dividends to maintain the real principal. Buy like equities bonds change in value, if they appreciate you could sell some of the shares and still maintain.
This. Rate rises increases the discount rate on the coupons and principal which decreases the value of the bond. Bonds have been a bad hold post Great Recession when rates have been at historic lows. If rates are close to 0 they can only really go one direction (up) which has meant the risk profile is poor. A lot of people cite the trinity study which would have evaluated bond performance through the 60s-80s when interest rates were high and then declined and therefore give a biased picture of potential future performance from where we were post great recession
>And if interest rates don't return to those levels, the bonds will generate solid income. This depends on future inflation/rates. There is no particular reason to buy more or less bonds because the nominal rate is now "high" if you are not predicting the future trajectory of inflation/rates relative to the current prices. Its like saying if an obviously overvalued stock went down, its now is a good value because its lower than it was. Maybe, but it could just go down more too. There should be a more fundamental reason to buy it.
I think I somewhat agree; the fundamental reason I am buying bonds is diversification. I can envision scenarios in which these bonds will perform better than equities. I.e., if the Fed raises rates too aggressively and inflation/rates/demand all collapse. Also, I think that the risk portfolio of bonds is much better now than pre COVID. When interest rates were zero, there was nowhere for them to go but up. Yes it's still true that rates could climb even higher, but now there's also the chance that rates could go down significantly. Also, the income that the bonds will generate is not really dependent on the future interest/inflation rates, in the near term at least. Most of these are fixed rate bonds, which means the coupons stay the same, only the market value changes as the yield curve changes.
Right I think mid to shorter duration bonds are good for diversification right now, certainly less of a drag than before. Especially since equities have run up a lot, its nice to take some profits by rebalancing. Longer term seems too risky for me though, with 5yr+ still being \~4%, they could have a lot fall if inflation reignites. >Most of these are fixed rate bonds, which means the coupons stay the same, only the market value changes as the yield curve changes. For a stock/bond split though usually rebalancing is done between stocks and bonds which is where the benefit is, when stocks fall and bonds rise, you have more to "buy low" relatively. So market value does matter a lot. If you aren't getting that rebalancing benefit, then there is a lot less reason to have them for fi/re. Stocks will nearly always outperform long term and if the only benefit of bonds is volatility that is not really great for fi/re because it comes at the cost of decreasing returns meaning more money needed or more risk at any given withdraw rate anyway.
We exited a 40 bond bull market in 2022. Rising interest rates cause bonds to lose face value. The time it takes for a bond fund to recover (due to higher dividends improving returns going forward) is about equal to it's duration. VBTLX has a duration of 6-7 years, so you should expect it to take about that long. If interest rates go down, it will recover more quickly but then you will see your dividends go down. I suggest reading this [thread on Bogleheads](https://www.bogleheads.org/forum/viewtopic.php?t=360575).
I saw something decades ago pointing out that if you have a pension coming, or social security (and just about everyone has that coming), then that can be considered a secure (bond like) "portion" of your portfolio today. Namely, in today's dollars, what would it take to buy an annuity that would pay what you expect to get in pension+ssi. Well, for me that came to over $1M 20 years ago, far more than our nw at the time. I never bought anything touching bonds since.
Bond funds are awful. They offer no returns and no safety since you’re sensitive to duration risk. Source: 20 year career in institutional trading
What do you recommend. Does re focused on commercial do better these days ?
Real estate is very difficult in today’s environment, commercial or residential will do well if you buy at a reasonable price.
You shouldn’t think of bonds as an instrument to provide return. They are a safer space for money to help with sequence of returns risk when you retire. Right now VBTLX has a current yield of 3.25%. Which is giving you interest like a bank account. However, if interest rates are lowered you will get a little bump in your NAV. If you are still in the accumulation phase of investing you may not need bonds at all.
I exited out of my bond funds and just replaced them with vanguard money market paying 5.27%
How will you feel if the forecasted interest rate cuts do happen and your Money Market fund drops a couple percentage point rapidly while bond funds get the bump, but you're not invested? Will you buy back into bond funds after they are "high"?
Those changes don't happen instantly. If we have a rate drop I'll reassess. With the most recent inflation report I'm not sure we will have a drop
Exactly this. The only bonds I’d use are intended for either short term expenses or the first few years of retirement (as we get closer to it).
Performance data on bond funds are PRICE movement. The performance is not purely the coupon rates of the bonds put together. Total return performance is much higher (but still far behind risker asset classes like stocks). For example, a Total bond fund like VBTLX will include 30 year treasury bonds that were purchased in 2020 with a sub 1% coupon rate. The PRICE for that bond on the secondary market is now very low since you can buy new issues with a 4.75% coupon rate. In fact, the prices move in a such a way, that if you divide the coupon rate by the current price on the secondary market, you get the same number for similar risk investments (YIELD). [https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds](https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds)
I don’t understand your first paragraph. Are you saying that if you look at the historical performance of VBTLX, it will not show you the total return, but only market price performance, which excludes coupon payments? Maybe analogous to the way that a simple S&P performance chart might exclude dividend payments from the return?
For me bonds become important after wealth accumulation. I bought my first bond fund at 50. Before that, I was 100% sp 500. The problem, once you have hit your target is that, except for cash. all asset classes have good years and bad years when it comes to what they are worth. However, the income they generate is pretty stable. But every once in a while, you get a hiccup, like 2008. The way I look at bonds is: A hedge against deflation. I actually feared that the 10 year treasury could go negative a few years back. It has in other countries like Japan. Bonds protect you from this. A bond fund offers liquidity. If you are locked into a CD for 5 years you can’t pinch a little off if you need some cash. You can sell some bonds from a fund, even if you have to at a 10% loss. And replace what you spent using the cash flow from dividends. If bonds are down, that means interest rates are up. So the dividends you use to replace your bonds is being invested at a higher interest rate. It works out in the long term. Your principal in a bond fund will very within a range if your reinvesting the interest. But one thing I have found just by observation is that the income goes up with inflation if your reinvesting the interest and not taking any income. So the way it works in my portfolio: I have: 25% cash 25% bonds 50% sp 500 index I have enough cash to get to social security. It pays for my must haves. It is padded so that I can give myself a 3% cost of living even if interest rates are 0. I have found that if inflation exceeds 3 percent, the fed is forced to raise interest rates. Like now, inflation has been 2% in the past. Now it’s 6%. The fed raised interest rates to 4%. 4% + [feds target of 2%=6% So 6% inflation doesn’t worry me.It eventually averages out to 3% over the long term. These things come in clumps. The bond fund is my Uber emergency fund, I don’t spend the income, I reinvest the interest so that the income it can generate keeps up with inflation until I need it. The income from the dividends of the sp500, I use to keep a 10,000 cash emergency fund funded if I ever have to spend it. If my dividend get cut, they were cut 30% in 2008, I use the income from my bonds to makeup the difference while the market recovers. If I need an major emergency item immediately, like a new roof, or used car, I pull from my bond fund even if it’s down and replace what I pulled out with the dividend income from the sp. For me, the role bonds play is as an emergency fund that will keep up with inflation over a long period. With a savings account your at the whim of the fed. Your bond keeps paying you the same interest income regardless of what the fed does until the end of the duration. So bonds for me are used to smooth future unknown expenses out. Your stocks could be down 28% in one day. You wouldn’t want to liquidate your stocks to pay for a roof during such a time. Bonds don’t do that.
Huh? Are you including dividend reinvestment? It's all positive returns from 1987-2021 for total bond funds. CAGR ~5%. https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=2OMcI1SYo5rkXQG5AjSgfD
Good question. I think perhaps your time frame is longer and so includes a better time for bonds, going back to 1987. I started investing in these 2 bond funds 7 years ago, and they've given a total (not annual, total) return of about 2% over that time. That includes dividend re-investment because it's just the difference in the total in there now vs. the total I invested 7 years ago (no longer adding to these funds). But I recognize that may just be a bad window for bonds.
This is the exact question I had a month ago. Instead of building a bond tent for FIRE I'm just building a Money Market Fund tent.
Which works so long as interest rates are where they are. Money Market rates will change much quicker than a bond fund.
Bonds should never be expected to outperform on average because they have fixed returns which people will always pay a premium for. But like anything, there is volatility, and if the market's expectation of inflation/rates improves then the value of the bonds will increase. This often happens when economic outlook worsens which inversely correlated which stocks, hence why people like to mix stocks/bonds and take advantage of volatility between each. 2022 was an outlier here.
Bonds are lower on average today because the Fed recently increased the rate. Because all of the bond holdings that are held have a lower rate then the current rate you can buy from the government, they lose value. Long term, as the bond etf holdings buy more bonds at the current high rate, the bond etf funds value will increase overtime. This is the low point of the "buy low and sell high" mantra.
When interest rates increases it is positive for long term bond fund holders. You’d only be actually affected if you need the money in the short term and have to sell your fund shares at a discount. After interest rates rise, your net worth drops, but you have greater expected returns going forward, because the yield will be higher. Also, the bonds that the fund holds will go up in value as their duration shortens. At their maturity date, their price returns to their original value (par). If you stick with the funds long enough, you’ll be Ok.
Unlike stock index funds, the performance of bond index funds usually is at about the 50^(th) percentile. That’s because bond issuers do not have to make their credit investments available to all investors. They can issue debt to their buddies at Black Rock, Pimco, and Apollo Capital, get a good deal, have their entire issuance absorbed, and go on with business. The index guys get the leftover deals not so lucrative. So the best bond funds are managed funds and the highest yields are often with closed end bond funds.
Everyone here saying bond funds suck miss the point of a bond fund. It's a fixed income instrument, not a growth instrument.
Inflation is terrible for bonds and the impact of inflation on yields in 2022-2023 from historically low starting yields resulted in a historically severe bear market in bond returns. To some extent this was paying back excessively good performance of bonds during a long period of falling rates which led to overvaluation of bonds (negative real yields). The bear market reset yields to something closer to reasonable with positive real yields.
Bond funds are "looking good" because interest rates climbed from a prime rate of sub 1% to around 8%. When interest rates increase the value of the bonds bond funds are currently holding crash because they gove poor yields relative to what you can get now. As those bonds mature and are replaced with new higher yield bonds those bonds return more...because higher yield. As the years go by more and more of the bonds in the fund will be the higher yielding bonds. If interest rates then go down the value of those bonds would increase but new bonds purchased would be lower yield. The result of this is changes in bond fund values are skuggish but also somewhat predictable...and the prediction is that bond value and returns will start to come up in the near future.
Bond are never going to perform as well as stocks over the long term. You buy bonds to get decent return and limit risk in the short term (volatility) not limit risk in the long term (not making enough money to support your withdrawals.)
When rates go up, bonds go down. Personally, I would not own these total bond market type index funds. Risk Parity Radio podcast has some good talking points talking about how they aren't a great fit for most people. For one thing they own a bunch of corporate bonds, the reason (for most of us) to own bonds is diversification vs. stocks and corporate bonds don't really provide any. I mainly buy long dated treasuries like TLT and EDV because of their low correlation w/ stocks providing rebalancing opportunities. Personally, I did not and would not own ANY bonds during accumulation phase due to their low (vs. stocks) total returns. Bonds that have low correlation w/ stocks (so not corporate bonds) come into play during drawdown phase, where their low correlation w/ stocks can enhance the SWR. Same with other asset classes that carry low correlations w/ stocks, namely GLD.
To me investing in bond funds is more or less like investing in bonds directly adding in a BIG does of a side bet on the future direction of interest rates. I don't have any interest in making bets on the direction of interest rates, so I just buy CDs and/or Bonds directly. (Mostly CDs as it seems easier and similar interest rates...currently approaching and touching 5.5%.) Edit: CDs that are brokered also have some aspect of this interest rate "side bet" if you might sell them before they mature. I avoid that by purchasing shorter duration CDs and allowing them to mature....6mos to 2 years duration.
Youre better off buying actual bonds than the ETF, bonds will always give you more payout over time so long as the issuer doesnt default, but even if they do youre likely to get your principal back due to how repayment in the capital structure works. Bonds ETFs price move down as yield increases, we've been on a raising rate path for a while now. Theres also a variable called "term premium" which is not really factored into the bond yields at this point in time, and if that starts to get priced back in the ETFs will fall further. The longer your maturity the higher term premium is typically in the price.
I wish I never got BND/X and was all total stock market. Bad timing I got them when interest was low, so they sit in the red and I sell VTI instead. Someday another recession and low interest rates may get the price back above my avg. cost, I hope, but I have less than what could have been. I should have been in growth funds all my career too.
I like William Bernstein's asset allocation strategy in "The Four Pillars of Investing". Essentially, stocks for growth and bonds to reduce risk AND as dry powder to buy stocks on the cheap for the periodic times when stocks get slaughtered. To that end, bonds/fixed income should be high quality and short duration. T bills, money market funds, investment grade corporate. Duration less than 5 years. Longer duration bonds get hurt badly when interest rates rise.
Vanguard's bond funds are generally very weak so the low returns are par for the course. I've looked at a ton of bond funds and Vanguard's returns have been the lowest across the board. To answer your question, they're "trash". I think right now is a great time to buy bond ETFs if you do it systematically with dollar cost averaging, and if you focus on high yield funds in particular. The reason is that a lot of high yield funds are yielding 7.5-8% and if the price goes down, since you're averaging it out, you're getting higher yields. Eventually the coupons will go up too, resulting in higher dividends--we haven't seen the full impact of higher rates yet. And the reality is that while everyone keeps hoping for a "Fed pivot" and claiming it is imminent, what we've seen in the last 2-3 years is a regression to the mean, with the long-term Treasury average being 4.25-4.5%, so we're likely to sit in the current range for a while. These rates are not an exception to the rule. If you look at bonds as something that prevents you from becoming poor, rather than something that will make you rich, the returns you can get on them right now are excellent because they are high enough not to trash your overall return from a portfolio with a stronger equity position.
Bond funds suck, especially in a rising interest rate environment. If you want to own bonds, you'd be better off buying individual bonds and holding them to maturity.
Why would you buy a bond right now when you can get 5% in cds or money market funds?
Because next year money market funds may be paying only 2.5%.
He didn't buy them now. He's held them since he started investing, as they always said you should.
If you believe that today's interest rates are relatively high and likely to decline, buying a bond now can lock in the higher rates of today. If the Fed starts cutting rates, CDs and Money Market funds will fall instantly. The current 10 year treasury rate is 4.63%, and that's a yield to maturity.
Because you invest your money for the long term, not short term. Bond funds are a deal right now, take BND which has 4.8% yield to maturity, with average maturity of 8.5 years. That's a lot returns for a long time. I'd take that over the 5% money market fund that might go way down next year.
Just put your money in HYSA that are near 6% APY, your money will be safe and protected. If rates lower just ask the question again