Bogleheads

[tan]

People here clearly find market timing reprehensible, yet openly and often discuss timing of fixed income mutual fund (vs. individual) investments (esp., ST Treasuries, Tips, Money Markets, TBM, etc.). Why is this okay when we constantly talk about our inability to predict interest rates? What happened to stay the course when it comes to "fixed" income? Thoughts and comments, even to tell me I'm a moron, are welcome.

[ddb]

Yup, seems like a lot of posters here definitely DON'T believe that the market efficiently prices fixed income securities. Notice all the talk lately about low TIPS yields - do any of us really know more than the collective market when it comes to valuing these securities?

There are also certain fixed income "shifting" strategies that are advocated here, and I can't understand why. No different than saying that anytime, say, health care stocks have a P/E above 18.5, you should sell and buy energy stocks. Would anybody here support such a strategy? Probably not, but they'll happily ditch TIPs when real yields drop below a certain point and shift the assets into short-term bonds or CDs.

- DDB
_________________
"There is a moment of sheer panic when I realize that Paul's apartment overlooks the park, and is obviously more expensive than mine. " - PB

[craigr]

You're right. You can't time the bond market. If anything, the bond market is more efficient than the stock market and even more likely to be a losing timing strategy. There is another thread that hit on similar themes here:

http://diehards.org/forum/view....nds#159374

[Ken Schwartz]

You guys have hit upon a pet peeve of mine. Unfortunately, influential posters advocate market timing schemes for fixed income securities, implying inefficient markets.

Best wishes,
Ken

[larryswedroe]

Just my opinion but there is a difference between acting because you think rates are incorrectly priced and effective portfolio management

For example, DFA shifts maturities daily based on the shape of the yield curve, and that is based on academic research.

The same type strategy could be adopted to TIPS for example--extending maturity if yields are higher and not if they are lower. For example, after 20 years the TIPS curve turnd negative.

Since I have already covered why I think a shifting maturity approach to TIPS should be considered (I have no problem with a static approach) I don't want to go over it all again

[Sidney]

Many consider market timing to be making investments based on some prediction of the future.

http://en.wikipedia.org/wiki/Market_timing

Most people who are moving in and out of TIPS are not doing it because they are predicting the future move of interest rates. In fact, most are also not moving out of bonds but rather in/out of specific instruments and maturities.

Personally, I moved into TIPS in July, 2007. Out in November. Funds came from short term I-G bonds in July and went back to short term I-G bonds in Nov.

Is this market timing? I had no idea where rates were headed either time. I was triggered only by where rates (real) were at the time.
_________________
I always wanted to be a procrastinator.

[peter71]

Hi All,

I think you could sort of distinguish between timing bonds and/or bond funds based on yields (which isn't that different from timing a mortgage or a CD) and timing bonds and/or bond funds based on predictions about the future. I agree that both of these things go on here (especially in these -- i think -- unusually turbulent times for certain types of non-treasury bonds -- esp. munis) but for those who are only looking at the yield on a new investment it seems to me that with bond funds to not market time in the sense of looking at yields is to performance chase, no?

All best,
Pete

[tan]

Thanks for your thoughts, all. One additional comment with respect to Larry's comments: I suppose I understand that actively shifting in the manner done by DFA may make sense for institutional-type investors, but my concern is more with us little folks. There seem to be some conflicting messages between "stay the course" and "shift when appropriate for fixed income." Seems to me a potential recipe for disaster UNLESS you are a) relatively informed and savvy and b) can afford a not insubstantial amount of time and research that would need to be devoted to this type of tactic. But, then, this starts drifting from the Boglehead simplicity mantra, no?

Again, thanks for all of your thoughtful comments. This question was meant to be rhetorical, and not accusatory, so that we (read: me) can learn more.

[Taylor Larimore]

Hi Tan:

[Ken Schwartz]

[Taylor Larimore]

Hi Ken:

[G12]

Well, I wasn't really market timing but when I wanted to add CCF's as an asset class in a tax deferred account it made sense to sell individual TIPs with embedded gains as compared to doing something else, then I added some muni's in taxable and still have VIPSX in another tax deferred account but not enough to get to the CCF allocation I wanted. Maybe it was timing, maybe it wasn't, but the CCF's have been very useful.

[Ken Schwartz]

[Rager1]

For the long term investor, $1 invested in each of the bond funds at the end of 1992 would have resulted in the following values (pre-tax):

Hi Yield = $2.75
Total Bond = $2.49

Ed

[Taylor Larimore]

Hi Ken:
Thank you for your reply.

During the 3-year (2000-2002) bear market, Vanguard's Hi-Yield Corporate Bond Fund had an annualized 3-year return of +1.24% while the Total Stock market was (-14.31%).

I think it was fair for me to say:

Quote:

"ANY of Vanguard's short-or intermediate-term bond funds should do the job of providing income and reduce portfolio volatility."

It is true (and not surprising) that Total Bond Index outperformed Hi-Yield during the last bear market. It is one of the reasons I recommend Total Bond Market and not bother with Hi-Yield.

Best wishes.
Taylor

[Ken Schwartz]

[Ken Schwartz]

[hoxbox]

There seems to be disagreement on whether to use a shifting allocation or shifting maturity method (advocated by Swedroe) or just use 50% regular bond / 50% TIPS. In a tax advantaged account the average investor only has access TIPS via mutual funds. The mutual funds are freely tradable and the premium people are willing to pay for the inflation protection (based on what the market thinks the future inflation rates are going to be) is built into the pricing. For example, Vanguard TIPS fund VIPSX has a 1 year return of 11.59% even though the real yield is only 0.94% because the market expects a higher inflation rate in the future.

Based on all this I'll keep it simple and do 50% bonds/50% TIPS with my preplanned total bond allocation

[ResNullius]

[dougpnca]

To make money in bonds, you have be really good, really quick & really tough. And 2 out of 3 won't cut it. Remember, as an individual you are competing with pros who live this stuff. Tough to time that market.

dougP
_________________
every dollar not spent is a buck & a half you don't have to make.

[larryswedroe]

Taylor
RE the high yield fund

I have presented plenty of evidence on why you should not include the high yield fund--there are better alternatives. All would have delivered the same returns with less risk.
And if you have a location choice you are taking one of the two risks in the wrong location.

[grayfox]

Here is a bond market timing tip in real time.

Buy Muni Bonds NOW, they are yielding more than Treasuries.

There is some nutty stuff going on in the muni bond market that I don't understand. It has something to do with the bond insurers credit ratings. Also something about auction failures. All derived from the subprime mess.

But what I DO know is that the Muni's will pay the interest on time and pay back the money at the end. So they are a bargain.

Yes, sometimes you can time the bond market.

[billern]

[matt]

grayfox wrote:

[markh]

In the port A and Port B examples, what did 10,000 grow to from 1994 to 2007. Looked like the high yield hybrid grew to more

[Ken Schwartz]

[Chip]

[snowman9000]

[tan]

Dancing on the head of a pin. I like that. Thanks for all of your comments. Food for thought. I'm still confused a bit, I suppose, but that just means I need to learn more about this area.

[dbr]

[grayfox]

[Billy NY]

Is there a risk that if one buys a muni fund now, one could be hurt because the fund is very likely experiencing significant net outflows and will therefore be forced to sell low?

[Taylor Larimore]

Hi Billy:

Quote:

Is there a risk that if one buys a muni fund now, one could be hurt because the fund is very likely experiencing significant net outflows and will therefore be forced to sell low?

Yes. And there are even more risks that we don't know about. But Billy, the risks are already priced into the bonds whose prices are almost entirely set by municipal bond fund managers that know a lot more than we do.

If your asset allocation plan includes Muni Bonds, then own them and stay-the-course. It looks easy, but I think it is fruitless to try and outsmart the bond market by moving in and out of different type bonds.

(I speak as a former director of an agency that issued municipal bonds.)

Best wishes.
Taylor

[Billy NY]

The risk I wrote about relates, I think, to owning municipal bonds through a fund. It wouldn't apply to owning individual municipal bonds, and for that reason I wouldn't expect the risk to be reflected in bond prices.

I'm not asking because I'm considering panic selling -- or any other kind of selling. I'm asking because I'm considering buying. I am therefore trying to consider whether there are unique risks to purchasing through a fund at a time when funds are probably experiencing significant net outflows, as opposed to purchasing individual bonds.

Thanks, Taylor, for taking the time to respond.

Billy

[Taylor Larimore]

Hi Billy:

Quote:

The risk I wrote about relates, I think, to owning municipal bonds through a fund. It wouldn't apply to owning individual municipal bonds, and for that reason I wouldn't expect the risk to be reflected in bond prices.

My answer above, relates to both individual bonds and bond funds. If you own an individual municipal bond or a bond fund, the price of both has probably declined recently.

Best wishes.
Taylor

[baw703916]

Billy,

I'd say that the risk of having to sell at a loss for a fund is greatly increased if it uses leverage or invests in a lot of these exotic variable-rate instruments. Since Vanguard's funds don't, the only way their funds will have to take a loss is if a lot of shareholders look at the NAV and sell in a panic.

If anyone from, or with a direct connection to, Vanguard, happens to read this--a post on the Vanguard website explaining the volatility in municipal bonds, what's causing it, and why shareholders shouldn't panic would be very helpful right now!

Best wishes,
Brad
_________________
I don't foresee any Black Swans appearing in the future

[Billy NY]

Thanks, Brad. I just wrote a posting on the separate thread "Muni Bond Fund Declines" that may be relevant to your posting. I am responding by cross-reference because I may have caused confusion by raising the same concern in two separate threads. I'm now trying to do penance for my sins by consolidating the discussions on the other thread. Thanks so much.

mea culpa, mea culpa, mea maxima culpa,

Billy

[baw703916]

[AzRunner]

Getting back the original question about timing the fixed income market, I think sometimes the market gets in a situation where you no longer feel compensated for your holdings.

For example, a TIPS bond I held that matured in April 2011 had a yield to maturity of 0.40%. Most of my gain in this bond had already been realized as a capital gain. In a tax deferred account there were no tax consequences to sell. It was just a question of what to buy instead. I chose a Vg intermediate term Investment Grade bond fund. Of course there is more risk with this fund but at a yield of 5% it seems like the risk is compensated.

In general I agree that there is a tendency to think you can time the fixed income market and one may be better served with a buy and hold strategy. OTOH, trades at the margin of your account may help and probably will not hurt that much if you end up on the wrong side of the transaction.

Norm

[Paladin]

[Taylor Larimore]

Hi Paladin:

Quote:

Taylor, Would you suggest TLH muni bond funds given the recent fall in NAV?

You ask a good question but I am not sure of the answer. Hopefully another Boglehead will chime in and teach us both.

I can tell you that tax-loss harvesting individual bonds can be complicated for holders of individual bonds. See the article below:

http://209.85.165.104/search?q....mp;strip=1

Sorry, I cannot be more helpful.

Best wishes
Taylor

[dougpnca]

Market timing will drive you crazy. Too many variables pulling in too many directions. Bonds, either individual or funds, have so many forces driving the prices that I can't imagine a retail investor being able to sort it all out with any degree of consistency.

My bonds & funds provide stability & income. I learned the hard way that trading, timing, etc., were beyond me. The equity side of my portfolio provides the growth.

Bonds are wonderful vehicles but they are more complex than is commonly appreciated.

dougP
_________________
every dollar not spent is a buck & a half you don't have to make.

[Dead Man Walking]

A real timer of the bond market would use American Century Target Maturity Government Bond funds to time the bond market. He’d hold long bond funds as interest rates fell and make interest on his capital gains when he shifted to a treasury money market when rates were rising.

DMW