"Bond investing: Is a bear still out there?"

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gkaplan
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"Bond investing: Is a bear still out there?"

Post by gkaplan »

Brian Scott, senior investment analyst in Vanguard Investment Strategy Group, discusses the current market for bonds and the potential implications of rising interest rates. Mr. Scott explains why Vanguard continues to believe bonds can play an important role in the diversification of your portfolio....

https://personal.vanguard.com/us/insigh ... ing-052014
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Re: "Bond investing: Is a bear still out there?"

Post by Toons »

When was the last Bond Bear Market? :shock:
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Re: "Bond investing: Is a bear still out there?"

Post by Munir »

Excellent balanced presentation on the bond market. However, he did not address what the realisitc options are for income-seekers (retirees) in such a low-return environment of bond returns. Maybe that needs another article.

I liked the fact that he mentioned there are investment-grade bonds (corporates) which are not treasuries:

"And by investment grade, I'm referring to bonds that have a credit rating of at least BBB or higher according to S&P, and these investment-grade bonds are considered to be highly creditworthy, very low probability of default."

Some investors trash anything that is not treasuries as a poor credit risk investment.
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Re: "Bond investing: Is a bear still out there?"

Post by Quasimodo »

Interesting article on historical bond yields:

http://www.american.com/archive/2012/ap ... ury-yields

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Re: "Bond investing: Is a bear still out there?"

Post by Buddtholomew »

Interesting article Quasi for a historical perspective on yields. I am sure this has been cited elsewhere, but what is the hypothetical return (real and inflation adjusted) for an investor that held US treasuries over the entire period, dividends reinvested.
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Re: "Bond investing: Is a bear still out there?"

Post by nisiprius »

Toons wrote:When was the last Bond Bear Market? :shock:
Probably 1940-1980, a very bad period in terms of real value, because of bursts of high inflation at both the beginning and the end of it.
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Re: "Bond investing: Is a bear still out there?"

Post by Toons »

nisiprius wrote:
Toons wrote:When was the last Bond Bear Market? :shock:
Probably 1940-1980, a very bad period in terms of real value, because of bursts of high inflation at both the beginning and the end of it.
Thanks :happy
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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

But the silver lining to rising interest rates is that if you're continuing to make new purchases of bonds,
Really? How many retired investors re-invest bond fund dividends.
We're telling investors that we think bond returns over the next ten years are likely to be in the neighborhood of 2% to 3%.
What bond funds or duration does that 2% to 3% apply?
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Re: "Bond investing: Is a bear still out there?"

Post by midareff »

I don't see this as a bear issue but rather a return issue. This AM news had the 10 treasury at 2.51. Knock off 25% for tax and you barely have inflation. The 5 year loses after tax and inflation. Tough to make a buck on bonds these days.
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Re: "Bond investing: Is a bear still out there?"

Post by midareff »

Bustoff wrote:
But the silver lining to rising interest rates is that if you're continuing to make new purchases of bonds,
Really? How many retired investors re-invest bond fund dividends.
We're telling investors that we think bond returns over the next ten years are likely to be in the neighborhood of 2% to 3%.
What bond funds or duration does that 2% to 3% apply?
The distribution yield of IT Tax Ex and IT IG is slightly over 3.% It's really tough for a retiree to own IT Treasuries and lose purchasing power every month to inflation and taxes. ........ while some expect the coming decade to offer somthing in interest rate increases which will decrease fund value. Hang on to your britches boyz, the ride may get a little rough.

BTW, the bonds in my IRA reinvest as do some in taxable. There are many ways for a reriree to decumulate.
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Re: "Bond investing: Is a bear still out there?"

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by Quasimodo » Fri May 16, 2014 12:23 pm

Interesting article on historical bond yields:

http://www.american.com/archive/2012/ap ... ury-yields
Great article, Quasi. Most of us today don't remember what happened before the bond bull market began in 1981. Poor policy from the Fed and/or elected representatives can have terrible long term effects on everything, but especially on bonds. Volcker was a big enough man to make the hard choice to raise rates to such a high level that it devastated the economy and created a severe recession. That at last put an end to the long term relentless rise in inflation. It was not a popular move at the time, was widely criticized by politicians, but Volcker stuck to his guns. Hopefully we learned our lesson from that disaster but it sure didn't look like it as the Fed and Washington fueled the home price bubble less than a decade ago.

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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

Looks like we should be worrying more about stocks.

Image
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Re: "Bond investing: Is a bear still out there?"

Post by Quasimodo »

Buddtholomew wrote:Interesting article Quasi for a historical perspective on yields. I am sure this has been cited elsewhere, but what is the hypothetical return (real and inflation adjusted) for an investor that held US treasuries over the entire period, dividends reinvested.
Sorry, I don't know. I'd also be interested in that statistic.

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Re: "Bond investing: Is a bear still out there?"

Post by nisiprius »

I take exception to that American Enterprise Institute article, A Fearful Symmetry: Six Decades of Treasury Yields for cutting off the chart at 1950, for no explicitly stated reason. They simply talk about 1950 as if it were some obvious starting point. Endpoints are the very devil, and whenever someone fails to give a reason for choosing an endpoint I suspect the worst. I think they have done it because for some reason they want to present a narrative about a "fearful symmetry."

I have posted before on what I have called the "two-humped camel" (and, yes I'm putting spin on it, too, because I guess it is a 2-1/2-humped camel):

Image

In a sense, I'm making the same point. Stocks are bad enough; a chart from Jim Otar which I won't post again--find it here shows that, instead of thinking of 112 years of data as 112 data points, it is much more accurate to think of it as about 8 data points, each corresponding to one "secular" bull or bear market.

But bonds? We have 2-1/2 data points, and they are very different from each other. Even if you thought you knew the underlying dynamics and the statistical parameters, how do you estimate a statistical parameter with 2-1/2 data points?
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Re: "Bond investing: Is a bear still out there?"

Post by Quasimodo »

Thanks for the chart, Nisiprius.

Thinking about what life was like for me in 1950, and the many changes in the world that have taken place since then, it’s daunting trying to imagine all the changes going back into the 1800s.

I can relate to the people mentioned in the American Enterprise article who felt sure they saw interest rates topping out, but were drastically wrong. Looking at the chart, it’s tempting to believe rates are near a bottom now, but that could be drastically wrong as well.

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Re: "Bond investing: Is a bear still out there?"

Post by Buddtholomew »

The chart resembles the NIKKEI index peak in the 1990's. Thanks nisiprius, a broader view puts things into perspective. One could reasonably expect rates to return to the 1920 and 1960 peaks and not consider the increase during the 70's and 80's as the norm.
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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

Buddtholomew wrote:The chart resembles the NIKKEI index peak in the 1990's. Thanks nisiprius, a broader view puts things into perspective. One could reasonably expect rates to return to the 1920 and 1960 peaks and not consider the increase during the 70's and 80's as the norm.
Makes one wonder if it would be reasonable to anticipate a 1960-1980 period and plan accordingly. OTOH, that is a chart of the long bond which may not represent a prudent portfolio.

It would be interesting to know what happened to intermediate term bond investors from 1960-1980
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Re: "Bond investing: Is a bear still out there?"

Post by garlandwhizzer »

Bustoff wrote:by Bustoff » Fri May 16, 2014 2:13 pm

Looks like we should be worrying more about stocks.
We would be if we only looked backwards and assumed the future of bonds to be an exact replay of the past as outlined by your chart.

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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

I'm probably wrong about this but if the long bond in Nisi's chart is a 20 year bond, then does that mean its price would fall about 20% when interest rates rose one percentage point ?
So if from 1960 to 1981 the yield on the long bond rose from say 4% to 14% (which it looks like it did), then bond prices fell by 200% ?
That can't be right can it?
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Re: "Bond investing: Is a bear still out there?"

Post by ogd »

Bustoff wrote:I'm probably wrong about this but if the long bond in Nisi's chart is a 20 year bond, then does that mean its price would fall about 20% when interest rates rose one percentage point ?
So if from 1960 to 1981 the yield on the long bond rose from say 4% to 14% (which it looks like it did), then bond prices fell by 200% ?
That can't be right can it?
Leaving aside the obvious problem that the interval is longer than 20 years -- if the change from 4% to 14% were to occur within a day, the bond would lose 54% of value (http://www.investopedia.com/calculator/bondprice.aspx).

The relation between rates and values is non-linear and the duration math only works for small changes in rates. Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner. At 4%, the 20 year has duration 13.86. At 14% it's only 6.92 years. You can imagine a series of small rate changes leading to smaller and smaller losses, rather than losing proportionally.
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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

ogd wrote:
Bustoff wrote:I'm probably wrong about this but if the long bond in Nisi's chart is a 20 year bond, then does that mean its price would fall about 20% when interest rates rose one percentage point ?
So if from 1960 to 1981 the yield on the long bond rose from say 4% to 14% (which it looks like it did), then bond prices fell by 200% ?
That can't be right can it?
Leaving aside the obvious problem that the interval is longer than 20 years -- if the change from 4% to 14% were to occur within a day, the bond would lose 54% of value (http://www.investopedia.com/calculator/bondprice.aspx).

The relation between rates and values is non-linear and the duration math only works for small changes in rates. Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner. At 4%, the 20 year has duration 13.86. At 14% it's only 6.92 years. You can imagine a series of small rate changes leading to smaller and smaller losses, rather than losing proportionally.
ogd,
Did not know that. Thank you for the link and explanation.
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Re: "Bond investing: Is a bear still out there?"

Post by Doc »

ogd wrote:Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner
Rates? By rates do you mean YTM or coupon? :wink:
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Re: "Bond investing: Is a bear still out there?"

Post by ogd »

Doc wrote:
ogd wrote:Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner
Rates? By rates do you mean YTM or coupon? :wink:
Both. The effect is slightly different due to the pricing of reinvestment opportunities.

I suppose in my example, it's the YtM change that matters, the duration of a bond that started at 4%, at 14% market rates, is 8.72 years. Kudos if that's what you were winking for.
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Re: "Bond investing: Is a bear still out there?"

Post by billyt »

No less than former Fed chair Ben Bernanke expects rates to stay low for quite a long time:

from recent REUTERS article:
"At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said."
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Re: "Bond investing: Is a bear still out there?"

Post by wastenot »

billyt wrote:No less than former Fed chair Ben Bernanke expects rates to stay low for quite a long time:
But can Bernanke know what Mr. Bond Market has in mind for the future?" Or as Trotsky said: "You may not be interested in war, but war may be interested in you."
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Re: "Bond investing: Is a bear still out there?"

Post by billyt »

I agree in principle that no one knows the future. However, for me, Ben Bernanke's opinion that rates may not normalize within a current retiree's lifetime carries somewhat more weight than dozens of anonymous posters who are dead certain that rates have no where to go but up, and soon!
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Re: "Bond investing: Is a bear still out there?"

Post by Bustoff »

billyt wrote:I agree in principle that no one knows the future. However, for me, Ben Bernanke's opinion that rates may not normalize within a current retiree's lifetime carries somewhat more weight than dozens of anonymous posters who are dead certain that rates have no where to go but up, and soon!
billy,
At first glance I thought this was a direct quote from Bernanke. But that's not the case.
At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said.


So the information is really coming from a reporter that got his information from "a source" who had spoken to "a guest" who said it was his "impression" ?
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Re: "Bond investing: Is a bear still out there?"

Post by Austintatious »

billyt wrote:I agree in principle that no one knows the future. However, for me, Ben Bernanke's opinion that rates may not normalize within a current retiree's lifetime carries somewhat more weight than dozens of anonymous posters who are dead certain that rates have no where to go but up, and soon!
To me, the scenario Bernanke suggests seems the most likely one. Rates continue to be dismally low, despite the prolonged assurance by so many that rates were about to go up, and sooner rather than later. Other than that unfulfilled prognostication (at least so far), why ought we assume that rates are about to rise or that they will rise meaningfully in the next 5 years or even the next ten years? Does anyone see anything concrete that tells us rates must rise to the extent that those holding bond products would be seriously injured? Yes, we know that it can happen, but what tells us that it's gonna happen this time? It seems quite unlikely that our economy will suddenly slip into overdrive anytime soon, and just as unlikely that the Fed will see need for anything other that minimal rate increases, if even that. Other than our obligatory assumption that rates will rise because they always have, are there any objective criteria out there telling us that these low rates aren't the "new normal" at least for years to come, as Bernanke seems to suggest might be the case?
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Re: "Bond investing: Is a bear still out there?"

Post by Doc »

Austintatious wrote:Other than that unfulfilled prognostication (at least so far), why ought we assume that rates are about to rise or that they will rise meaningfully in the next 5 years or even the next ten years?
The Federal Reserve wrote:Goals of Monetary Policy

The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
http://www.federalreserve.gov/pf/pf.htm
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Re: "Bond investing: Is a bear still out there?"

Post by columbia »

Some people with large bond holdings are funny creatures: desiring higher yields, but not wanting the prices to go down.

?
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Re: "Bond investing: Is a bear still out there?"

Post by Austintatious »

Doc wrote:
Austintatious wrote:Other than that unfulfilled prognostication (at least so far), why ought we assume that rates are about to rise or that they will rise meaningfully in the next 5 years or even the next ten years?
The Federal Reserve wrote:Goals of Monetary Policy

The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
http://www.federalreserve.gov/pf/pf.htm
Doc, I'm assuming that you're offering the Fed's goal of promoting "moderate long-term interest rates" as grounds for the assumption that rates must rise soon, or even within the next 5 to 10 years. Though that goal is pertinent, it's existed throughout this time of near zero rates policy and I just don't see it as determining whether we''ll see or likely see a significant rise in rates anytime soon. I don't doubt that the Fed hopes to achieve or at least genuinely strive to meet its goal of moderate long-term rates. Nor do I doubt that even the most "dovish" (not my term) of the Fed members would, in general, prefer economic conditions amenable to higher rates for savers/bond investors. But I just don't see anything with this economy that suggests the Fed's current policy of very low rates is likely to change in the next few to several years. It seems to me that the condition of the economy will ultimately be the deciding factor, and that there's little to nothing on the economic horizon that would justify any real movement by the Fed toward notably higher rates. Of course, it's just my guess and you can be certain that I would not bet more than a bottle of moderately priced whiskey on my interest rate prediction. Thanks for the link. It's a handy summary of the Fed to have on hand.
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Re: "Bond investing: Is a bear still out there?"

Post by Buddtholomew »

ogd wrote:
Bustoff wrote:I'm probably wrong about this but if the long bond in Nisi's chart is a 20 year bond, then does that mean its price would fall about 20% when interest rates rose one percentage point ?
So if from 1960 to 1981 the yield on the long bond rose from say 4% to 14% (which it looks like it did), then bond prices fell by 200% ?
That can't be right can it?
Leaving aside the obvious problem that the interval is longer than 20 years -- if the change from 4% to 14% were to occur within a day, the bond would lose 54% of value (http://www.investopedia.com/calculator/bondprice.aspx).

The relation between rates and values is non-linear and the duration math only works for small changes in rates. Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner. At 4%, the 20 year has duration 13.86. At 14% it's only 6.92 years. You can imagine a series of small rate changes leading to smaller and smaller losses, rather than losing proportionally.
These calcuations apply to individual bond holdings as opposed to a bonf fund with constant duration, correct?
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: "Bond investing: Is a bear still out there?"

Post by ogd »

Buddtholomew wrote:
ogd wrote:
Bustoff wrote:I'm probably wrong about this but if the long bond in Nisi's chart is a 20 year bond, then does that mean its price would fall about 20% when interest rates rose one percentage point ?
So if from 1960 to 1981 the yield on the long bond rose from say 4% to 14% (which it looks like it did), then bond prices fell by 200% ?
That can't be right can it?
Leaving aside the obvious problem that the interval is longer than 20 years -- if the change from 4% to 14% were to occur within a day, the bond would lose 54% of value (http://www.investopedia.com/calculator/bondprice.aspx).

The relation between rates and values is non-linear and the duration math only works for small changes in rates. Or, if you prefer, the duration of a bond itself changes based on rates, as more of the return comes sooner. At 4%, the 20 year has duration 13.86. At 14% it's only 6.92 years. You can imagine a series of small rate changes leading to smaller and smaller losses, rather than losing proportionally.
These calcuations apply to individual bond holdings as opposed to a bonf fund with constant duration, correct?
They are about individual bonds, but a fund is merely a composition thereof. If rates increase slowly, I don't quite know how funds would react to the increased separation between duration and maturity. You'd have to read the prospectus and/or understand the index. At least one of my funds (VFIUX) gives the impression that it would keep maturities constant, not duration.

It's conceivable that a fund that keeps duration constant could suffer greater losses, as it has to lengthen maturities greatly to keep that duration. Not 200%, for obvious reasons. On the upside, such a fund would have made a mint as soon as rates started going down. If you trade at market prices, there's always a positive side of the coin, e.g. investors don't bid the long yields even higher because they can imagine one day being very happy with having locked them in.
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Re: "Bond investing: Is a bear still out there?"

Post by Waba »

The case for rates to go up is that it is very hard for short term rates to go down from 0%.

But ones they have gone up to anything in the 3-4% range, I have not heard any particular strong argument for what they would do further from that point on. Fed seems intent of keeping them in that range.

Given that the current rates are so low, the opportunity cost of sitting in cash instead is rather low so I see no need for bonds until rates have come up off from the ground.

Calling a bear seems excessive, but with little upside at the moment, why bother.
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Re: "Bond investing: Is a bear still out there?"

Post by ginmqi »

columbia wrote:Some people with large bond holdings are funny creatures: desiring higher yields, but not wanting the prices to go down.

?
This. I see threads in the forum complaining about (possible) rising rates and at the same time about the on coming "bear market" in bonds. Interesting in deed. I my self am still learning about bonds so I am starting to notice this. Hard for me to understand as well. Seems like a case of wanting to have their cake and eat it too!

In general rising rates are good for bond investors I thought?
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