With the U.S. stock markets off to their worst start in decades, it seems only prudent to be overweight in cash and higher-quality bonds. You already hold some good bond funds: DODIX has returned +1.2% year to date (compare that to DODBX) and Vanguard's VIPSX is up +3.45% ytd. The bond markets are exceedingly volatile: Last Thursday there was a sell-off in U.S. Treasuries after the Fed auction but yesterday--Friday--investors piled back in again. Bonds outperformed in the bear market of 2000-2002 and they may again in this one. With yields on the low side, I think it makes good sense to buy bond funds with low expense ratios like the etfs AGG, BND, and TIP. The challenge this year is in picking bond funds that pay incrementally higher yields than money-market funds but that don't have excessive exposure to the riskier sectors of the credit market. That's why it's easier to let Pimco's Bill Gross, Loomis Sayles' Dan Fuss, and Vanguard's managers pick the bond sectors and maturities based on their experience and common sense.

Excellent reply by Closer and a further reference to your original question lies with the high valuation of the 10YR Treasury note. Since the beginning of the subprime mess investors have been moving into Treasuries and pricing in Fed rate cuts which have driven yields of the 10yr down to near record lows.

 

Bond funds have outperformed the stock market and the price per bond share has skyrocketed. Short-term investors are not willing to overpay and fear the Fed may have to change course to fight inflation.

 

A possible solution may be to DCA into short-term bonds and TIPS. You’ll have to do your own due dillegence.

Closer: Need advice from you guys. I have rolled over my 401K to a  Vanguard TIRA and wish to allocate 400K between 4 Funds. Given what's been posted about Bill Gross and the Vanguard Bond Managers how would you spread the 400K between Harbor Bond, TIPS Fund, Short Term Bond Index and GNMA. I am 74 yrs old, semi-retired and drawing a 4% RMD from this tax-deferred account. I do not want Equities in this TIRA. Before the rollover I had 200K plus with Harbor and done very well the last few yrs. for a Bond Fund.

Any suggestions appreciated.

Lionel 

Romey:

ps--I'm in my late 40s, the majority of my investments are in taxable accounts, but what tax deferred accounts I do have, I have in bond funds. My equity funds are well diversified, and the bond funds I have include DODIX, Vanguard TIPS Fund, the Vanguard Intermediate Term Bond SPYDER (BIV),  and Vanguard Intermediate Term Tax Exempt (in taxable account).

But the main question is, again, why am I reading and hearing not to go into Bonds in the current climate? Do they mean individual bonds and not bond funds? Thanks!

One thing to consider is that if the Dems get control of the House, Senate and White House, they may eliminate the long term capital gains tax and tax long term capital gains at ordinary income tax rates (which are sure to go up if they control Congress and the WH).  If that happens, I am not sure that bond funds in the tax deferred accounts and equity funds in the taxable accounts is a good idea.

When you say bonds, what are you talking about - tax-exempt muni bonds or corporate bonds or even bonds issued by foreign governments?  And are you talking about investment grade bonds or high yield bonds? 

And who is saying not to go into bonds?  I have read/heard the opposite at least about muni bonds.

 

MommaD:

One thing to consider is that if the Dems get control of the House, Senate and White House, they may eliminate the long term capital gains tax and tax long term capital gains at ordinary income tax rates (which are sure to go up if they control Congress and the WH).  If that happens, I am not sure that bond funds in the tax deferred accounts and equity funds in the taxable accounts is a good idea.

 

Sorry to butt in but I am not sure I quite understand this. Assume Dems take cotrol and tax rates go up and that if not abolished the cap gains tax goes up as well....

 

You say bonds in taxdeferred and equities in taxable is not a good idea... why not? And do you suggest to flip it around? As in equities in taxdeferred and bonds in taxable?

 

I assume tax efficient index funds still make sense in a taxable no matter whatt he tax rate.... I just don't see why bonds would be bad in taxdeferred

All in my opinion...

Treasury debt is pretty expensive right now, and I think other forms of debt are a better buy, relatively speaking. For tax-deferred accounts this means corporates and/or GNMAs. For taxable accounts this means munis for many people (certainly at the 25% and higher federal rates).

If you want inflation-indexed securities, govt debt (TIPS, Ibonds) are the instruments of choice. If you want to own these, there is really no other good alternative to my knowledge. I think they are pretty expensive today, though.

Duane

But the main question is, again, why am I reading and hearing not to go into Bonds in the current climate? Do they mean individual bonds and not bond funds? Thanks!

Re:Probably because the One' s saying it are Equity advocates..They always have hated Bonds...LOL

And of course.. Bonds on have Only Beaten the S&P Indexn ow for the past 10 yrs...

and LSBRX advocate in Bull Market

And VFITX in A Bear..

has worked for me in the past Bear yrs and still is this time around..

DODIX & HABDX are good one's as well.. Did very well last time around too..

  

Since I'm retired, I need lots of income and I need to preserve my capital. So, the answer is: bonds! 

I've got Loomis Sayles bond fund LSBDX, Vanguard Inflation-Protected bond fund VIPSX and Vanguard Short-term Treasury fund VFISX. These three funds currently constitute 44.31% of my total mutual fund portfolio.

Plus, as a further hedge against the declining dollar, I have bought some closed-end world bond and emerging-market bond funds, all of which are doing extremely well year-to-date: GIM, TEI, EDD, EFL and SGL. 

As I wrote elsewhere, in 2008 the emerging-market equities are in the basement whereas the emerging-market bonds are in the penthouse.

Jagor