Bonds versus Bonds

My earlier bond comparison "Bonds vs. The Stock Market" has led me to make a deeper look at major bond funds with varying maturities and varying credit quality ratings. Below are the results for the 10 largest bond funds in the world: 

Results first, analysis follows: 

Methodology

The method here is fairness to the small individual investor and NOT to the fund managers. Yes, there are hundreds of bond funds offered by dozens of companies but few will know these companies unless they are sold to you-a costly proposition. In the end bond funds differ only in expenses, credit quality and duration (a fancy name for time to maturity).  So I picked the TEN LARGEST funds I could find on Yahoo Finance and from searching.

All the numbers here can be found by typing the fund symbol in Yahoo finance, including daily prices since inception. If you do this, be sure to use the "Adjusted Close". This includes the interest payouts of the funds over time. 

Five of the ten are Vanguard funds. Vanguard manages over $800 Billion of the $1.2 Trillion held by the ten largest funds. PIMCO had the reputation as the largest bond fund manager in the world and today is far from it. 

Results

The ten largest bond funds had an average yield of 2.2% but with rates rising in 2021 are down 2% year-to-date (as of 3/3/2021). That is, they already lost all their income for the year plus another 2 points. Duration averages 5 years and is a measure of the gain or loss a fund is likely to have for every 1% change in interest rates (in this case 5% down in price for every 1% rise in interest rates). The average credit rating for these funds are a very good AA. 

Note, as expected, the short term funds with the shortest durations have the best year-to-date returns. PIMCO has excelled here but note the low BBB average credit quality combined with the shortest 1.9 year duration. 

Conclusion

Bond funds are NOT bonds. Bond prices fluctuate prior to their maturity and, if they don't go bankrupt, will eventually mature and return your capital regardless of interest rates. As a former bond trader I could never see the value of bond funds. 

Funds never mature. A bond fund always is buying new bonds to replace those it matures and a large portion of the bond portfolio will always be subject to interest rates.

 

For those who really want to preserve capital, the shortest term bond funds, will do best. Money market funds and CDs will do better. Bank CDs, which pay more than money markets, are usually non-negotiable, you cannot get your money early barring a penalty. Money markets have the lowest rates.

The trade offs are always the same, the safer and shorter the bond, the lower the yield. 

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.

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