## Total Bond fund tanks

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
airahcaz
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### Total Bond fund tanks

Since this is the theoretical board.

Person own Total Bond (BND) currently 83+.

What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

Noobvestor
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### Re: Total Bond fund tanks

I believe the theory is that the fund NAV will decrease roughly as a factor of duration times rate increase, so roughly 5 years duration times 5 percent increase = 25% nominal nav drop. Someone can (and no doubt will!) correct me if I am wrong.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

magician
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### Re: Total Bond fund tanks

airahcaz wrote:Since this is the theoretical board.

Person own Total Bond (BND) currently 83+.

What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

The average duration on BND is about 5.2 years, so its NAV will decline by about 5% * 5.2 = 26%; that drops it from 83 to about 61. (In fact, the drop will be less than that because of convexity, but I don't know the convexity of BND; so, it may drop to only, say, 65 or 67.)

The decline will be immediate (or, at least, very quick). In theory, if rates didn't change again, it would take about 5.2 years to return to 83. (In practice, it could take more or less than that depending on when the funds bonds mature; and, of course, in practice, rates will change again, and the whole process will start again.)
Simplify the complicated side; don't complify the simplicated side.

FNK
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### Re: Total Bond fund tanks

It would take 5.2 years reinvesting dividends to get to the same point where you would have been in 5.2 years reinvesting dividends without the change in interest rates. NAV will not increase to 83; your balance will recover. After 5.2 years, you will be better off than if the change didn't happen (same balance with higher yield).

Duration is point of indifference.

Reinvested dividends are extremely important, especially with higher rates.

airahcaz
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### Re: Total Bond fund tanks

So we know interest rates are highly unlikely to go up 5% in one shot, but it could go up 1% annually which is close to what has occurred in the past.

Doesn't this make bonds, and BND, not as 'safe' as it is always touted to be?

Also, what happens to the yield - does it increase in lockstep with interest rates increase?
And even if yield does increase, do the bonds actually yield less since it is a higher yield but on a lower NAV?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

billyt
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### Re: Total Bond fund tanks

Bonds and bond funds will always be safer than stocks and stock funds and less safe than CD's. Price of bond goes down, the dollar amount of yield is the same, the percent yield is higher (just the math).

Dandy
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### Re: Total Bond fund tanks

If interest rate rose 5% quickly I think the panic/fear factors would probably affect behavior more than just the bond fund duration. The stock market would probably take a big hit and fear/panic may drive people into bonds/bond funds -- most likely Treasuries. But some might go into Total bond - then agian money might leave bond funds for gold and make the decline worse. I don't think we have ever faced such a large and rapid increase in interest rates -- so all bets are off.

john94549
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### Re: Total Bond fund tanks

Large and rapid rises in interest rates have, indeed, occurred. I remember back in 1979-1980 when short-term CD rates went crazy. Here's a chart from the St. Louis Fed:

http://research.stlouisfed.org/fred2/graph/?id=CD6M

SSSS
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### Re: Total Bond fund tanks

airahcaz wrote:So we know interest rates are highly unlikely to go up 5% in one shot, but it could go up 1% annually which is close to what has occurred in the past.

Doesn't this make bonds, and BND, not as 'safe' as it is always touted to be?

Also, what happens to the yield - does it increase in lockstep with interest rates increase?
And even if yield does increase, do the bonds actually yield less since it is a higher yield but on a lower NAV?

Duration of the fund is about 5 years. If interest rates rise, the value of the fund will drop, but the increased yield will "replace" the lost money over 5 years, and after that you'll be ahead of where you'd be if interest rates hadn't risen.

If interest rates fall, the value of the fund will rise, but the lower yield will "take back" the gain in 5 years, and then you'll be making less than if interest rates hadn't fallen.

So LONG-TERM, interest rate increases are good for bond investors.

airahcaz
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### Re: Total Bond fund tanks

SSSS wrote:
airahcaz wrote:So we know interest rates are highly unlikely to go up 5% in one shot, but it could go up 1% annually which is close to what has occurred in the past.

Doesn't this make bonds, and BND, not as 'safe' as it is always touted to be?

Also, what happens to the yield - does it increase in lockstep with interest rates increase?
And even if yield does increase, do the bonds actually yield less since it is a higher yield but on a lower NAV?

Duration of the fund is about 5 years. If interest rates rise, the value of the fund will drop, but the increased yield will "replace" the lost money over 5 years, and after that you'll be ahead of where you'd be if interest rates hadn't risen.

If interest rates fall, the value of the fund will rise, but the lower yield will "take back" the gain in 5 years, and then you'll be making less than if interest rates hadn't fallen.

So LONG-TERM, interest rate increases are good for bond investors.

Thanks, this is great, makes sense. Can we go one step further if possible?

if NAV for BND is 83, and interest rates rise 1%, it may not be linear, but we can expect the NAV to go down by what percentage, and the current 12-Mo. Yield
of 2.72% to go up by 1% to 3.72%?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

MN Finance
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### Re: Total Bond fund tanks

Duration * interest change as a potential loss is an important gut check for willingness to take risk, but in practice, the likelihood of all bonds with different maturities, credit qualities, etc changing rates at the same time, with no other change to the yield curve, is not likely at all.

I would also say that comparing the CD yields of the 70s which are not linked in almost any way to the yield curve and BND is a good example, but again, not telling of what can happen with a rise in rates for BND or other similar fund.

garlandwhizzer
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### Re: Total Bond fund tanks

SSSS wrote:
Analysts generally advise fund investors to target small-cap stocks in order to tap into the true growth story behind emerging markets.

True perhaps, for nominal dollars, but not for real inflation-adjusted dollars or real purchasing power. How much purchasing power does one lose in 5 years of flat returns in nominal dollars? Unknown, depends on inflation rate which is not accurately predictable. Returns in real real inflation-adjusted dollars back to zero real return in purchasing power often takes a decade or more after long periods of governmental induced very low interest rates like the current situation or post WW2.

Garland Whizzer

Elbowman
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### Re: Total Bond fund tanks

Also, if you are in the withdrawal phase, and especially if you are 83+ , you should probably keep a fraction of your portfolio in a short term bond fund. If interest rates rise sharply, you can live off your short term bonds while BND recovers.

airahcaz
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### Re: Total Bond fund tanks

Elbowman wrote:Also, if you are in the withdrawal phase, and especially if you are 83+ , you should probably keep a fraction of your portfolio in a short term bond fund. If interest rates rise sharply, you can live off your short term bonds while BND recovers.

Elbowman, 83 is the BND NAV
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

livesoft
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### Re: Total Bond fund tanks

Someone who is 83+ years old has a heart attack when they see this and die. Their worries are over. God Bless 'em.

But you meant the price of BND is currently \$83.
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YDNAL
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### Re: Total Bond fund tanks

airahcaz wrote:What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

In theory.....
1. BND price decreases 5% x 5.2 duration = 26%
2. You have same BND shares earning 5% more annually. You are in the same spot in 5.2 years.

airahcaz wrote:if NAV for BND is 83, and interest rates rise 1%, it may not be linear, but we can expect the NAV to go down by what percentage, and the current 12-Mo. Yield of 2.72% to go up by 1% to 3.72%?

Landy | Be yourself, everyone else is already taken -- Oscar Wilde

athrone
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### Re: Total Bond fund tanks

You can also look at history, Real returns for Total Bond Market (intermediate duration, ~5-7 years) were:

1977: -3.91%
1978: -7.02%
1979: -6.91%
1980: -6.13%

For a cumulative Real loss of -22% over four years. This was a period of rising interest rates and high inflation.

stan1
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### Re: Total Bond fund tanks

athrone wrote:You can also look at history, Real returns for Total Bond Market (intermediate duration, ~5-7 years) were:

1977: -3.91%
1978: -7.02%

So let's say its the end of 1978 and no end is in sight (I deleted 1979 and 1980 because, well, its the end of 1978 and we don't know what the future will bring). I'm old enough to remember 1978, and there really was no end in sight. How many of you would keep 40% of your portfolio in Total Bond Market, and how many would be buying 12+% CDs?

airahcaz
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### Re: Total Bond fund tanks

YDNAL wrote:
airahcaz wrote:What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

In theory.....
1. BND price decreases 5% x 5.2 duration = 26%
2. You have same BND shares earning 5% more annually. You are in the same spot in 5.2 years.

airahcaz wrote:if NAV for BND is 83, and interest rates rise 1%, it may not be linear, but we can expect the NAV to go down by what percentage, and the current 12-Mo. Yield of 2.72% to go up by 1% to 3.72%?

Indeed - thanks for the info - however, I am on the phone with Vanguard, and they are unable to tell me if a NAV drops 5% based on the above, would the NAV recoup back to where it was prior to the rise in interest rates, e.g. assume a NAV of 100, down 5% to 95, after 5 years does it recover to 100 at the end of the duration, or remain at 95.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

dbr
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### Re: Total Bond fund tanks

airahcaz wrote:
Indeed - thanks for the info - however, I am on the phone with Vanguard, and they are unable to tell me if a NAV drops 5% based on the above, would the NAV recoup back to where it was prior to the rise in interest rates, e.g. assume a NAV of 100, down 5% to 95, after 5 years does it recover to 100 at the end of the duration, or remain at 95.

The total value of the investment recovers. That amount will be the product of the NAV, which may not recover, times the number of shares held, which increases whenever a distribution of dividends or realized capital gains is reinvested. I would have to think about whether the NAV remains exactly at 95 depending on purchases and sales of bonds in the fund.

It is certainly true that if you think you can spend the dividends and that the NAV will somehow recover all by itself, then you are wrong.

airahcaz
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### Re: Total Bond fund tanks

dbr wrote:
airahcaz wrote:
Indeed - thanks for the info - however, I am on the phone with Vanguard, and they are unable to tell me if a NAV drops 5% based on the above, would the NAV recoup back to where it was prior to the rise in interest rates, e.g. assume a NAV of 100, down 5% to 95, after 5 years does it recover to 100 at the end of the duration, or remain at 95.

The total value of the investment recovers. That amount will be the product of the NAV, which may not recover, times the number of shares held, which increases whenever a distribution of dividends or realized capital gains is reinvested. I would have to think about whether the NAV remains exactly at 95 depending on purchases and sales of bonds in the fund.

It is certainly true that if you think you can spend the dividends and that the NAV will somehow recover all by itself, then you are wrong.

Spending dividends - not reinvesting, so yes that's the premise.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

dbr
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### Re: Total Bond fund tanks

airahcaz wrote:
dbr wrote:
airahcaz wrote:
Indeed - thanks for the info - however, I am on the phone with Vanguard, and they are unable to tell me if a NAV drops 5% based on the above, would the NAV recoup back to where it was prior to the rise in interest rates, e.g. assume a NAV of 100, down 5% to 95, after 5 years does it recover to 100 at the end of the duration, or remain at 95.

The total value of the investment recovers. That amount will be the product of the NAV, which may not recover, times the number of shares held, which increases whenever a distribution of dividends or realized capital gains is reinvested. I would have to think about whether the NAV remains exactly at 95 depending on purchases and sales of bonds in the fund.

It is certainly true that if you think you can spend the dividends and that the NAV will somehow recover all by itself, then you are wrong.

Spending dividends - not reinvesting, so yes that's the premise.

The NAV does not recover and the amount of wealth you have in the fund does not recover either.

Do you have a basic picture in your head regarding how the NAV of a fund is determined and how your total return in a fund develops from the change in the sum of market capital value of the bonds in a fund plus the interest earned by those bonds?

jeffyscott
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### Re: Total Bond fund tanks

athrone wrote:You can also look at history, Real returns for Total Bond Market (intermediate duration, ~5-7 years) were:

1977: -3.91%
1978: -7.02%
1979: -6.91%
1980: -6.13%

For a cumulative Real loss of -22% over four years. This was a period of rising interest rates and high inflation.

I think this tells us more about the impact of very high inflation on real returns, that it does about the impact of the rising rates. According to m* chart the nominal total return was about +10% for that period, so that means inflation must have been around 32%.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
press on, regardless - John C. Bogle

Rodc
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### Re: Total Bond fund tanks

jeffyscott wrote:
athrone wrote:You can also look at history, Real returns for Total Bond Market (intermediate duration, ~5-7 years) were:

1977: -3.91%
1978: -7.02%
1979: -6.91%
1980: -6.13%

For a cumulative Real loss of -22% over four years. This was a period of rising interest rates and high inflation.

I think this tells us more about the impact of very high inflation on real returns, that it does about the impact of the rising rates. According to m* chart the nominal total return was about +10% for that period, so that means inflation must have been around 32%.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

I'm not sure how you separate the two in a case like this. Sort of a chicken and egg sort of problem.

Yields are going to go up I would think if inflation hits (sure many factors at play so never a clean story). But to get people to buy bonds generally you have to offer bonds with higher yields than inflation. Today seems very unusual. Yields may also rise when the economy recovers, FED won't be pushing down, maybe demand will rise as corp try to raise cash for new ventures, but that might also bring inflation. So I would not be at all surprised to see some correlation with uncertain causation.

While the general question of rising yields and bond performance is interesting, ultimately I think it is also useful just to understand what periods of poor bond performance might look like in a more general setting. And this is one such period.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Clive
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### Re: Total Bond fund tanks

For a cumulative Real loss of -22% over four years

I think it is also useful just to understand what periods of poor bond performance might look like in a more general setting

That loss could be considered as a single hit loss over one time point, that was later recovered

Take a 10 year average maturity comprised of 50-50 20 year and short term barbell.

By eye, 20 year might have rose from around 7.5% to around 15% yield. Let's assume that occurred the day after you'd bought the 20 year such that the price declined -47%. Add on the 7.5% income you'd receive over the year = -40% total loss over the year. The short term however might have earned 16%, and 50-50 weightings of both = -12% for the barbell. Which all things being equal should be much the same as 100% in a 10 year.

If short dated were yielding 16%, then inflation was probably also up at around 16%, so in real terms that's a -28% loss over the year (relatively close to the -22% over four years you noted).

Selling up at the end of that year and being down -28% in real terms (-16% nominal), but then re-buying back in for another year (or more simply rebalancing/rolling) would have you yielding around 15%, compared to 15% inflation assuming inflation also stayed 'up-there'. If inflation/yields declined however then the bond makes a capital gain and/or has you locked in at a relatively high yield (15%) for the remaining life of that bond.

Rather than a short/long dated barbell, another option is to hold long dated conventional and inflation bonds. When inflation/yields rise, the inflation bonds will relatively gain whilst the conventional relatively loses. Holding long dated of both captures the term benefit (higher yields for 'lending' for longer periods). US data for inflation bonds is limited (back to 1990's ?), but as a guide here are some total gain figures for UK Inflation Bonds (Index Linked Gilts) and Conventional Bonds going back to 1983 (shame no data exists for the 1970's )

Code: Select all

`Year   20_year_Index_Linked_Gilt   20_year_conventional_gilt Inflation1983   0.8   20.9   5.31984   6.6   1.8   4.61985   -0.2   51.3   5.71986   6.1   15.9   3.71987   6.9   6.8   3.71988   13.7   11   6.81989   14.5   11   7.71990   4.4   16.3   9.31991   5.2   9.4   4.51992   17.1   5.9   2.61993   21.1   5.6   1.91994   -7.9   18.9   2.91995   12   18.4   3.21996   6.5   28.8   2.51997   13.4   -11.3   3.61998   20.3   19   2.81999   5   7.7   1.82000   3.1   19.4   2.92001   -0.9   25   0.72002   8.2   -3.5   2.92003   6.8   9.2   2.82004   8.6   1.3   3.52005   9.1   9.8   2.22006   2.3   1.6   4.42007   5.5   7.2   42008   -1.2   8.4   12009   5.6   -0.1   2.32010   10.3   5.2   4.82011   18.95   28   4.82012   1.48   2.7   2.7`

Taken to even more of an extreme, stocks are somewhat like an undated variable coupon conventional bond, whilst gold is somewhat like an undated zero coupon inflation bond (more volatile) - hence why some investors opt to hold a barbell of stocks and gold (or Permanent Portfolio'ers hold a combination of STT/LTT, Stocks/Gold). A problem with such rigidity however is that it isn't always tax efficient to stick with such fixed allocations. During the 70's/80's for instance UK taxes on income (yields) were up at 35% levels, such that a 15% gross yield dropped to around 10% net yield - and there were no tax efficient options available to investors at that time. When income streams are being taxed at punitive levels its perhaps better to have low/no income (stocks that pay no dividend, gold produces no interest/dividends) and only take capital gains as and when it suits you rather than having enforced income being thrown at you every few months or so - that you might just be paying taxes on to then reinvest the remaining proceeds back into the market.

I believe it was a similar high taxation and few/no tax efficient options situation also evident in the US over those 1970's/80's high inflation/yield years. A single person on a 2011 \$60,000 inflation adjusted income tax band band for instance ('average' wage perhaps?) was paying 34% tax in 1980/1981. Being a Brit I know very little about US taxes on investments, but suspect it could have been as bad back then in the US as it was over here, with both inflation an taxes being a steep uphill struggle to overcome.
Last edited by Clive on Mon Jan 14, 2013 5:44 am, edited 2 times in total.

jeffyscott
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### Re: Total Bond fund tanks

"A single person on a 2011 \$60,000 inflation adjusted income tax band band for instance ('average' wage perhaps?) was paying 54% tax in 1980/1981."

Using CPI inflation adjustment, \$21,500 in 1980 would be \$60K in 2011 and the marginal tax rate for a single person with taxable income at that level was 34%, not 54%. In that year, I believe capital gains had a 60% exclusion, so that the rate was 40% of that on other income.

http://taxfoundation.org/article/us-fed ... d-brackets
press on, regardless - John C. Bogle

Clive
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### Re: Total Bond fund tanks

Thanks jeffyscott. It was 2am when I posted and I didn't proof read what I'd written before posting. I was looking at the same tax rates data source that you linked. I've edited the posting. Thanks again.

In the UK capital gains are taxed separately/differently to income. Gilts (treasury's) capital gains are tax exempt, but income isn't. I believe the reason why they don't implement capital gains tax on gilts is that its zero sum overall such that managing capital gains taxation would just be an overhead.

YDNAL
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### Re: Total Bond fund tanks

airahcaz wrote:
YDNAL wrote:
airahcaz wrote:What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

In theory.....
1. BND price decreases 5% x 5.2 duration = 26%
2. You have same BND shares earning 5% more annually. You are in the same spot in 5.2 years.

airahcaz wrote:if NAV for BND is 83, and interest rates rise 1%, it may not be linear, but we can expect the NAV to go down by what percentage, and the current 12-Mo. Yield of 2.72% to go up by 1% to 3.72%?

Indeed - thanks for the info - however, I am on the phone with Vanguard, and they are unable to tell me if a NAV drops 5% based on the above, would the NAV recoup back to where it was prior to the rise in interest rates, e.g. assume a NAV of 100, down 5% to 95, after 5 years does it recover to 100 at the end of the duration, or remain at 95.

airahcaz wrote:
It is certainly true that if you think you can spend the dividends and that the NAV will somehow recover all by itself, then you are wrong.

Spending dividends - not reinvesting, so yes that's the premise.

Airahcaz,

Why don't you work through some numbers (rather than question upon question)? The best way for ME to solve a problem is to work the problem. Simplisticaly, using 5 year duration:

Code: Select all

`BND Investment    100,000     100,000       Interest Rate   1%         2%Adjustment    -       (5,000)      Adj NAV    100,000     95,000       Year 1    101,000     96,900       Year 2    102,010     98,838       Year 3    103,030     100,815       Year 4    104,060     102,831       Year 5    105,101     104,888`

Whether you spend the dividends or not, you get what you signed-up to get.
Last edited by YDNAL on Mon Jan 14, 2013 10:25 am, edited 1 time in total.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Rodc
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### Re: Total Bond fund tanks

Clive wrote:
For a cumulative Real loss of -22% over four years

I think it is also useful just to understand what periods of poor bond performance might look like in a more general setting

That loss could be considered as a single hit loss over one time point, that was later recovered

Unfortunately the losses actually extend back from the early 1980 for a few decades of poor real performance, this is just a particular bad short(ish) bit of that time period.

TIPS may have helped had they been available. Then again with nominals having such poor performance, TIPS, just like today, may have been bid up to negative real returns. Hard to know.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Tom_T
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Joined: Wed Aug 29, 2007 2:33 pm

### Re: Total Bond fund tanks

Over the 26-year history of Total Bond Market, the lowest NAV was \$8.73 (in 1987), and the highest was \$11.23 (in 2012). That is a difference of 22% from high to low. Just to give an idea of where rates were, the 10-year Treasury was in the neighborhood of 9% back in 1987. It hit a low of around 1.5% last year (maybe a tad under.)

airahcaz
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### Re: Total Bond fund tanks

Well, thanks for the responses and interesting detailed dialog. At the end of the day, well actually earlier today, bought some decent shares in BND.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

Taylor Larimore
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Location: Miami FL

### Re: Total Bond fund tanks---Maybe not.

airahcaz wrote:Since this is the theoretical board.

Person own Total Bond (BND) currently 83+.

What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

airahcz:

We have held Total Bond Market Index Fund for many years.

In 2008 inflation was 0.1%. In 2011 U.S. inflation (CPI-U) was 3.0% for an increase of nearly 3%. These were our returns:

2008: 5.1%
2009: 5.9%
2010: 6.5%
2011: 7.6%

Past performance does not guarantee future performance.

It is "total return" that's important.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

FNK
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Joined: Tue May 17, 2011 7:01 pm

### Re: Total Bond fund tanks

In terms of actual moves, I did a 401(k) loan, ditched TBM and paid down my mortgage.

airahcaz
Posts: 1252
Joined: Sat Oct 31, 2009 3:37 pm

### Re: Total Bond fund tanks

BND is down 1% and at the same time SPY is up 3% since I've bought
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

Taylor Larimore
Posts: 21834
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

### Congratulations!

airahcaz wrote:BND is down 1% and at the same time SPY is up 3% since I've bought

Congratulations!

You are diversified. I start to worry if all our funds move up or down together.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

schwarm
Posts: 705
Joined: Sun Oct 28, 2007 1:17 pm
Location: Lower Alabama

### Re: Total Bond fund tanks

Dandy wrote:If interest rate rose 5% quickly I think the panic/fear factors would probably affect behavior more than just the bond fund duration. The stock market would probably take a big hit and fear/panic may drive people into bonds/bond funds -- most likely Treasuries. But some might go into Total bond - then agian money might leave bond funds for gold and make the decline worse. I don't think we have ever faced such a large and rapid increase in interest rates -- so all bets are off.

I realize the OP is asking a general question, and an interesting one.
Given that we have about 8% unemployment with the federal funds rate at about 0, the bond fund values with a large interest rate jump would be pretty far down on the list of problems.
In the current situation, kind of like asking if I drove my car off a cliff what effect would it have on my tire pressure.

Nicho_1978
Posts: 43
Joined: Wed Jun 20, 2012 6:57 am

### Re: Total Bond fund tanks

Since bonds have an inverse relationship with stocks, is it possible that if this equity rally continues, the bond market will take a hit, even if interest rates and inflation remains low.

magician
Posts: 1566
Joined: Mon May 02, 2011 1:08 am
Location: Yorba Linda, CA
Contact:

### Re: Congratulations!

Taylor Larimore wrote:
airahcaz wrote:BND is down 1% and at the same time SPY is up 3% since I've bought

Congratulations!

You are diversified. I start to worry if all our funds move up or down together.

I start to worry if all of my funds go down together; I'm quite happy when they all go up together. That is, after all, the plan.
Simplify the complicated side; don't complify the simplicated side.

magician
Posts: 1566
Joined: Mon May 02, 2011 1:08 am
Location: Yorba Linda, CA
Contact:

### Re: Total Bond fund tanks

Nicho_1978 wrote:Since bonds have an inverse relationship with stocks, is it possible that if this equity rally continues, the bond market will take a hit, even if interest rates and inflation remains low.

I assume that by an inverse relationship you mean that their returns have a negative correlation.

That doesn't mean that if equities increase in value bonds will decrease in value; that would happen if their prices have a negative correlation, but not necessarily if their returns have a negative correlation.
Simplify the complicated side; don't complify the simplicated side.

Tom_T
Posts: 1450
Joined: Wed Aug 29, 2007 2:33 pm

### Re: Total Bond fund tanks

Nicho_1978 wrote:Since bonds have an inverse relationship with stocks, is it possible that if this equity rally continues, the bond market will take a hit, even if interest rates and inflation remains low.

How do you explain that both bonds and stocks have done well over the past three+ years? Haven't we had an equity rally since 2009? It didn't start last month...

hpowders
Posts: 181
Joined: Sun Aug 26, 2012 7:08 am

### Re: Total Bond fund tanks---Maybe not.

Taylor Larimore wrote:
airahcaz wrote:Since this is the theoretical board.

Person own Total Bond (BND) currently 83+.

What happens, in theory, if interest rates skyrocket 5 percentage points overnight, again, in theory?

Would the NAV decline significantly from 83 and what sort of decline and for how long?

airahcz:

We have held Total Bond Market Index Fund for many years.

In 2008 inflation was 0.1%. In 2011 U.S. inflation (CPI-U) was 3.0% for an increase of nearly 3%. These were our returns:

2008: 5.1%
2009: 5.9%
2010: 6.5%
2011: 7.6%

Past performance does not guarantee future performance.

It is "total return" that's important.

Best wishes.
Taylor

Total return and long-term thinking!

EternalOptimist
Posts: 825
Joined: Wed Nov 07, 2012 12:21 pm
Location: New York

### Re: Total Bond fund tanks

If bonds take a hit, I would think equities might improve
"When nothing goes right....go left"

Nicho_1978
Posts: 43
Joined: Wed Jun 20, 2012 6:57 am

### Re: Total Bond fund tanks

Tom_T wrote:How do you explain that both bonds and stocks have done well over the past three+ years? Haven't we had an equity rally since 2009? It didn't start last month...

It would be interesting to see what those return would be if the yield in those years you mentioned was as low as they are now?

crowd79
Posts: 640
Joined: Sun Nov 18, 2012 10:37 pm

### Re: Total Bond fund tanks

Vanguard Intermediate-Term Bond index(VBIIX) has plunged over .40 a share since I added it to my Vanguard IRA portfolio in December. Should I sell it and re-invest in a different bond fund or something else? I bought this because my 401k option (SEGSX) is mainly in government securities and Mortgage-backed securities. I wanted some corporate bond exposure and thought VBIIX looked decent enough.

jeffyscott
Posts: 6181
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

### Re: Total Bond fund tanks

Nicho_1978 wrote:Since bonds have an inverse relationship with stocks, is it possible that if this equity rally continues, the bond market will take a hit, even if interest rates and inflation remains low.

They don't have an inverse relationship to equities, they have an inverse relationship to interest rates. When interest rates rise bond prices fall, when interest rates fall bond prices rise. This is not a possibility that may or may not happen, it is simply math.

That inverse relationship is actually, I think, better thought of in the opposite way. When investors are willing to pay less for a bond, this means the interest rate is higher. If I own a \$1000 bond that is paying me \$20 per year in interest and then bond market "takes a hit" and I can only sell it to you for \$800, you would be getting a higher yield than I was and the interest rate has increased.

Of course "interest rates" are not a monolith. There are short term and long term rates, there are treasury rates, there are corporate rates, etc.
press on, regardless - John C. Bogle

Tom_T
Posts: 1450
Joined: Wed Aug 29, 2007 2:33 pm

### Re: Total Bond fund tanks

Nicho_1978 wrote:
Tom_T wrote:How do you explain that both bonds and stocks have done well over the past three+ years? Haven't we had an equity rally since 2009? It didn't start last month...

It would be interesting to see what those return would be if the yield in those years you mentioned was as low as they are now?

My point is that bonds and stocks do not have an inverse relationship. They can both go up, and they can both go down. What will happen this year if stocks sell off while interest rates are rising?

ofcmetz
Posts: 1978
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

### Re: Total Bond fund tanks

crowd79 wrote:Vanguard Intermediate-Term Bond index(VBIIX) has plunged over .40 a share since I added it to my Vanguard IRA portfolio in December. Should I sell it and re-invest in a different bond fund or something else? I bought this because my 401k option (SEGSX) is mainly in government securities and Mortgage-backed securities. I wanted some corporate bond exposure and thought VBIIX looked decent enough.

Did you buy it before the capital gains payout in December? The share price dropped 20 cents on 12-20-13 when it paid these out.
Profiling is ok if it means looking for low cost index funds.

crowd79
Posts: 640
Joined: Sun Nov 18, 2012 10:37 pm

### Re: Total Bond fund tanks

ofcmetz wrote:
crowd79 wrote:Vanguard Intermediate-Term Bond index(VBIIX) has plunged over .40 a share since I added it to my Vanguard IRA portfolio in December. Should I sell it and re-invest in a different bond fund or something else? I bought this because my 401k option (SEGSX) is mainly in government securities and Mortgage-backed securities. I wanted some corporate bond exposure and thought VBIIX looked decent enough.

Did you buy it before the capital gains payout in December? The share price dropped 20 cents on 12-20-13 when it paid these out.

I know, dumb. Tough lesson learned. Bought around Dec 10th.

grabiner
Posts: 15563
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

### Re: Total Bond fund tanks

crowd79 wrote:
ofcmetz wrote:Did you buy it before the capital gains payout in December? The share price dropped 20 cents on 12-20-13 when it paid these out.

I know, dumb. Tough lesson learned. Bought around Dec 10th.

That wasn't a dumb move; you got those 20 cents in cash, so the share price decline didn't hurt you. (Even in a taxable account, it didn't hurt you, as the 20 cents was taxed as a long-term capital gain, and if the fund hadn't sold the bonds, it would have distributed the same 20 cents as ordinary income in later years.)
David Grabiner

YDNAL
Posts: 13773
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

### Re: Total Bond fund tanks

airahcaz wrote:BND is down 1% and at the same time SPY is up 3% since I've bought

Hopefully you have the appropriate SPY/BND split to match your Ability and Need for risk. If so, why is this a bad thing?

Airahcaz, you shouldn't look at a specific asset class in isolation and shouldn't look at what the market does every day. Invest for the long-term that applies to YOU - everyone's "long-term" is not created equal.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde