Investing - Theory, News & General • Bond fund choices in retirement - important or not?

We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.

I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?

Great discussion. I would venture to say that one’s portfolio may end up in the same place whether they invest in either of those two bond funds. But if we had a large economic turn down I’d much rather be in the treasury fund vs the IG fund and the extra small yield isn’t worth it imho.

I buy into the idea that the 35% of my portfolio that is in a treasury bond ladder is the ballast of my portfolio when all hell breaks loose in the economy and for the bonds’ performance it should be as uncorrelated to the stock market as possible. So it’s safer to have treasuries in my bond portfolio than corporates. VFSUX that has 50% BBB rated bonds, and I don’t think the risk is worth the additional .33% yield (BBB is one step above junk). Yes VFSUX is safe. The treasury fund is just safer.

Peeling the onion a little deeper, a quick scan shows VFSUX has bonds from companies like Boeing and CVS. Great companies but more risk than treasuries. I don’t take vanguard’s risk ratings as gospel - in fact I’d question vanguard having those two funds having the same risk rating. But I realize the risk of default of most of VFSUX’s bonds is small. If we had a large economic turn down or another 2008 bank crisis I think we’d be hoping we were in treasuries. I see the vanguard total bond fund and etf have a risk rating of 2. Others have questioned that rating after its double digit decline in 2022.

So big picture it’s a bit of a purist philosophy to separate corporate risk from bond risk in one’s portfolio but I it is one I like because it helps me know when I really need that bond money it will all be there. Even in a recession or depression. Many here invest in corporate bonds so keep researching and don’t take my risk adverse stance on this as anything more than my opinion.

I have a gov cola pension that covers my living expenses and still keep 35% of my portfolio in treasuries. I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.

Here is the best recent article that I could find that delves into the risk with corporate bonds. I’d imagine the vanguard folks that gave VFSUX a risk rating of 1 might not agree with this morningstar article. lol.

https://www.morningstar.com/markets/why ... rate-bonds

This is a really good explanation of your position. A few thoughts in response.

It is not like I am for only one or the other (all Treasuries or all corporates). I split my fixed income between Treasuries, TIPS, munis, and corporates plus cash, as I stated in the OP. It is just that I am never certain if I have the right percentages of each, to give me the optimal risk-adjusted return.

With that said, all investing is about risk. I am aware of the BH point that one can get the same risk adjusted return by increasing their equity position and holding only Treasuries and it is a point worth evaluating further.

The M* article from March 2023 was good but I want to extract part of it, as it gives a different take on the risks of corporate bonds.

Still, risks of defaults in the investment-grade market shouldn’t be overstated, say money managers, as defaults have historically been low and that is unlikely to change, even given the rise in BBB rated issues.

Says Morningstar’s Bruno: “BBB rated debt has a 1.5% probability of default over a five-year period, and so in essence, it’s rather few and far between that the actual risk of default materializes.”

Financial conditions in the past 10 years also account for the rise in BBB rated issues, say investment managers, noting there wasn’t a significant financial difference between the A and BBB designations, so companies chose to take on more leverage and free up working capital for their businesses.

Moreover, there were changes in insurance regulations that made it less onerous for insurance companies to invest in BBB rated corporate debt while buying A rated became more expensive, says Arvind Narayanan, senior portfolio manager of investment-grade credit at Vanguard.

Narayanan calls Verizon Communications VZ the “poster child” of a company that allowed its ratings to fall to BBB as a calculated business decision to put its capital to better use.

He points out the “vast majority of the BBB rated issues come from noncyclical sectors,” such as telecommunications, pharmaceuticals, and healthcare companies, that are better positioned to ride out a recession, and those are the areas he prefers for their earnings stability.

Statistics: Posted by Parkinglotracer — Fri Jun 14, 2024 5:03 am — Replies 27 — Views 3333