Lowering bond duration

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Lowering bond duration

Postby fredd » Sun Mar 24, 2013 10:01 am

I thought that this quote was worth repeating. it comes from Vanguard. It cautions against lowering durations in anticipation of rising interest rates.

"While we understand investors' concerns and the natural inclination to "do something," it's important to also understand that the yield curve doesn't necessarily move uniformly across maturities. Even if rates of short-term and long-term bonds increase together—not always the case—there's no assurance that they will rise at the same rate. In fact, short-term rates can rise more than long-term rates, an outcome realized in more than half of the Vanguard Capital Markets Model's hypothetical scenarios. If that were to happen, shortening your duration to lessen your interest rate risk could potentially result in larger losses than if you maintained broad diversification."

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Re: Lowering bond duration

Postby midareff » Sun Mar 24, 2013 10:51 am

Stay the course .. echo stay the course... echo stay the course.
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Re: Lowering bond duration

Postby Munir » Sun Mar 24, 2013 6:09 pm

fredd wrote:I thought that this quote was worth repeating. it comes from Vanguard. It cautions against lowering durations in anticipation of rising interest rates.

"While we understand investors' concerns and the natural inclination to "do something," it's important to also understand that the yield curve doesn't necessarily move uniformly across maturities. Even if rates of short-term and long-term bonds increase together—not always the case—there's no assurance that they will rise at the same rate. In fact, short-term rates can rise more than long-term rates, an outcome realized in more than half of the Vanguard Capital Markets Model's hypothetical scenarios. If that were to happen, shortening your duration to lessen your interest rate risk could potentially result in larger losses than if you maintained broad diversification."

fredd


Baloney- excuse me, I mean to say theory, theory, theory! Note that they said this occurs in their hypothetical scenarios. When and how often has it happened historically? If one's horizon is long enough to hold bond funds way beyond their current duration, there is a good possibility that one can recoup NAV losses incurred by a rise in rates. Otherwise, it becomes prudent to shorten duration of part of one's portfolio if one's judgment is that rates will not go any lower.

Also note that the Short-Term Investment Grade Fund is doing better in total return in its YTD returns than the intermediate bond funds. Why is that? I have hedged my bets by owning both intermediate and short term but let's not kid ourselves that the short duration funds will lose more NAV than longer duration funds if and when rates rise.That possibility is REMOTE.
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Re: Lowering bond duration

Postby foxfirev5 » Sun Mar 24, 2013 6:28 pm

I have to agree the statement from Vanguard appears a bit self serving for my tastes.
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Re: Lowering bond duration

Postby gkaplan » Sun Mar 24, 2013 7:47 pm

foxfirev5 wrote:I have to agree the statement from Vanguard appears a bit self serving for my tastes.


How is it self serving? Vanguard offers fixed income funds that span a wide spectrum of maturities and durations.
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Re: Lowering bond duration

Postby lwfitzge » Sun Mar 24, 2013 7:54 pm

gkaplan wrote:
foxfirev5 wrote:I have to agree the statement from Vanguard appears a bit self serving for my tastes.


How is it self serving? Vanguard offers fixed income funds that span a wide spectrum of maturities and durations.


agreed, but I am wondering if they would also advise their portfolio managers not to adjust their portfolio for mean duration? I doubt it.
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Re: Lowering bond duration

Postby momar » Sun Mar 24, 2013 9:28 pm

Munir wrote:Baloney- excuse me, I mean to say theory, theory, theory! Note that they said this occurs in their hypothetical scenarios. When and how often has it happened historically? If one's horizon is long enough to hold bond funds way beyond their current duration, there is a good possibility that one can recoup NAV losses incurred by a rise in rates. Otherwise, it becomes prudent to shorten duration of part of one's portfolio if one's judgment is that rates will not go any lower.

Also note that the Short-Term Investment Grade Fund is doing better in total return in its YTD returns than the intermediate bond funds. Why is that? I have hedged my bets by owning both intermediate and short term but let's not kid ourselves that the short duration funds will lose more NAV than longer duration funds if and when rates rise.That possibility is REMOTE.

1/3/2012:
1 year treasury: 0.12%
5 year treasury: 0.89%

1/2/2013
1 year treasury: 0.15%
5 year treasury: 0.76%

So it is true that shorter durations could rise while longer durations fall or at least rise less. Enough to cause any significant heartburn? Who knows? And yeah, I get that these are miniscule. But I'm not combing through that much data.
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