Bond Funds vs The Stock Market

A long time friend wants to be OUT of the stock market and needs to know where to put his money now. He has two bond funds VFIDX and PAGNX and wants to know how they will move if the market declines.  Here we go: 

VFINX = Vanguard 500 Index Fund Investor Shares

VFIDX = Vanguard Intermediate-Term Investment -Grade Fund Admiral Shares

PAGNX = PIMCO GNMA and Government Securities Fund Class A Net Asset Value

Source: Yahoo Finance

As usual we will stick to Vanguard, where we can, as the most "pure" investment available to individual investors. Again we will use the period "12/31/2019 - 2/22/2021" to be our laboratory for testing extreme market movement. This example will compare mutual funds to mutual funds, no need to get ETFs involved. The correlation* of daily returns is shown.

VFINX, the Vanguard S&P 500 fund, is our proxy for the stock market. 

The definition of market risk.

Yield: 1.46%

2021 Return: -1.02%

VFIDX is a corporate bond fund with

Average rating: A+

Average maturity: 6.7 years

Yield: 2.48%

2021 return: -.58%

Correlation to VFINX: 0.0764

PAGNX is a GNMA and Government bond fund with

Average rating: AAA (by Moody's and Fitch), AA+ (by Standard and Poors)

Average maturity: 1.9 years

Yield: 1.87%

2021 return: +0.2%

Correlation to VFINX: -0.0013

*(1/-1=perfect correlation/negative correlation, 0 = no correlation)

Results

While the bond correlations to stocks are very low , the govies are even lower and slightly negative as one would expect. When stocks fall the Fed tends to buy government bonds and  reduce rates and these make government bond prices higher. Low rates help corporate bonds hold their prices but the greater risk in falling stock prices may overwhelm the interest rate effects. 

The first two months of 2020 had a slightly rising stock market, rising corporate bond market and slightly rising govie market. Interest rates were flat to lower this period. 

Next the stock market collapsed but interest rates were mixed to LOWER. Corporates FELL as the market fell in spite of lower rates but far less than stocks. The Fed lowering rates moved govies higher.

The long slog to recovery in stocks also carried corporates. While govies hardly moved.

The stock market year-end sprint higher had little effect on both bond markets. 

2021 has been a mixed year so far. As of yesterday's close, stocks and corporates were slightly lower and govies have barely held their own. 

Conclusion

Both bond funds are, for the most part, independent of the stock market. Corporates a tad less so and govies more so. Bonds of all flavors have lower risk, historically and here, too. The moral of the story, reaching for safety and yield sacrifices total return. 

The government bond fund is least effected by the stock market. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.