RetireJapan

Bond returns have also been terrible this year. You can scroll down on the link here to see short and longterm bond index returns for the US market:

http://news.morningstar.com/index/indexReturn.html

The year-to-date figures are negative for almost all bond maturities and the short term treasury and corporate bond total returns are only 0.6-0.74% for the year. That includes interest so bonds have a worse return than the current US money market return of 2%. I think people overestimate the safety provided by bonds when you start from such a very low interest rate environment and either see interest rates rise or the economy go into recession.

The year-to-date figures are negative for almost all bond maturities and the short term treasury and corporate bond total returns are only 0.6-0.74% for the year. That includes interest so bonds have a worse return than the current US money market return of 2%

I think you're confusing YTD return vs yield. Yes, ytd returns are low as bond values have fallen, but yields have risen. Take that 2% interest rate from the money market accounts, that's yield. So when you compare it to a bond, or bond fund, then you should compare it the bond/fund yield or coupon. Take PFIIX for example, PIMCO low duration income fund, the ytd return is 1.39%, but the yield is 3.21%. That puts the interest rate of the bond fund at 160% of the money market fund. That still may not sound like much, but since inflation runs around 2-3% in the US, that 1% will make a difference over time.

Having said that, it doesn't mean that bonds/funds are always better than money market accounts (MMA). It always depends on your situation. MMA accounts at US banks are FDIC insured up to $250,000 USD and some accounts have check writing. They're very liquid, there's no selling of instruments to get your money out, so no commissions if you're taking money out.

But you're right bonds have had terrible returns this year, unfortunately everything else has done worse. The SP500 is underwater for 2018, so anything you invested this year is negative. My main goal is to minimize the losses and preserve as much capital as possible and then when uncertainty is gone, reallocate funds to move money out of the bonds/funds most likely back in to equities. Well, that's my theory anyway.

I don’t mean to contest the point that interest rates (or yields for new bonds) are going up, but those year to date returns demonstrate that even short term bond funds are not a great risk hedge for stocks because as yield rises there can be capital losses on bonds in the fund (your total return is less than the yield) and that problem is worse when moving from interest rates of 2% to 3% than from 4% to 5% as in other cycles. I think you realize that already (it’s why PFIIX has a higher yield than return) but I want to suggest this is more of a problem when moving from the extraordinarily low rates of today.

Oh no, thank you for pointing that out! You're spot on. You also got me thinking about the weakness of a bond fund vs the actual bond again. It's strong point.

zeo wrote: ↑Fri Dec 14, 2018 1:13 am...Did that make any sense?

Yes, thanks--I guess it's the demand aspect and mkt psychology that has an impact.