Anyone read Vanguard's commentary on rising interest rates?

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Five
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Anyone read Vanguard's commentary on rising interest rates?

Post by Five » Sat Dec 17, 2016 7:06 pm

Hi folks,
Sorry to beat a dead horse but I wanted to ask if anyone read Vanguard's commentary/informational e-mail that the Fed plans to raise interest rates by 0.25 percent in 2017, 2018, and 2019 until a normal interest rate of 3.0 percent is achieved. Just asking......(and I am preparing for some of the answers).....does this concern anyone who invests in tax exempt intermediate term municipal bond fund or total bond market index fund? I know the connection between rising rates and drop in NAV but rise in SEC Yield. But three interest rate raises over the next 3 years? Really? Just stay the course and dollar cost average into the bond fund? Buy brokered CD's? Buy only short term muni bond funds? Any insights would be appreciated.
What about those who bought over the last several years when interest rates were very low?
Thank you.

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investorguy1
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by investorguy1 » Sat Dec 17, 2016 7:14 pm

can you post the url for the article please?

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dm200
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by dm200 » Sat Dec 17, 2016 7:14 pm

Five wrote:Hi folks,
Sorry to beat a dead horse but I wanted to ask if anyone read Vanguard's commentary/informational e-mail that the Fed plans to raise interest rates by 0.25 percent in 2017, 2018, and 2019 until a normal interest rate of 3.0 percent is achieved. Just asking......(and I am preparing for some of the answers).....does this concern anyone who invests in tax exempt intermediate term municipal bond fund or total bond market index fund? I know the connection between rising rates and drop in NAV but rise in SEC Yield. But three interest rate raises over the next 3 years? Really? Just stay the course and dollar cost average into the bond fund? Buy brokered CD's? Buy only short term muni bond funds? Any insights would be appreciated.
What about those who bought over the last several years when interest rates were very low?
Thank you.


For an organization I manage (part time), we hold some funds in the GNMA fund. Its NAV has taken quite a hit in the last six weeks - about 3%. My opinion is "stay the course"

I think the consensus is that the Fed will raise short term rates 0.25 3-4 times in 2017. Remember that short term rates can go up, but longer term rates may stay the same, go down or go up.

Brokered CDs can lost "value" before maturity if rates rise.

Five
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by Five » Sat Dec 17, 2016 7:36 pm

Go to Vanguard...under the "News and Perspectives" tab, read "After Fed 'liftoff' last year, another rate hike". Sorry.....my IPad won't let me post URL. Tried but couldn't do it.

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CABob
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by CABob » Sat Dec 17, 2016 8:46 pm

Bob

AlohaJoe
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by AlohaJoe » Sat Dec 17, 2016 9:21 pm

Why not read one of the dozens of other threads about rising rates to see the answers people have already posted?

Five
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by Five » Sat Dec 17, 2016 9:54 pm

I read through the dozens of other articles on rising interest rates already.....ad nauseum!!
What I attempted to point out is something no one else mentioned......Three 0.25 percent raises in interest rates planned for the next 3 years----this was not mentioned on any other site, at least per my recollection. My question is-- how will this affect the bond funds in general? Answer I already surmise---no one knows!
My question wonders about what will happen to the NAV every time a raise is anticipated.....or are we pretty much already set for the anticipated raises in 2017? Will the NAV be by the end of the 9th interest rate raise in 2019 and what will this do to investors' confidence in bonds? How long will it take the yield to catch up/ adjust for each rise in rates? I know others will say to stay the course and just DCA if you have a long time horizon. I agree in general but will see what occurs when the rate hikes start as proposed. I am going to look into zero coupon bonds.....don't know much about them yet. Thanks all.

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arcticpineapplecorp.
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by arcticpineapplecorp. » Sat Dec 17, 2016 10:30 pm

from the article:

Fed rate increases could well bring some short-term pain to the bond market (bond prices fall as rates rise). It's important to realize that the rate increase is a sign that the Fed believes the U.S. economy is healthy enough to progress with normalizing rates. Policy changes can cause some short-term volatility in the market as investors digest the news, but bonds still play an important role helping to maintain stability in portfolios, particularly during volatile stock market periods.
It's helpful to keep in mind the silver lining—higher rates can benefit long-term investors. The higher cumulative income from reinvested dividends and compound interest can outweigh the front-end volatility from rising rates over the long run.

I think these are some of the best points:
1. the economy is healthy enough to start to stand on its own
2. bonds can be volatile in the short term (as can any investment)
3. the purpose for bonds is for stabilizing the portfolio (reducing the overall volatility which is MOSTLY caused by equities).
4. Rising rates improve returns for long term investors (with a hold time of at least the average duration of the bond fund you're holding)

Vanguard recommends we all "Maintain discipline".
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

kolea
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by kolea » Sun Dec 18, 2016 2:47 am

Note this quote in the link which is worth calling out:

"We believe the Fed could raise policy rates to 1.5% by the end of 2017, potentially once a quarter," said Davis. "The U.S. economy is strong enough that it no longer warrants short-term interest rates below 1%."


The Fed only sets the FFR - the Federal Funds Rate which is an ultra-short term rate. It has some effect eventually on US T-bills (loans for less than 1 year) but much less effect on US notes and bonds. The latter are more affected by market forces than the Fed. It is not clear to me at all that there is much to be concerned about with this news. Interest rates go up and down, as does the stock market. It is all to be expected.
Kolea (pron. ko-lay-uh). Golden plover.

kenner
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by kenner » Sun Dec 18, 2016 6:44 am

... anyone read Vanguard's commentary/informational e-mail that the Fed plans to raise interest rates ...

Yes.

... does this concern anyone who invests in tax exempt intermediate term municipal bond fund or total bond market index fund?

No, not for those who have an appropriate overall asset allocation and a long term investment outlook. Some of us believe that the Fed's analysis confirms that the US and world economies are recovering from the economic and financial crisis that was signaled by the 50% decline in US stock market prices that caused global panic in 2008-2009. The Fed is indicating a gradual normalization of interest rates that projects our economic forecast is growing stronger.

But three interest rate raises over the next 3 years? Really?

I see this as a sign of the Fed's confidence in it's analysis and it's desire to allow investors and businesses to make forward-looking plans that can optimize continued success in growing the economy.

Quark
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by Quark » Sun Dec 18, 2016 6:56 am

There's no good reason to believe current interest rates aren't fair or don't reflect everything we know on the subject.

The Fed itself predicts three interest rate hikes in 2017. The Fed has been overly optimistic about the economy for years, predicting stronger growth, more inflation and more rate hikes than actually happened. This is not unusual - no one is very good at economic predictions, particularly regarding interest rates. The market is well aware of the Fed's thoughts and has taken them, as well as everything else we know about the economy, into account in setting prices. Even though the market isn't very good at predicting, the odds are high neither you nor anyone else on this board is consistently better in a way that leads to better investment results (other than by staying the course). Is there any reason to believe Vanguard is better at predicting the economy than other analysts?

Regarding three hikes, here's the WSJ "Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017" http://www.wsj.com/articles/fed-raises- ... 1481742086 or just google the subject - there are lots of articles. Or look at CME's fedwatch tool.

Saphomd
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by Saphomd » Sun Dec 18, 2016 9:47 am

All you really need to know :



It's helpful to keep in mind the silver lining—higher rates can benefit long-term investors. The higher cumulative income from reinvested dividends and compound interest can outweigh the front-end volatility from rising rates over the long run."

dbr
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by dbr » Sun Dec 18, 2016 9:53 am

Have I read it? No

Am I concerned? No

Did I buy bonds when interest rates were low? No, but why would that have anything to do with it?

Am I glad to see interest rates go back up some? Yes

Do I own a significant position in bonds? Yes, mostly intermediate duration.

Have I ever planned to shift to CDs? No

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patrick013
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by patrick013 » Sun Dec 18, 2016 4:11 pm

kolea wrote:The Fed only sets the FFR - the Federal Funds Rate which is an ultra-short term rate. It has some effect eventually on US T-bills (loans for less than 1 year) but much less effect on US notes and bonds. The latter are more affected by market forces than the Fed. It is not clear to me at all that there is much to be concerned about with this news. Interest rates go up and down, as does the stock market. It is all to be expected.


Most of my investments are in fixed income, a lesser percentage than most in
market portfolio indexes. I always watch 3 numbers. The FFR, the Prime Rate,
and the 30 Year TRSY rate. The yield curve will stay positive if 2 things happen.
There is an ample supply of bonds, no quantitative easing to reduce bond supply
which lowers rates. And some real growth in GDP which keeps corporate financing
active at all maturities and keeps rates at sane spreads.

The interest rate can be a blessing or a curse. Slow increases by themselves can
be hardly noticeable, but past spikes increasing interest rates of several per cent
or more in a short period can halt growth abruptly, and cause an unwanted flattening
of the yield curve and precede an unwanted but resulting market crash. But that's
life.

Any money likely to be withdrawn in a few years looks good to me in a ST bond index fund
as well as in bank accounts. Next week there'll probably be more journalistic articles
about how rates will not rise more than .25% per year. Who knows.
age in bonds, buy-and-hold, 10 year business cycle

Five
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Re: Anyone read Vanguard's commentary on rising interest rates?

Post by Five » Sun Dec 18, 2016 8:52 pm

My question---will the series of 9 interest rate hikes from 2017-2019 significantly affect bond fund prices (mostly the NAV) where investors can lose thousands of dollars in the bond fund itself which will take many years (much longer than the bond fund's duration) to recoup just from reinvesting (SEC yield) dividends?
Just think about this---interest rate hike---price/share drops, yield rises to some degree, but thousands are lost in the overall bond fund portfolio-----interest rate hike occurs again 4 months later.....process repeats over and over.....
An intermediate duration fund, like total bond market index fund or the tax exempt intermediate term municipal bond fund will take years to recover the overall significant drop in the fund value....9 hikes proposed over the next 3 years. As soon as a recovery begins after one interest rate hike, another one will come along to lower the NAV some more.
The increase in yield likely will not be able to keep up with the loses, even with DCA attempts.
Think about those who have invested a significant amount of money in one of the bond funds when interest rates were held artificially low---
Am I correct in my thinking? Do you think that the price drops (bond fund losses) will be this severe over the coming years? I do not have any experience with multiple interest rate hikes in such a short period of time.
Thank you.

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