Bond Question

[WonderingWoman]

Thank you, Dr. Dahle, love your insights.

The bond market has shaken my core beliefs about minimizing risk with a conservative ballast such as bonds for the stock market. Every day it seems like my PWZ retreats more (down 10.52% since I bought in.)
PWZ: INVESCO EXCHANGE TRADED FD TR II CALIF AMT FREE MUN BD ETF (Muni California Long) (I live in CA)

Lessons learned: Bond ladder, diversify plus take more risk.
My question: I have a hefty loss that I want to Tax Loss Harvest. BUT, I would absolutely abhor a permanent loss here. Any suggestions on where to park it for 31 days?

Thank you all.

[VagabondMD]

VTEB would be a decent choice. Not CA-specific, but for one month, it will not make much of a difference.

[WonderingWoman]

Thank you, VagabondMD. VTEB has a few CA munis in it but I am guessing not enough to trigger a wash sale disallow.

[VagabondMD]

Thank you, VagabondMD. VTEB has a few CA munis in it but I am guessing not enough to trigger a wash sale disallow.

That is correct.

[Random1]

Stock and bonds prices and returns are not directly correlated , which means some times stocks and bond returns go up, some times stock and bond returns go down, and some times stocks go up and bonds go down.

Just because equities go down it does not assume that bond returns will go up.

[bovie]

Why are you invested in long-term California-specific municipal bonds?

I get that you live there and it's probably for taxes, but in my opinion, those aren't sufficient reasons to not be more broadly diversified, especially when it comes to fixed income.

Point is, you may not really be holding the "conservative ballast" that you think you are.

[Auric goldfinger]

I’ve fought the ladder vs bond fund debate for a while now. At this point I’m glad to be all in intermediate ladder with actual bonds.. As my current bonds come due, new purchases are nearly at par for a coupon rate of 5%.

[xraygoggles]

There's nothing wrong with holding a CA muni bond - I do as well. However, I do 50/50 VTEB/CA muni, to diversify the risk somewhat.

The reason it's down 9% this year is because of interest rates, not because the fund itself is bad. I compared yours to Vanguard (VCLAX) and they have similar returns YTD. As long as you hold it to its effective duration, you will recover all the losses, as the new bonds acquired at the higher rates take the place of old ones maturing.

[WonderingWoman]

Thank you all for your thoughtful responses! The principal plunge took me by surprise, I admit. I do know yield was rising in tandem with interest rate increases which would send prices in the opposite direction but I kept thinking the plummet was predicated on expectations and would stop. How low can they go? I am relieved to hear that I will recover losses if I hold for a few years (but these are long-term?!)

That said, I think I will sell and buy VTEB to tax loss harvest then buy back half a month later. Unless I am missing something?

Thoughts are much appreciated.

[RoadtoFIRE]

I have been wondering the same thing. I have been recently buying into the PIMCO California Muni bonds funds (PZC, PCK, PCQ) that offer state and feb tax exemption. The price keep dropping which means the dividend yield keeps going up. Right now it's at 5.42%. That seems like a really good return especially considering it's tax exempt. I'm wondering if I should take a bigger stake in this and "lock in" a consistent 5.42% Am I missing something?

[bovie]

I have been wondering the same thing. I have been recently buying into the PIMCO California Muni bonds funds (PZC, PCK, PCQ) that offer state and feb tax exemption. The price keep dropping which means the dividend yield keeps going up. Right now it's at 5.42%. That seems like a really good return especially considering it's tax exempt. I'm wondering if I should take a bigger stake in this and "lock in" a consistent 5.42% Am I missing something?

Yes, you are missing something.

If the price dropped by 50%, the yield would skyrocket. Do you think that would be a good thing for you?

And you wouldn't be "locking in" anything. The yield is fluid, just like the price. It's a fund, not an individual bond.

"Don't chase yield."

[xraygoggles]

That said, I think I will sell and buy VTEB to tax loss harvest then buy back half a month later. Unless I am missing something?

Thoughts are much appreciated.

Yes that's not a bad idea - I tax-loss harvested VTEB already this year as well.

[Tom Kazansky]

One small consideration - I believe there's a six month rule if you end up selling VTEB/VTEAX later at a loss:

https://www.whitecoatinvestor.com/9-...-loss-harvest/

[Max Power]

Bonds are one of the more inane things to invest in.

There was a magical time when interest rates were double digits for USA mortgages, Fed prime, treasury bonds, etc. Inflation was also low or even negative. It was very hard to beat UST bonds. That was a long time ago... possibly before half of forum members were even born, and it was before almost any of us were investing.

Now, it is clearly the opposite: high inflation and low Fed interest rates (effectively negative, considering inflation) . How will bonds ever do well in such a scenario? They won't... at *best* they'll perhaps keep up with inflation. They are more likely to drop with the stocks (as they did in 07/08, COVID, Ukraine, etc crashes) due to defaults and interest rates. Bonds are not "conservative" or opposite stocks (that would be inverses and perhaps commodities). Bonds are simply less volatile historically than equities or indexes... which in a market that goes up and up in the long term, is not good.

Present day, bonds are basically only potentially useful if you have clearly "won the game," and you want to trade gains for less risk of drastic losses (again, only in theory). They also kick dividends, which is good if you have handily won the FI game. You can do the same thing with annuities, dividend stocks/funds, REITs, angel investing, etc. Even if I won a $100M prize tomorrow, I honestly doubt I would buy any bonds in the present interest/market climate. There is a reason basically no hedge funds hold any significant bond position (yet they certainly have in the past decades).

If you want something that stores your wealth, do gold. It is boring and basically goes sideways, but it goes up with inflation in the long haul.
iBonds may work to try for that goal also, but they are mainly doing well right now due to influx of new buyers from ads, forum placements, and ppl looking for non-stock options due to market dip... your liquidity and long term results are anyone's guess.

Conventional bonds like UST bonds or muni or others are not going to work in a high inflation and low productivity situation. Interest rates can't go up substantially unless US GDP and productivity does (where ppl want to buy our bonds). Hint: our GDP relative to other countries is going down % terms, and other places are getting siiick of us printing over $100M per day and sending them our fake money and bonds in trade for their real goods and commodities. The wheels will wobble and fall off (default), very likely in our lifetime. In the 1980s, interest rates were over 15% and bonds were thriving. How many times before 2020 did you ever hear "negative interest rates"? Think it through. Buy stocks and indexes on sale, or gold... all are much better suited to keep up with inflation.

[xraygoggles]

Bonds are one of the more inane things to invest in.

There was a magical time when interest rates were double digits for USA mortgages, Fed prime, treasury bonds, etc. Inflation was also low or even negative. It was very hard to beat UST bonds. That was a long time ago... possibly before half of forum members were even born, and it was before almost any of us were investing.

Now, it is clearly the opposite: high inflation and low Fed interest rates (effectively negative, considering inflation) . How will bonds ever do well in such a scenario? They won't... at *best* they'll perhaps keep up with inflation. They are more likely to drop with the stocks (as they did in 07/08, COVID, Ukraine, etc crashes) due to defaults and interest rates. Bonds are not "conservative" or opposite stocks (that would be inverses and perhaps commodities). Bonds are simply less volatile historically than equities or indexes... which in a market that goes up and up in the long term, is not good.

Present day, bonds are basically only potentially useful if you have clearly "won the game," and you want to trade gains for less risk of drastic losses (again, only in theory). They also kick dividends, which is good if you have handily won the FI game. You can do the same thing with annuities, dividend stocks/funds, REITs, angel investing, etc. Even if I won a $100M prize tomorrow, I honestly doubt I would buy any bonds in the present interest/market climate. There is a reason basically no hedge funds hold any significant bond position (yet they certainly have in the past decades).

If you want something that stores your wealth, do gold. It is boring and basically goes sideways, but it goes up with inflation in the long haul.
iBonds may work to try for that goal also, but they are mainly doing well right now due to influx of new buyers from ads, forum placements, and ppl looking for non-stock options due to market dip... your liquidity and long term results are anyone's guess.

Conventional bonds like UST bonds or muni or others are not going to work in a high inflation and low productivity situation. Interest rates can't go up substantially unless US GDP and productivity does (where ppl want to buy our bonds). Hint: our GDP relative to other countries is going down % terms, and other places are getting siiick of us printing over $100M per day and sending them our fake money and bonds in trade for their real goods and commodities. The wheels will wobble and fall off (default), very likely in our lifetime. In the 1980s, interest rates were over 15% and bonds were thriving. How many times before 2020 did you ever hear "negative interest rates"? Think it through. Buy stocks and indexes on sale, or gold... all are much better suited to keep up with inflation.

They are good for cushioning vol in a large portfolio. TIPS are useful and better than cash in inflation scenario. Gold is kinda dumb - much rather own digital gold (btc).