Timing the market? :Bonds in rising interest rate environment

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graphite01
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Timing the market? :Bonds in rising interest rate environment

Post by graphite01 » Thu Jun 01, 2017 7:20 pm

Hello,
I have been reading about bonds and understand that in a rising interest rate environment bonds decline in value. Right now it sounds like the US central bank anticipates more rate hikes this year. Should I wait until interest rates rise to more "normal" levels and then purchase bonds? "Does this wait until..." approach qualify as timing the market? or is it ok that I am trying to wait for a normalized interest rate environment after we have been in a super low environment for the past couple of years.

Thanks!

MotoTrojan
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Re: Timing the market? :Bonds in rising interest rate environment

Post by MotoTrojan » Thu Jun 01, 2017 7:23 pm

graphite01 wrote:Hello,
I have been reading about bonds and understand that in a rising interest rate environment bonds decline in value. Right now it sounds like the US central bank anticipates more rate hikes this year. Should I wait until interest rates rise to more "normal" levels and then purchase bonds? "Does this wait until..." approach qualify as timing the market? or is it ok that I am trying to wait for a normalized interest rate environment after we have been in a super low environment for the past couple of years.

Thanks!
What are you doing with the money in the meantime? I don't know a ton about bonds (100% equities) but if you do wait, don't hold cash... at-least get a CD. You may find that that is a better move anyways, with the low interest rates.

livesoft
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Re: Timing the market? :Bonds in rising interest rate environment

Post by livesoft » Thu Jun 01, 2017 7:25 pm

I think that you can play with timing the purchase of bonds. It is rather easy actually. Here is what you can do:

Bond ETFs like AGG and BND will fluctuate going into the June FOMC meeting. They may drop in price by 1% in the next 2 weeks.

If the price of the ETF drops by 0.4% to 0.5% since the previous close, then buy some; otherwise wait.

Conversely, if the price of the ETF pops by 0.4% to 0.5% since the previous close, then sell some; otherwise wait.

That's it.

Oh, while waiting, don't hold cash nor CDs. Instead buy VCSH with your bond allocation money.
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Good Listener
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Good Listener » Thu Jun 01, 2017 7:26 pm

I only know that everybody is talking about a rising rate market...as they've done for the last 10 years.

acanthurus
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Re: Timing the market? :Bonds in rising interest rate environment

Post by acanthurus » Thu Jun 01, 2017 7:28 pm

The Federal Reserve rate hikes only directly affect extremely short term government bonds.

They indirectly affect everything else. Other factors may outweigh the Fed's short term rate hike.

It is entirely possible that the Fed could raise the overnight lending rate between banks, only to see 10 and 30 year government bond yields decline, while corporate yields drop, and municipal yields rise. Different bond types and different durations have many different things affecting their price.

Figure out the purpose of what bonds should be doing in your portfolio, then go select funds that have bonds with those qualities. The index everything mantra may not be the best idea when it comes to bonds.

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BolderBoy
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Re: Timing the market? :Bonds in rising interest rate environment

Post by BolderBoy » Thu Jun 01, 2017 7:33 pm

graphite01 wrote:Should I wait until interest rates rise to more "normal" levels and then purchase bonds?
Are you a long term investor? If yes, don't wait as it won't matter in the long run. And I'm presuming that you are talking about bond FUNDS and not individual bonds, right?
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livesoft
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Re: Timing the market? :Bonds in rising interest rate environment

Post by livesoft » Thu Jun 01, 2017 8:10 pm

BTW, bond funds are up 1.8% to 2.4% or so YTD, while cash is up about about 0.4%, so you shouldn't have been waiting in cash. Even if bonds drop 1%, you would still be better than cash.
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whodidntante
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Re: Timing the market? :Bonds in rising interest rate environment

Post by whodidntante » Thu Jun 01, 2017 8:32 pm

graphite01 wrote:Hello,
I have been reading about bonds and understand that in a rising interest rate environment bonds decline in value. Right now it sounds like the US central bank anticipates more rate hikes this year. Should I wait until interest rates rise to more "normal" levels and then purchase bonds? "Does this wait until..." approach qualify as timing the market? or is it ok that I am trying to wait for a normalized interest rate environment after we have been in a super low environment for the past couple of years.

Thanks!
I own bonds, but I don't know enough about you to know if you should own bonds. What is the reason you are buying bonds? If you don't buy bonds, what would you buy instead? Why?

Yes, you are timing the market.

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arcticpineapplecorp.
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Re: Timing the market? :Bonds in rising interest rate environment

Post by arcticpineapplecorp. » Thu Jun 01, 2017 8:42 pm

Welcome to the forum.

Maybe read this article by Bill McNabb (the current chairman and CEO of Vanguard) titled, "Rates change, but the role of bonds don't". Link below. It's well done and should give you some insights. Our good friend Taylor Larimore put a comment at the end of the post as well, "Stocks let us eat well. Bonds let us sleep well."

By the way, it's time in the market, not timing the market that matters. What's your time horizon for needing the money invested in bonds? If your time horizon is at least as long as the duration of the bond fund you're investing in, then things should work out fine in the long run. Investing is a marathon and not a sprint.

https://vanguardblog.com/2017/05/02/rat ... ds-doesnt/
"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

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Steelersfan
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Steelersfan » Thu Jun 01, 2017 8:58 pm

Good Listener wrote:I only know that everybody is talking about a rising rate market...as they've done for the last 10 years.
And those that have talked that way have missed out on good returns for bonds.

Trying to predict future bond yields has driven a lot of smart people onto the shoals of despair.

2b2
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Re: Timing the market? :Bonds in rising interest rate environment

Post by 2b2 » Thu Jun 01, 2017 9:27 pm

"the shoals of despair"

I like that! An apt nautical metaphor

2b2

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Ozonewanderer
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Ozonewanderer » Thu Jun 01, 2017 10:47 pm

The trick is simply finding a good fortune teller. :D

Dominic
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Dominic » Thu Jun 01, 2017 10:52 pm

The market already prices in expectations of future interest rates. The current price of bonds includes the knowledge that the Fed is likely to raise the short term rate 1-2 more times in 2017.

J295
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Re: Timing the market? :Bonds in rising interest rate environment

Post by J295 » Fri Jun 02, 2017 6:38 am

We don't time our bond portfolio allocations any more than we time our equity portion. Is the bond market so much easier to predict than the stock market? How have the bond market prognosticators done the past 8 years?

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Toons
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Toons » Fri Jun 02, 2017 6:42 am

Pick an asset allocation.
Stick TO IT.
Ignore the news.(especially which way rates are headed)
:happy
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Call_Me_Op
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Call_Me_Op » Fri Jun 02, 2017 6:46 am

graphite01 wrote:Hello,
I have been reading about bonds and understand that in a rising interest rate environment bonds decline in value. Right now it sounds like the US central bank anticipates more rate hikes this year. Should I wait until interest rates rise to more "normal" levels and then purchase bonds?
You need to continue reading. Everything that is widely known is already factored into prices.
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greg24
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Re: Timing the market? :Bonds in rising interest rate environment

Post by greg24 » Fri Jun 02, 2017 9:49 am

While waiting for that 1% bond fund decline, your equities could drop 10%.

Hogan773
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Hogan773 » Fri Jun 02, 2017 11:18 am

Good Listener wrote:I only know that everybody is talking about a rising rate market...as they've done for the last 10 years.
Haha indeed!

I have been "positioned" for rising rates for many years now, hunkering down in very short term stuff like Short Term Tax Exempt and Limited Term Tax Exempt. Yes we got a nice pop in rates with Trump election and I was glad to be in the short stuff, but now it has been winding back down as people wonder what Trump will actually accomplish. In any case I am coming to the realization that I have been "paying" a lot for this insurance in the form of lower dividends every month, so I have recently been rebalancing some of the short to the Intermediate and High Yield. Probably the wrong time but I don't know how many years I should keep market timing this "rise in rates" and have decided to just start rebalancing slowly now.

Jim180
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Re: Timing the market? :Bonds in rising interest rate environment

Post by Jim180 » Fri Jun 02, 2017 7:42 pm

Four years ago (2013) a well known financial talk show host said everyone should move to low duration bond funds because the Fed is ready to start raising rates. He said everyone should get out of intermediate and long-term bond funds because they are going to get taken to the woodshed. When he made that proclamation 4 years ago the yield on the 10 year Treasury was 2.73%. Right now the yield is 2.15%. If a guy that's been on the radio for 30 years can't time the bond market then I don't think anyone else should try.

protagonist
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Re: Timing the market? :Bonds in rising interest rate environment

Post by protagonist » Fri Jun 02, 2017 8:11 pm

Good Listener wrote:I only know that everybody is talking about a rising rate market...as they've done for the last 10 years.
Unlike stock returns, which are unpredictable, treasury yields seem to follow a predictable pattern of inclines lasting a few decades reversing into declines lasting a few decades and vice versa.

As per this chart http://www.businessinsider.com/10-year- ... 790-2012-6

Smoothing out the blips, this has been the approximate behavior of the 10 year treasury note over the past couple of centuries:
Roughly 1800-1820: yields declined ~8% to ~4%
Roughly 1820-1860: yields increased ~4% to ~7% (with a few big blips)
Roughly 1860-1900: yields declined ~7% to ~3%
Roughly 1900-1920: yields increased to ~6%
Roughly 1920-1946: yields declined to 1-2%
Roughly 1946-1981: yields increased to above 15%- all-time high
Roughly 1981-now: yields declined to all-time low

Treasuries of other maturities followed the exact same pattern over the course of their lifetimes.

This pattern may happen by "chance alone", though I don't think so. One could argue that trends such as these make sense. Bond rates correlate with Fed funds rates, which are policy-related and responsive to the economy, and policies and overall major economic trends do not fluctuate daily like stock prices. It would also make sense that T-bills would correlate more closely with Fed funds rates than T-bonds, since they are shorter term and policies do eventually change.

The last 35 years has been the largest and steepest (by far) decline in yield in history, following the largest and steepest (by far) incline (also ~35 years). Each period of rise or fall appears to last about 20-40 years before it reverses. If the pattern makes sense, we should be due for a reversal, though it is impossible to say exactly when.

BuyAndHoldOn
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Re: Timing the market? :Bonds in rising interest rate environment

Post by BuyAndHoldOn » Fri Jun 02, 2017 8:29 pm

Dominic wrote:The market already prices in expectations of future interest rates. The current price of bonds includes the knowledge that the Fed is likely to raise the short term rate 1-2 more times in 2017.

Precisely. The same math that is leading to this thread is also part of the inputs to the current market price.

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in_reality
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Re: Timing the market? :Bonds in rising interest rate environment

Post by in_reality » Fri Jun 02, 2017 9:03 pm

protagonist wrote:
Good Listener wrote:I only know that everybody is talking about a rising rate market...as they've done for the last 10 years.
Unlike stock returns, which are unpredictable, treasury yields seem to follow a predictable pattern of inclines lasting a few decades reversing into declines lasting a few decades and vice versa.

As per this chart http://www.businessinsider.com/10-year- ... 790-2012-6

Smoothing out the blips, this has been the approximate behavior of the 10 year treasury note over the past couple of centuries:
Roughly 1800-1820: yields declined ~8% to ~4%
Roughly 1820-1860: yields increased ~4% to ~7% (with a few big blips)
Roughly 1860-1900: yields declined ~7% to ~3%
Roughly 1900-1920: yields increased to ~6%
Roughly 1920-1946: yields declined to 1-2%
Roughly 1946-1981: yields increased to above 15%- all-time high
Roughly 1981-now: yields declined to all-time low

Treasuries of other maturities followed the exact same pattern over the course of their lifetimes.

This pattern may happen by "chance alone", though I don't think so. One could argue that trends such as these make sense. Bond rates correlate with Fed funds rates, which are policy-related and responsive to the economy, and policies and overall major economic trends do not fluctuate daily like stock prices. It would also make sense that T-bills would correlate more closely with Fed funds rates than T-bonds, since they are shorter term and policies do eventually change.

The last 35 years has been the largest and steepest (by far) decline in yield in history, following the largest and steepest (by far) incline (also ~35 years). Each period of rise or fall appears to last about 20-40 years before it reverses. If the pattern makes sense, we should be due for a reversal, though it is impossible to say exactly when.
So if yields rise ~2% to ~4% over the next 20-40 years, is it really worth holding off purchases? Of course they may rise more than that, but I don't wonder if globalization and ease of which jobs can be switched to lower cost areas won't limit things. Sure, every place could see inflation and higher rates all at once ... still, I don't predict another energy crisis!
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protagonist
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Re: Timing the market? :Bonds in rising interest rate environment

Post by protagonist » Fri Jun 02, 2017 11:18 pm

in_reality wrote: So if yields rise ~2% to ~4% over the next 20-40 years, is it really worth holding off purchases? O
If you think that the ultimate course of interest rates is up, then yes, it is worth it. Because, as a buy-and-hold investor why invest in something if you think your chances are greater than 50-50 that you will lose money in real terms?

Nobody can say how much yields will rise over the next 20-40 years, but if you think they will more likely rise then fall but just can't say when (probably this month to start with), why would you want to invest in bonds? We invest in stocks because we think they will more likely gain value than lose value. At least with CDs you are somewhat protected, assuming you have generous EWP's and a decent yield.

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