Bond return negative. CD or money market alternative.

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WhiteMaxima
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Bond return negative. CD or money market alternative.

Post by WhiteMaxima » Fri Sep 15, 2017 3:38 pm

This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?

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whodidntante
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Re: Bond return negative. CD or money market alternative.

Post by whodidntante » Fri Sep 15, 2017 3:42 pm

This has been discussed here many times. Of course a good Boglehead will stay the course and buy and hold low cost bond funds. I started a thread about alternatives to that and it generated interesting discussion.
viewtopic.php?t=224687

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Re: Bond return negative. CD or money market alternative.

Post by WhiteMaxima » Fri Sep 15, 2017 3:46 pm

Bond fund return almost zero minus fee and tax. A dividend paying equity fund looks more better still though PE is high. Unless there recession is imminent, equity fund is still better place to be.

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Re: Bond return negative. CD or money market alternative.

Post by mega317 » Fri Sep 15, 2017 3:53 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:46 pm
Unless there recession is imminent
That is quite a big qualifier

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Re: Bond return negative. CD or money market alternative.

Post by z3r0c00l » Fri Sep 15, 2017 4:00 pm

Knowing how bonds have done this year is nearly meaningless when it comes to deciding what will happen next year. If interest rates simply hold steady, a diversified intermediate bond fund should match or beat CDs. If rates drop a bit over the next year, bonds could outperform significantly. If rates go up significantly, it will cost you, but by that point the bonds would be earning much more than CDs and the above scenarios would apply in spades.

An equity dividend fund is not comparable to bonds and CDs in any way. A bad year in bonds is -5%. A bad year in stocks is -30%.

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Re: Bond return negative. CD or money market alternative.

Post by barnaclebob » Fri Sep 15, 2017 4:07 pm

Total bond market is up 3.5% YTD from a total return perspective. What bond return are you talking about?
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Even if you look at 1Y timeframe its up .8% but that was due to a bad month around mid november.

In any case only idiots have invested in bonds for about 7 years now according to the talking heads. Personally I'm still waiting for those terrible returns to happen and bonds are up at least 30% since they've were declared a terrible investment.
Last edited by barnaclebob on Fri Sep 15, 2017 4:14 pm, edited 5 times in total.

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Re: Bond return negative. CD or money market alternative.

Post by JBTX » Fri Sep 15, 2017 4:09 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:38 pm
This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?
If intermediate term bonds return is zero that likely means interest rates have risen making bond funds relatively more attractive. Their yield isn't zero.

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Re: Bond return negative. CD or money market alternative.

Post by ruralavalon » Fri Sep 15, 2017 5:19 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:38 pm
This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?
This year bond fund return is not negative, zero or even close.

Right now total return of Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX)is up 4.39% year to date.

Right now total return of Vanguard Intermediate-term Investment Grade Bond Fund Admiral Shares (VFIDX) is up 4.36% year to date.
Last edited by ruralavalon on Fri Sep 15, 2017 5:24 pm, edited 1 time in total.
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Re: Bond return negative. CD or money market alternative.

Post by Valuethinker » Fri Sep 15, 2017 5:24 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:38 pm
This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund. (corporate bonds, which are often callable, are a bit different).

If your interest rate on a greater than 1 year CD exceeds the Yield of the comparable bond fund, then it's a reasonable bet.

High Yield bonds have credit risk. This comes out as a correlation with equities especially when markets are going down. Beware, that reduces the diversification potential of the bond weighting in your portfolio. And take a look at any HY bond fund 2008-09.

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Re: Bond return negative. CD or money market alternative.

Post by dm200 » Fri Sep 15, 2017 5:36 pm

This is, in my opinion, looking at the past year -

Who knows what the next year(s) will look like.
Last edited by dm200 on Fri Sep 15, 2017 5:47 pm, edited 1 time in total.

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Re: Bond return negative. CD or money market alternative.

Post by stemikger » Fri Sep 15, 2017 5:46 pm

Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Bond return negative. CD or money market alternative.

Post by Daryl » Fri Sep 15, 2017 5:54 pm

I just added to my Total Bond Fund earlier this week. Equities could double, or be slashed in half on Monday. Either way, I'll be alright

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Re: Bond return negative. CD or money market alternative.

Post by livesoft » Fri Sep 15, 2017 6:01 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:46 pm
Bond fund return almost zero minus fee and tax. A dividend paying equity fund looks more better still though PE is high. Unless there recession is imminent, equity fund is still better place to be.
What is the purpose of spreading such obviously false statements? On risk-adjusted criteria I think bond funds are having a stellar year.

Or maybe I should have said everyone should have been invested in DGS (small-cap emerging markets)?
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Re: Bond return negative. CD or money market alternative.

Post by WhiteMaxima » Fri Sep 15, 2017 6:05 pm

BOND: YTD 2,5% , 1Year -0,33%, 3 Year 2,5%. Barely beat inflation.

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Re: Bond return negative. CD or money market alternative.

Post by matjen » Fri Sep 15, 2017 6:12 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 6:05 pm
BOND: YTD 2,5% , 1Year -0,33%, 3 Year 2,5%. Barely beat inflation.
Where did that come from? Here is a quote for Pimco's BOND ETF (which I assume you are referencing).

YTD: 4.62% 1 year 3.36%, 3 year 3.57%

https://www.bloomberg.com/quote/BOND:US
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Re: Bond return negative. CD or money market alternative.

Post by longinvest » Fri Sep 15, 2017 6:44 pm

Valuethinker,
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
A bond fund is similar to a CD ladder. One wouldn't estimate the long-term return of a CD ladder with its average yield to maturity; that wouldn't make sense. CD investors know this intuitively. They know that future longest-rung rates will be the main driver of the ladder's long-term returns.

This has been discussed before:

How can Bond Funds perform better than yield (and the posts that follow)
Bond funds: coupon and yield (and the posts that follow)
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Re: Bond return negative. CD or money market alternative.

Post by dm200 » Sat Sep 16, 2017 1:23 pm

WhiteMaxima wrote:
Fri Sep 15, 2017 3:38 pm
This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?
For an organization I manage (part time), we hold Vg GNMA (Admiral shares) and 1 year return (as of 8/31/17) is 0.60%. Three year return is 2.36%

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Re: Bond return negative. CD or money market alternative.

Post by Valuethinker » Sun Sep 17, 2017 7:34 am

longinvest wrote:
Fri Sep 15, 2017 6:44 pm
Valuethinker,
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
A bond fund is similar to a CD ladder. One wouldn't estimate the long-term return of a CD ladder with its average yield to maturity; that wouldn't make sense. CD investors know this intuitively. They know that future longest-rung rates will be the main driver of the ladder's long-term returns.

This has been discussed before:

How can Bond Funds perform better than yield (and the posts that follow)
Bond funds: coupon and yield (and the posts that follow)
Thank you

https://www.validea.com/blog/bogles-str ... e-returns/

summarizes John Bogle's research on this point -- 90% of the returns of a bond are estimated by the Yield to Maturity.

With the CD ladder, if the yield curve is flat then yes one would so forecast returns? So basically this is about whether the Yield Curve is flat or not?

I think what you are saying is that "riding the yield curve" down would tend to give you the return of the longest bond if 1). the yield curve is upward sloping? 2). yield curves don't change shape or level?

I'll have to read through the threads which won't happen immediately, but just for clarification.

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Re: Bond return negative. CD or money market alternative.

Post by hulburt1 » Sun Sep 17, 2017 8:27 am

I just don't like bond. Maybe I don't understand them. I'm 2 years in money market take weekly income. And the rest in s&p, total and health care.
Have dividend go to money plus take 10% of profit for the year and move to money market. Planning on staying that course. I'm 64

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Re: Bond return negative. CD or money market alternative.

Post by longinvest » Sun Sep 17, 2017 9:21 am

Valuethinker,
Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
longinvest wrote:
Fri Sep 15, 2017 6:44 pm
Valuethinker,
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
A bond fund is similar to a CD ladder. One wouldn't estimate the long-term return of a CD ladder with its average yield to maturity; that wouldn't make sense. CD investors know this intuitively. They know that future longest-rung rates will be the main driver of the ladder's long-term returns.

This has been discussed before:

How can Bond Funds perform better than yield (and the posts that follow)
Bond funds: coupon and yield (and the posts that follow)
Thank you

https://www.validea.com/blog/bogles-str ... e-returns/

summarizes John Bogle's research on this point -- 90% of the returns of a bond are estimated by the Yield to Maturity.
If John Bogle disagreed with mathematics, he would be wrong. But, first, let's listen (or read the transcript) of what he actually says, instead of reading a possibly inacurate "summary" of his opinion:

http://news.morningstar.com/cover/video ... ?id=772785
Video Report by Christine Benz, September 28, 2016
Benz: ... Let's talk about your return expectations for stocks and bonds starting with equities. I think you have a really intuitive formula for forecasting equity market returns over the next decade. Let's talk about how you get there and where you arrive.
...
Bogle: ... And the bond returns, the 10-year Treasury, which is the basic benchmark, is at 1.6%. And I think very few people are going to be satisfied with that. So by going a little longer and a little less in government and federal securities, U.S. government securities, you could probably get 2.5% return without an awful lot of problems. ...
...
Bogle: But the reality, just reality, maybe my view of reality may be wrong, but the reality is, we should be expecting much lower market returns. ...
So, what he is saying is that within the next 10 years (from September 2016), he expects bonds to return more or less 1.6%, the yield on a 10-year Treasury. He is quite clear in saying that he might be wrong.

First, let's note that he is not using the average yield-to-maturity of an intermediate Treasury fund, he is using the yield on a Treasury whose maturity matches his projection horizon.

Second, if we were investing into a 10-rung Treasury ladder, this would be the yield on the longest rung. Again, this is not the average yield to maturity of the ladder.

Third, with a 10-rung ladder, at the end of the first year the shortest rung will mature, a lot of coupons will have been paid, and all of this money will be reinvested into a new 10-year rung, for which we don't and can't know the yield. If this future yield is higher than the current yield of a 10-year Treasury, there's a possibility that the 10-year return of the ladder could be higher than projected. If this future yield is lower than the current yield of a 10-year Treasury, there's a possibility that the 10-year return of the ladder could be lower than projected. This will be repeated another 8 times before reaching our 10-year horizon. But, we're not done. There's another factor which adds imprecision to a 10-year return projection; it's the future shape of the yield curve affecting the marked-to-market value of the ladder 10 years from now. In summary, we don't know the main elements affecting future returns: (1) we don't know future yields on 10-year Treasuries within the next 9 years, and (2) we don't know the future shape of the yield curve in 10 years. We might as well stop kidding ourselves and admit that we don't know the future 10-year return of the ladder.

Finally, a 10-year return projection would only be useful to me if I needed to spend 100% of my money in exactly 10 years from now. Obviously, I don't have such a precise horizon for all of my money. The fact is that I don't know the exact horizon for my money; I don't even know exactly how much I will really need each year in the future. And, more importantly, I have decades of investment ahead of me between now and my death. So, a 10-year return projection is meaningless to me; I consider it noise to be ignored (despite all of my respect for John Bogle).
Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
With the CD ladder, if the yield curve is flat then yes one would so forecast returns? So basically this is about whether the Yield Curve is flat or not?
Even with a CD ladder, you would need to know the future rates on the longest rung (each time it will be bought in the future) to be able to predict future returns. Unfortunately, these future rates are unknowable. If longest-rung rates go up, future returns will be higher, if they go down, future returns will be lower.
Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
I think what you are saying is that "riding the yield curve" down would tend to give you the return of the longest bond if 1). the yield curve is upward sloping? 2). yield curves don't change shape or level?
There's no riding of the yield curve involved; only yearly reinvestment of coupons and maturing principals. The only two days where the yield curve has an impact on returns is on the day a Treasury ladder is bought (shorter yields are used to price shorter rungs of the ladder), and on the day the ladder is disposed of (again, shorter yields are used to price shorter rungs of the ladder). The longer the ladder is held, the lesser the impact of the start and end yield curves on total returns. In other words, the impact of the yield curve on returns converges towards zero over long horizons. The only persistent impact on returns is that of the average reinvestment yield of the longest rung (but, this impact is smaller over short horizons).
Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
I'll have to read through the threads which won't happen immediately, but just for clarification.
The posts in the linked threads (and follow-ups) provide clear explanations based on mathematics.
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Re: Bond return negative. CD or money market alternative.

Post by grabiner » Sun Sep 17, 2017 10:14 am

WhiteMaxima wrote:
Fri Sep 15, 2017 3:38 pm
This year bond fund return is almost zero. Equity is 16%. Could CD and money market replace bond in this environment? Or even high yield bond?
A CD can do the same thing; you just won't see it on your bank statement. If interest rates rise, your bond is worth less than face value, and bond traders know this and thus trade bonds for a lower price. Your CD is not traded on the market, but it is also worth less than face value, because you could put an equal dollar amount into a higher-yielding CD but your bank will not allow you to do that.

The problem with high-yield bonds is that the higher return comes with a lot of risk, which means that you can't use high-yield bonds as substitutes for conventional bonds. In 2008, Vanguard Total Stock Market was down 37%, Total Bond Market was up 5%, and High-Yield Corporate was down 21%. You accept the low yields of bonds in order to reduce the risk in times like that.
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Re: Bond return negative. CD or money market alternative.

Post by livesoft » Sun Sep 17, 2017 10:19 am

WhiteMaxima wrote:
Fri Sep 15, 2017 6:05 pm
BOND: YTD 2,5% , 1Year -0,33%, 3 Year 2,5%. Barely beat inflation.
Since commas are used, i suspect these are numbers from a European (German?) web site and perhaps WhiteMaxima is seeing the effects of currency exchange rates.
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Re: Bond return negative. CD or money market alternative.

Post by Geologist » Sun Sep 17, 2017 10:36 am

I'm not sure why you would use return over the last 9 months as your benchmark for deciding what to do about bonds. Why not 6 months, 3 months, or last week? There is no guarantee that bond returns will be positive.

You should have a reason for investing in bonds and not pay any attention to short-term returns. You could choose CD's for part (or even all) of your bond investment, but not because of recent bond returns. You would make an allocation to bonds and CD's and go on with your life.

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Re: Bond return negative. CD or money market alternative.

Post by Valuethinker » Sun Sep 17, 2017 11:06 am

longinvest wrote:
Sun Sep 17, 2017 9:21 am
Valuethinker,
Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
longinvest wrote:
Fri Sep 15, 2017 6:44 pm
Valuethinker,
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
A bond fund is similar to a CD ladder. One wouldn't estimate the long-term return of a CD ladder with its average yield to maturity; that wouldn't make sense. CD investors know this intuitively. They know that future longest-rung rates will be the main driver of the ladder's long-term returns.

This has been discussed before:

How can Bond Funds perform better than yield (and the posts that follow)
Bond funds: coupon and yield (and the posts that follow)
Thank you

https://www.validea.com/blog/bogles-str ... e-returns/

summarizes John Bogle's research on this point -- 90% of the returns of a bond are estimated by the Yield to Maturity.
If John Bogle disagreed with mathematics, he would be wrong. But, first, let's listen (or read the transcript) of what he actually says, instead of reading a possibly inacurate "summary" of his opinion:
I was referencing a paper he wrote -- I couldn't find that link again (I know I have a copy of the paper). Not what he said, but what his research results were.

http://johncbogle.com/wordpress/wp-cont ... -13-12.pdf

right that's not the paper I was thinking of (which was back about 1999, from memory) but there's a restatement of it.


http://www.iijournals.com/doi/abs/10.39 ... 5.42.1.119
academic reference - Abstract Only
http://news.morningstar.com/cover/video ... ?id=772785
Video Report by Christine Benz, September 28, 2016
Benz: ... Let's talk about your return expectations for stocks and bonds starting with equities. I think you have a really intuitive formula for forecasting equity market returns over the next decade. Let's talk about how you get there and where you arrive.
...
Bogle: ... And the bond returns, the 10-year Treasury, which is the basic benchmark, is at 1.6%. And I think very few people are going to be satisfied with that. So by going a little longer and a little less in government and federal securities, U.S. government securities, you could probably get 2.5% return without an awful lot of problems. ...
...
Bogle: But the reality, just reality, maybe my view of reality may be wrong, but the reality is, we should be expecting much lower market returns. ...
So, what he is saying is that within the next 10 years (from September 2016), he expects bonds to return more or less 1.6%, the yield on a 10-year Treasury. He is quite clear in saying that he might be wrong.
He says that your returns over 10 years will be 1.6% if you use the 10 year Treasury?

First, let's note that he is not using the average yield-to-maturity of an intermediate Treasury fund, he is using the yield on a Treasury whose maturity matches his projection horizon.
Yes.
Second, if we were investing into a 10-rung Treasury ladder, this would be the yield on the longest rung. Again, this is not the average yield to maturity of the ladder.

Third, with a 10-rung ladder, at the end of the first year the shortest rung will mature, a lot of coupons will have been paid, and all of this money will be reinvested into a new 10-year rung, for which we don't and can't know the yield. If this future yield is higher than the current yield of a 10-year Treasury, there's a possibility that the 10-year return of the ladder could be higher than projected. If this future yield is lower than the current yield of a 10-year Treasury, there's a possibility that the 10-year return of the ladder could be lower than projected. This will be repeated another 8 times before reaching our 10-year horizon. But, we're not done. There's another factor which adds imprecision to a 10-year return projection; it's the future shape of the yield curve affecting the marked-to-market value of the ladder 10 years from now. In summary, we don't know the main elements affecting future returns: (1) we don't know future yields on 10-year Treasuries within the next 9 years, and (2) we don't know the future shape of the yield curve in 10 years. We might as well stop kidding ourselves and admit that we don't know the future 10-year return of the ladder.
If the yield curve were flat the return would be the same.

Suppose we put 1% of our portfolio into the 10 year treasury at 5% YTM , and 99% into the 5 year treasury at 2% YTM. Would your best guide to the return of that fund be 2% or 5%?

Finally, a 10-year return projection would only be useful to me if I needed to spend 100% of my money in exactly 10 years from now. Obviously, I don't have such a precise horizon for all of my money. The fact is that I don't know the exact horizon for my money; I don't even know exactly how much I will really need each year in the future. And, more importantly, I have decades of investment ahead of me between now and my death. So, a 10-year return projection is meaningless to me; I consider it noise to be ignored (despite all of my respect for John Bogle).
Actually it's the best guide you have to returns over the next 10 years from bonds.

Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
With the CD ladder, if the yield curve is flat then yes one would so forecast returns? So basically this is about whether the Yield Curve is flat or not?
Even with a CD ladder, you would need to know the future rates on the longest rung (each time it will be bought in the future) to be able to predict future returns. Unfortunately, these future rates are unknowable. If longest-rung rates go up, future returns will be higher, if they go down, future returns will be lower.
So isn't your best guess the average yield?

Valuethinker wrote:
Sun Sep 17, 2017 7:34 am
I think what you are saying is that "riding the yield curve" down would tend to give you the return of the longest bond if 1). the yield curve is upward sloping? 2). yield curves don't change shape or level?



There's no riding of the yield curve involved; only yearly reinvestment of coupons and maturing principals. The only two days where the yield curve has an impact on returns is on the day a Treasury ladder is bought (shorter yields are used to price shorter rungs of the ladder), and on the day the ladder is disposed of (again, shorter yields are used to price shorter rungs of the ladder). The longer the ladder is held, the lesser the impact of the start and end yield curves on total returns. In other words, the impact of the yield curve on returns converges towards zero over long horizons. The only persistent impact on returns is that of the average reinvestment yield of the longest rung (but, this impact is smaller over short horizons).
[/quote]

Right, so we are agreeing?

It isn't when you buy the bonds, or when they redeem, it's the average return available to you as an average of those bonds?

Otherwise, you have to believe that interest rates are sustainably going *up* over the term of the fund, or sustainably *down*?

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Re: Bond return negative. CD or money market alternative.

Post by longinvest » Sun Sep 17, 2017 11:23 am

Valuethinker,
Valuethinker wrote:
Sun Sep 17, 2017 11:06 am
It isn't when you buy the bonds, or when they redeem, it's the average return available to you as an average of those bonds?

Otherwise, you have to believe that interest rates are sustainably going *up* over the term of the fund, or sustainably *down*?
First, let me insist: a 10-year projection is only useful to me for money I need in exactly 10 years. To go back to your original statement:
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
I don't consider 10 years to be long term. I consider 10 years as an intermediate term. It would seem that long-term bond fund providers agree with me; they sell bonds when they get as close as 10 years to maturity, because they stop considering them as long-term. Also, you were using the average yield to maturity, not the yield of the longest part of the fund.

Second, if we take the example of a 10-rung Treasury ladder in a fixed and flat yield curve environment, effectively, the 10-year Treasury yield would perfectly predict its 10-year future return, as reinvestment yields would all be equal to the starting yield, and there would be no premium or discount bonds on the days the ladder were bought and sold. But, this is completely utopic. The yield curve isn't flat and it's unlikely to remain completely fixed for 10 years.

I would even speculate to say that the 10-year Treasury yield might be a good approximation (?) of the 10-year return of the ladder regardless of the shape of the yield curve, if all yields of the yield curve remained fixed (unchanged) for the entire 10-year period. But, I would have to check the maths, just to be sure. Again, this is completely utopic. The yield curve is unlikely to remain completely fixed for 10 years.

If one wanted to consider the yield on the longest rung as a middle point of possible future outcomes, considering that yields could go up or down*, then that might be (?) a reasonable assumption (I am not sure). But, then one would have to provide the error range for this approximation!** Let's not forget that over the next 10 years, we only know the outcome for parts of the ladder: the internal rate of return of the current 10-year rung (at it becomes a 9, 8, 7, ... 1-year rung), the internal rate of return of the current 9-year rung, and so on. The problem is that we don't know the outcome for the newer and bigger rungs that will be bought (as each new rung combines the principal of a matured rung and all the coupons paid within the year, leading to bigger and bigger rungs, over time). So, the starting yields do have a partial impact on future returns, for a 10-rung ladder held for 10 years, yet future reinvestment yields and final yield curve shape must be known to determine total returns. For longer horizons, the impact of initial conditions is increasingly diluted.

* Personally, I have no opinion on the possible future direction of 10-year Treasury yields and yield curve shapes. Are these yields as likely to go up or down? By how much? And, what can happen to the yield curve shape? This seems way too speculative to me. I prefer to ignore the noise and simply consider things over which I have control, such as my savings rate and ability to earn an income.
** Even John Bogle should provide such a range, which he unfortunately didn't do in the Morningstar interview I linked to in my previous post.
Last edited by longinvest on Sun Sep 17, 2017 12:51 pm, edited 17 times in total.
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KlangFool
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Re: Bond return negative. CD or money market alternative.

Post by KlangFool » Sun Sep 17, 2017 11:29 am

OP,

My AA is 60/40 including my emergency fund. My year to date return for my portfolio is 8.96%. So, why should I care the individual piece inside my portfolio? It is the portfolio return that is the important part. Yes, I am buying the total bond fund and intermediate term treasury with my new money since my AA tell me to do so.

KlangFool

Valuethinker
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Re: Bond return negative. CD or money market alternative.

Post by Valuethinker » Sun Sep 17, 2017 1:23 pm

longinvest wrote:
Sun Sep 17, 2017 11:23 am
Valuethinker,
Valuethinker wrote:
Sun Sep 17, 2017 11:06 am
It isn't when you buy the bonds, or when they redeem, it's the average return available to you as an average of those bonds?

Otherwise, you have to believe that interest rates are sustainably going *up* over the term of the fund, or sustainably *down*?
First, let me insist: a 10-year projection is only useful to me for money I need in exactly 10 years. To go back to your original statement:
Valuethinker wrote:
Fri Sep 15, 2017 5:24 pm
The long run return of a bond fund is best estimated by the average yield to maturity of the bonds in that fund.
I don't consider 10 years to be long term. I consider 10 years as an intermediate term. It would seem that long-term bond fund providers agree with me; they sell bonds when they get as close as 10 years to maturity, because they stop considering them as long-term. Also, you were using the average yield to maturity, not the yield of the longest part of the fund.
That is not a relevant to your argument.
Second, if we take the example of a 10-rung Treasury ladder in a fixed and flat yield curve environment, effectively, the 10-year Treasury yield would perfectly predict its 10-year future return, as reinvestment yields would all be equal to the starting yield, and there would be no premium or discount bonds on the days the ladder were bought and sold.
Right. So we agree on that. That's a good start.


I would even speculate to say that the 10-year Treasury yield might be a good approximation (?) of the 10-year return of the ladder regardless of the shape of the yield curve, if all yields of the yield curve remained fixed (unchanged) for the entire 10-year period. But, I would have to check the maths, just to be sure. Again, this is completely utopic. The yield curve is unlikely to remain completely fixed for 10 years.

If one wanted to consider the yield on the longest rung as a middle point of possible future outcomes, considering that yields could go up or down*, then that might be (?) a reasonable assumption (I am not sure). But, then one would have to provide the error range for this approximation!** Let's not forget that over the next 10 years, we only know the outcome for parts of the ladder: the internal rate of return of the current 10-year rung (at it becomes a 9, 8, 7, ... 1-year rung), the internal rate of return of the current 9-year rung, and so on. The problem is that we don't know the outcome for the newer and bigger rungs that will be bought (as each new rung combines the principal of a matured rung and all the coupons paid within the year, leading to bigger and bigger rungs, over time). So, the starting yields do have a partial impact on future returns, for a 10-rung ladder held for 10 years, yet future reinvestment yields and final yield curve shape must be known to determine total returns. For longer horizons, the impact of initial conditions is increasingly diluted.

* Personally, I have no opinion on the possible future direction of 10-year Treasury yields and yield curve shapes. Are these yields as likely to go up or down? By how much? And, what can happen to the yield curve shape? This seems way too speculative to me. I prefer to ignore the noise and simply consider things over which I have control, such as my savings rate and ability to earn an income.
** Even John Bogle should provide such a range, which he unfortunately didn't do in the Morningstar interview I linked to in my previous post.
You haven't engaged with his argument at all.

[Edited by Mod Mel Lindauer]

The closest we could come to is "because the Yield Curve normally has an upward or downward slope, the average bond yield in a fund is not likely to be a perfect estimate of the returns to the holder of that fund. "

Is that a fair summary of your view?

longinvest
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Re: Bond return negative. CD or money market alternative.

Post by longinvest » Sun Sep 17, 2017 4:27 pm

Valuethinker,
Valuethinker wrote:
Sun Sep 17, 2017 1:23 pm
The closest we could come to is "because the Yield Curve normally has an upward or downward slope, the average bond yield in a fund is not likely to be a perfect estimate of the returns to the holder of that fund. "

Is that a fair summary of your view?
No, it isn't.

Bond mathematics tell us that the only way to perfectly determine the future returns of a bond fund, between the time it is bought and sold, is to know, in addition to the price, coupon, and par value of all bonds in the fund at the time the fund is bought, (1) the future reinvestment yields of bonds acquired by the fund in the future, and the dates of these future transactions, (2) future gains or losses due to selling bonds prior to maturity, and the dates of these future transactions, and (3) the price of every bond in the fund at the time the fund will be sold. Informations (1), (2), and (3) are unknowable in advance. It is thus impossible to perfectly predict the future performance of a bond fund over any specific time period*. This is basic logic.

* For purists: I am aware that we know the precise future return of a single zero-coupon Treasury bond between the moment it is bought and its maturity as soon as we know the price paid. But, this is limited to that specific time frame and to a single coupon-less non-callable and non-defaulting bond held to maturity.

Some people try to develop prediction models for stocks and for bonds, mostly based on statistical studies of correlations between past returns and metrics. But statistics about the past simply can't eliminate the uncertainty about the future. Some people believe in these prediction models; I don't. I limit my trust to mathematics and logic.

My opinion is that future return predictions are noise, especially when unaccompanied by an error range. I think that my opinion is consistent with our Never try to time the market principle.

Bonds are complex securities. A bond fund, in particular, is quite different from a single CD. It doesn't have the same characteristics. I wouldn't select between a bond fund and a CD by comparing apples with oranges (single CD rate vs bond fund SEC yield). I would select based on the features I want from the investment. If I don't want price fluctuations and I don't care much about liquidity before maturity, then the CD will fit my needs. If I prefer liquidity and I don't mind small price fluctuations, I might select a short-term high-quality bond fund. If I am willing to dampen the volatility of stocks in my portfolio, I might select to invest into the total bond market.
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Re: Bond return negative. CD or money market alternative.

Post by LadyGeek » Mon Sep 18, 2017 7:11 pm

WhiteMaxima - Has your question been answered?

This is an investing forum whose members eat this stuff for lunch. We'll deep dive into topics simply because it's interesting to do so.

You don't need to understand the technical details of this discussion. The point is to make sure you get the help you need.

If you don't understand what to do, please don't hesitate to let us know and we'll try again.
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Re: Bond return negative. CD or money market alternative.

Post by Kevin M » Mon Sep 18, 2017 8:19 pm

grabiner wrote:
Sun Sep 17, 2017 10:14 am
Your CD is not traded on the market, but it is also worth less than face value, because you could put an equal dollar amount into a higher-yielding CD but your bank will not allow you to do that.
Ah, but they will--for a price, in the form of an early withdrawal penalty. And the price (for a good CD) is much less than the downside risk of a bond of same maturity. Of course there is no upside "risk" in the CD, since you cannot sell it for more if rates fall (you'll still pay the early withdrawal penalty, but typically you wouldn't redeem the CD if rates had fallen).

Of course all of this applies to CDs bought directly from banks or credit unions. Brokered CDs go up and down in price inversely to interest rates just like any other bond.

Kevin
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Re: Bond return negative. CD or money market alternative.

Post by indexonlyplease » Tue Sep 19, 2017 8:13 am

KlangFool wrote:
Sun Sep 17, 2017 11:29 am
OP,

My AA is 60/40 including my emergency fund. My year to date return for my portfolio is 8.96%. So, why should I care the individual piece inside my portfolio? It is the portfolio return that is the important part. Yes, I am buying the total bond fund and intermediate term treasury with my new money since my AA tell me to do so.

KlangFool
I like that. Set your AA and the funds and then just fund it. Easy investing. What it's all about.

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