garlandwhizzer wrote:One such period was 1940 to 1980, during which high quality intermediate term bonds with reinvested interest lost real purchasing power for 40 straight years, even though the graphs drawn in dollars indexed to 1940 paint a very happy picture.
Garland Whizzer: This seems to be a recurring theme of yours. Of course, you are absolutely right that inflation is the deadly enemy of fixed income investments. However, there are a couple of other points here. Currently inflation is closer to 1% than 2%, and it is anyone's guess what happens in the future. As long as nominal bond rates stay ahead of inflation, as they are now, then there is no problem. The other thing is the existence of inflation protected securities and ibonds. Anyone who is concerned about the effect of inflation on their fixed income portfolio should own some of these.
garlandwhizzer wrote:billyt wrote:Garland Whizzer: This seems to be a recurring theme of yours.
You're right, Billy, inflation is something that I worry about a lot even though it is currently low and has been decreasing for 30+ years.
All of these scenarios result in a real return of about zero over all the time periods.
linuxizer wrote:Nicely done. I had intended to something like this for awhile now, but have been too busy/lazy. Thanks for doing this. Note that your graph also illustrates the common refrain here that long-term investors are better off after rate increases.
billyt wrote:I don't understand that rising rates are a bond bear market. Since when are increasing returns a bear market? The prospect of trading a short term loss for bigger long term gains should appeal to the long term buy and hold investor. The only investors that are affected by these short term moves are those that are trying to time the bond market.
billyt wrote:I don't understand that rising rates are a bond bear market. Since when are increasing returns a bear market?
Electron wrote:The bear market exists while rates are actually rising. In the example shown in the chart, the bond investor had essentially no gain as measured from January 2014 to January 2020.
The bear market effectively ends when rates stop rising. At that point you benefit from the higher rates.
MnD wrote:In the case of TBM the decline in NAV and increase in distribution yield on a percentage basis is obvious, but an uptick in distribution amounts (which is needed for TBM to "regain" lost NAV) isn't jumping out at me.
billyt wrote:Thx1138: Ten year nominal returns for 10 year treasuries between 1956 and 1981 were uniformly positive and increasing over the interval. Of course, the effects of inflation were devastating.
Jack wrote:I might be informative to overlay on this graph the same scenario involving a short-term bond fund, say, initially yielding 1% and a duration 2.5 years. This would give some indication of the trade-offs in short vs intermediate funds in a rising rate environment, which is a subject of debate on this forum. Of course there is no guarantee that the slope of the yield curve would remain constant, but at least it is a starting point for comparison.
billyt wrote:I think it makes an important difference if you use actual data (interest rate and duration) for 2 comparable funds.
Chris M wrote:I'm hoping someone could check my arithmetic, and explain the cause of the discrepancy. Am I making a mistake? Is Vanguard making an assumption different from electron's?
thx1138 wrote:Remember duration is only an approximation and the larger the interest rate change the less accurate it is. So Vanguard's instantaneous 3% change is huge (as they point out in the paper almost un-historical in magnitude) and will "break" the duration rule of thumb more than electron's 1% spread out changes.
adlerps wrote:Have you done any back testing of your chart? Between 1953-1963, when interest rates were last this low, and 10 year bonds went from just under 3% to just over 4%.
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