Bonds — Appreciate Some Advice

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Gatewood
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Bonds — Appreciate Some Advice

Post by Gatewood » Fri Feb 16, 2018 6:53 pm

I was listening to investment analysts the other day — they mentioned that although bonds were taking a hit with the Fed increase rates — nevertheless, bond holders were better off in the long run because higher yields will result in higher returns

As I watch bonds funds (Vanguard Total Bond fund, Intermediate Investment Grade and Intermediate Tax Exempt) getting hammered — it’s hard to grasp that in the long run bond holders are better off

Appreciate insights your insights. Books or articles I should read

Thanks in advance

z3r0c00l
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Re: Bonds — Appreciate Some Advice

Post by z3r0c00l » Fri Feb 16, 2018 7:10 pm

Hammered? The first step is to gain a sense of perspective here. The worst FEW DECADES for bonds were about equal to the worst YEAR for stocks. And the worst year for bonds didn't even come close to the worst day for stocks. The temporary decline in bond funds was extremely minor, measured as a few percent at most. And the dividends from those funds have already countered the drop in NAV. I believe these funds are actually up YTD at this point!

The share price of this kind of bond fund isn't that important, it fluctuates within a +/- band of 10% most of the time. The income is most important and yes, if the yield net of inflation goes up, it is better in the long run. Note that these bonds funds clearly discuss their risks, indicating a 4-10 year time frame for this kind of investment:

"Conservative to moderate funds—Risk level 2 Risk level two
Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)."

There have been some very good threads here about bonds and "bond bubbles" so it would be worth reading a few of those. Then avoid ever listening to investment analysts. They don't know anything about the future and often have serious conflicts of interest.

chevca
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Re: Bonds — Appreciate Some Advice

Post by chevca » Fri Feb 16, 2018 7:28 pm

Gatewood wrote:
Fri Feb 16, 2018 6:53 pm
I was listening to investment analysts the other day...
My advice, stop doing this ^^ :happy

Joe_R95
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Re: Bonds — Appreciate Some Advice

Post by Joe_R95 » Fri Feb 16, 2018 7:36 pm

The rate increases mean that newly issued bonds have a slightly higher rate of return than the ones currently held by the funds. This in turn makes the funds holdings worth a little less comparatively, and the fund price drops accordingly. As the funds bonds expire and they buy more new issues the prices should go up accordingly. Eventually it will even out.

JBTX
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Re: Bonds — Appreciate Some Advice

Post by JBTX » Fri Feb 16, 2018 7:48 pm

Gatewood wrote:
Fri Feb 16, 2018 6:53 pm
I was listening to investment analysts the other day — they mentioned that although bonds were taking a hit with the Fed increase rates — nevertheless, bond holders were better off in the long run because higher yields will result in higher returns

As I watch bonds funds (Vanguard Total Bond fund, Intermediate Investment Grade and Intermediate Tax Exempt) getting hammered — it’s hard to grasp that in the long run bond holders are better off

Appreciate insights your insights. Books or articles I should read

Thanks in advance
It really depends on the “duration” of the bonds. If it is a 30 year zero coupon bond you will be in the hole all the way until you redeem it at maturity. If it short term treasury bill you be better off very quickly. Everything else is somewhere in the middle.

A bond with an average duration of 6 years will drop about 6% for every one percent rise in rates. Thus it will take six years of an extra 1% yield per year to make up for the 6% loss.

To complicate the whole matter further the whole analysis above is simplistic. The reality is if bond rates increase there is a decent chance inflation is increasing too. So higher yields are not going to make you richer if inflation goes up the same amount.

stocknoob4111
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Re: Bonds — Appreciate Some Advice

Post by stocknoob4111 » Fri Feb 16, 2018 8:05 pm

JBTX wrote:
Fri Feb 16, 2018 7:48 pm
To complicate the whole matter further the whole analysis above is simplistic. The reality is if bond rates increase there is a decent chance inflation is increasing too. So higher yields are not going to make you richer if inflation goes up the same amount.
However, if inflation is increasing with rates increasing isn't that a death knell for equities? What are the alternatives in such an environment? In addition CDs and such would also face the same situation, so the challenges would not be unique to bonds.

JBTX
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Re: Bonds — Appreciate Some Advice

Post by JBTX » Fri Feb 16, 2018 8:12 pm

stocknoob4111 wrote:
Fri Feb 16, 2018 8:05 pm
JBTX wrote:
Fri Feb 16, 2018 7:48 pm
To complicate the whole matter further the whole analysis above is simplistic. The reality is if bond rates increase there is a decent chance inflation is increasing too. So higher yields are not going to make you richer if inflation goes up the same amount.
However, if inflation is increasing with rates increasing isn't that a death knell for equities? What are the alternatives in such an environment? In addition CDs and such would also face the same situation, so the challenges would not be unique to bonds.
Higher interest rates and higher inflation typically isn’t good for equities. However equities can still do OK modest inflation and moderately higher interest rates, if both are a result of an exceptionally strong economy, but not so much for high interest rates.

FBN2014
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Re: Bonds — Appreciate Some Advice

Post by FBN2014 » Sat Feb 17, 2018 12:14 am

Stop watching the business entertainment shows on CNBC and Fox Business, buy Vanguard Total Bond index or ETF and relax. For every 1% rise in interest rates the NAV will decrease about 5%. The Vanguard fund is intermediate term bonds so it will take a few years for the value to recover as the older bonds mature and are replaced with higher coupon rates. In the meantime you are still collecting those interest payments at increasing yields.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

Dominic
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Re: Bonds — Appreciate Some Advice

Post by Dominic » Sat Feb 17, 2018 1:09 am

Provided you hold for the duration of the fund (Vanguard's total bond fund has a duration of 5-7 years, typically), you'll make roughly the current yield in dividends. That's very good news -- as long as you stay the course, you're going to make more money as yields rise. That said, you don't know that rates won't drop again. If they do, the value of your bond funds will rise again.

Either way, if you stick to your plan, you'll be just fine.

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whodidntante
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Re: Bonds — Appreciate Some Advice

Post by whodidntante » Sat Feb 17, 2018 1:18 am

The trend followers are out of bonds because they got their sell signal already.

Image

But I think you'll be just fine, though maybe extremely bored, if you hang on. A terrible market for bonds is maybe a 10% nominal loss -- nothing like a terrible market for stocks.

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