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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Long term bond fund Date: 1/11/2008 8:05 PM
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Would you drop a large chunk of money into Vanguard CA tax-free Long Term Bond Fund at this time? Financial Engines is giving me that advice. At present, I have most of my fixed income in CDs of 1 year or less, and in Vgd Investment grade bond fund, Vgd. Tax free Intermediate Term Bond Fund, and a BIG chunk in the Vgd. Prime Money Market Fund, which is of course dropping with the interest rates. We are within a couple of years of retirement. Yikes, what to do??
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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22664 of 35400
Subject: Re: Long term bond fund Date: 1/11/2008 8:17 PM
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Would you drop a large chunk of money into Vanguard CA tax-free Long Term Bond Fund at this time?

Are you sure they didn't say *short* the long term bond fund?

Yikes, what to do??

Get a different advisor. Yes, it's likely that rates will go down over the next 6 months; but only likely. It's entirely possible that the covers could come off the ball and rates could skyrocket a year down the road. Don't be the guy holding long-term funds if that happens. And don't expect to be treated gently when trying to exit a long fund if rates go sharply up.

At these rates, you should only be in either hard bonds, CDs, or short funds.

JMO

Hedge

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22665 of 35400
Subject: Re: Long term bond fund Date: 1/11/2008 8:50 PM
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A quick look at the numbers suggests the risk/benefit of this fund looks good compared to other long term options. This assumes you will still be in a high enough tax bracket after you retire to offset the lower yield (your combined federal and state taxes would need to be around 33% to equal the long term corporate fund yield). And it assumes long California munis are safe, despite Aarnoold crying crisis today. The duration is only 6.7, which is much less than the 11 of the long corporate fund.

Of course, there is interest rate risk. I don't think any of us will be surprised if rates continue to fall short term, but a few years from now, I find it hard to believe interest rates won't be going way up, and not necessarily because of a booming economy. If California is borrowing heavily (don't forget those retiree health plans) and rates in general are higher, you could easily lose 20% on the NAV, even with only 6.7 duration (that's about 300 basis points change in interest rates).

Compared to a Pen Fed 5% 5-year CD, 3.35% at 33% taxes, if the fund pays you 4% currently but averages 5% over 5 years and is at 6% in 5 years, you're looking at a 13.5% loss to NAV, averaged over 5 years, so your total average return on the fund would be about 2.7%. From that perspective it might be worth the risk, though 4% average return (about current fund yield) would be unlikely, since it is very doubtful these low rates will be around in 5 ears.

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22667 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 1:38 AM
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Would you drop a large chunk of money into Vanguard CA tax-free Long Term Bond Fund at this time?

just long enough to play the fed meeting coming up and the get out - might be an ok play.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22670 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 9:34 AM
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just long enough to play the fed meeting coming up and the get out - might be an ok play.

Maybe, but the nice thing about not playing is we can actually do some pretty good number crunching to decide which vehicle does best over a longer period under various circumstances.

I'd still think for playing short term drop in interest rates, 30-year Treasury Bond is how you would do it. I'm not convinced, because the foreign money that has kept yields down, isn't going to like the continued drop in the formerly known as "all might" dollar that is likely to result from Fed trying to bail out Wall Street in the name of Main Street. How long are the hedgies going to play Treasuries down?

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22672 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 2:10 PM
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"Would you drop a large chunk of money into Vanguard CA tax-free Long Term Bond Fund at this time?"

If taxes go up substantially (federal and CA both), demand for these bonds will increase. There could be a capital gain.

For me personnally, cash is king right now.

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22673 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 2:37 PM
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I'm not convinced, because the foreign money that has kept yields down, isn't going to like the continued drop in the formerly known as "all might" dollar that is likely to result from Fed trying to bail out Wall Street in the name of Main Street.

There's still the problem of what to do with greenbacks once they've left the US to buy stuff. Sure, they can keep them floating offshore, but that's just a bet that the dollar will rise in the future at a rate greater than they can get in some US denominated issue today. What we are seeing now is the decision that owning equity in the US, i.e. purchasing businesses and real estate, is a better bet than holding dollars or US debt. The spin is that it's a sign of faith in the US economy, but we know better.

Hedge

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22674 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 3:12 PM
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There's still the problem of what to do with greenbacks once they've left the US to buy stuff. Sure, they can keep them floating offshore, but that's just a bet that the dollar will rise in the future at a rate greater than they can get in some US denominated issue today. What we are seeing now is the decision that owning equity in the US, i.e. purchasing businesses and real estate, is a better bet than holding dollars or US debt. The spin is that it's a sign of faith in the US economy, but we know better.


Is a conundrum, no?

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22675 of 35400
Subject: Re: Long term bond fund Date: 1/12/2008 3:18 PM
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Is a conundrum, no?

Personally, I don't think so. China is only about 1/4 industrialized. That leaves a lot of growth that the Chinese citizens are going to insist on. Some of that can eventually come from internal consumption, but for now much of it has to come from the US. So, China, at least, has no choice but to accept USD at any value we choose for them. Unfortunately, their Emerging Market competitors have to accept those same valuations in order to keep their own economies afloat. I have no idea how long it will take before China normalizes enough so that they will unpeg the RMB and sane trading practices can resume. I'm guessing it will be a major shock to the US consumer when it eventually happens.

Hedge

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