Short versus Intermediate Term Bond

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Always passive
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Short versus Intermediate Term Bond

Post by Always passive » Tue Jul 17, 2018 1:58 pm

Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?

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vineviz
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Re: Short versus Intermediate Term Bond

Post by vineviz » Tue Jul 17, 2018 2:04 pm

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
First, there are no "givens" in investing.

Second, even if the Fed continues to increase the Fed Funds rates increases that really doesn't really drive short and intermediate yields directly. Even during periods during which the Fed raises its overnight rate, long term bonds have historically produced higher total returns than intermediate or short term bonds. As long as your investment horizon is longer than the duration of the bonds you investing in, at least when it comes to treasuries, there isn't actually much incremental risk to holding the longer duration instruments.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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patrick013
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Re: Short versus Intermediate Term Bond

Post by patrick013 » Wed Jul 18, 2018 1:36 pm

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
Looking at various alternatives with BSV, BIV, and BLV keeping
duration short calc's show that a 4 year duration should yield
2.986% with a combination of 68.6% of BSV and 31.4% of BIV.

So I should be able to liquidate these in 4 years at that approximate
YTM. Move into a longer maturity position is the hoped for event
for that time horizon without the associated duration risk. So some
people move their bonds around more than others with the info at
hand.
age in bonds, buy-and-hold, 10 year business cycle

livesoft
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Re: Short versus Intermediate Term Bond

Post by livesoft » Wed Jul 18, 2018 1:49 pm

Bond funds can go up or down by 0.5% in a single day. Not often, but often enough.

So would you switch from intermediate term to short term if the intermediate term went up 0.5% in a single day?

And if intermediate term dropped by 0.5% in a single day, would you switch from short-term to intermediate term?

One problem is that you don't know what will happen in the future. Right now the 0.5% drop can happen, but the 0.5% pop can happen. It is probably best to own both kinds of bond funds and just rebalance between them when the pops and drops happen.
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Taylor Larimore
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Re: Short versus Intermediate Term Bond

Post by Taylor Larimore » Wed Jul 18, 2018 1:56 pm

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
Always passive:

Consider Vanguard's Total Bond Market Index Fund:

* Worst annual return since its 1986 inception was -2.66% in 1994 (it gained +16% in 1995).

* Maximum diversification (the only "free lunch" in investing). TBM contains over 8,000 short-term, intermediate-term and long-term bonds--all investment grade.

* One fund simplicity.

Read my "Simplicity" link below.

Best wishes
Taylor
Last edited by Taylor Larimore on Wed Jul 18, 2018 2:49 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

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patrick013
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Re: Short versus Intermediate Term Bond

Post by patrick013 » Wed Jul 18, 2018 2:10 pm

@Livesoft

You're right the trend is only 50% sure but it has
to be a secular trend. A monthly trend is a casino
and that has to done by spread analysis. Would
you buy with a 2% spread or sell with a 2% spread ?
:)
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ruralavalon
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Re: Short versus Intermediate Term Bond

Post by ruralavalon » Wed Jul 18, 2018 5:44 pm

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
I don't believe that those are "given". Also the timing is an open question.
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livesoft
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Re: Short versus Intermediate Term Bond

Post by livesoft » Wed Jul 18, 2018 5:55 pm

patrick013 wrote:
Wed Jul 18, 2018 2:10 pm
@Livesoft
...
Sorry, I don't know what you are writing about, but you can pm me to explain if you wish.
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Re: Short versus Intermediate Term Bond

Post by Always passive » Wed Jul 18, 2018 10:38 pm

ruralavalon wrote:
Wed Jul 18, 2018 5:44 pm
Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
I don't believe that those are "given". Also the timing is an open question.
Can you please help me understand why you feel so? Vanguard calculates these estimates, or does it not?

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ruralavalon
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Re: Short versus Intermediate Term Bond

Post by ruralavalon » Thu Jul 19, 2018 7:39 am

Always passive wrote:
Wed Jul 18, 2018 10:38 pm
ruralavalon wrote:
Wed Jul 18, 2018 5:44 pm
Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
I don't believe that those are "given". Also the timing is an open question.
Can you please help me understand why you feel so? Vanguard calculates these estimates, or does it not?
Ii is not a "given that the Fed will continue raising short-term rates" for "1,2,3 years".

How good will you be at predicting when they will stop?

Many people were predicting in 2009 that they would start raising rates, but they didn't start until 2015.
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patrick013
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Re: Short versus Intermediate Term Bond

Post by patrick013 » Thu Jul 19, 2018 11:30 am

livesoft wrote:
Wed Jul 18, 2018 5:55 pm
patrick013 wrote:
Wed Jul 18, 2018 2:10 pm
@Livesoft
...
Sorry, I don't know what you are writing about, but you can pm me to explain if you wish.
Don't worry about it, it's just a wait and see situation.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Short versus Intermediate Term Bond

Post by abuss368 » Fri Jul 20, 2018 6:03 pm

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
Hi Always passive -

It has been said that trying to predict the movement of interest rates is harder than the stock market! In my opinion any investment grade low cost bond fund that is short or intermediate term will do the job of providing safety and income to an investment portfolio.
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Phineas J. Whoopee
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Re: Short versus Intermediate Term Bond

Post by Phineas J. Whoopee » Fri Jul 20, 2018 7:31 pm

abuss368 wrote:
Fri Jul 20, 2018 6:03 pm
...
In my opinion any investment grade low cost bond fund that is short or intermediate term will do the job of providing safety and income to an investment portfolio.
It's as if I've read those words in that order from an uncredited poster.

PJW

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Re: Short versus Intermediate Term Bond

Post by peppers » Fri Jul 20, 2018 7:49 pm

deleted
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Re: Short versus Intermediate Term Bond

Post by abuss368 » Sat Jul 21, 2018 5:27 am

Bonds returns are impacted by credit and term. With bonds higher yield almost always means higher risk.

Keep investing simple!
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Re: Short versus Intermediate Term Bond

Post by LMBFlorida » Sat Jul 21, 2018 7:11 am

Taylor Larimore wrote:
Wed Jul 18, 2018 1:56 pm
Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
Always passive:

Consider Vanguard's Total Bond Market Index Fund:

* Worst annual return since its 1986 inception was -2.66% in 1994 (it gained +16% in 1995).

* Maximum diversification (the only "free lunch" in investing). TBM contains over 8,000 short-term, intermediate-term and long-term bonds--all investment grade.

* One fund simplicity.

Read my "Simplicity" link below.

Best wishes
Taylor
But it is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.

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Re: Short versus Intermediate Term Bond

Post by 22twain » Sat Jul 21, 2018 7:33 am

LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Short versus Intermediate Term Bond

Post by averagedude » Sat Jul 21, 2018 7:39 am

Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
I actually agree with your assessment which is why im being tactical with my fixed income investing. With such a flattened yield curve, i dont think an investor is getting enough compensation for the interest rate risk of having longer duration products. I will say though the bond market is telling us that long term interest rates are going to be historically low in the future. This strategy i have implemented has a very good chance of failure because trying to predict future interest rates is impossible. Matter of fact, ive been wrong for most of my life on where interest rates are headed except for the last couple of years.

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Re: Short versus Intermediate Term Bond

Post by Always passive » Sat Jul 21, 2018 8:17 am

22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
If I thought that the past can tell something about the future, I would not have placed the question. What happened is great, but that is far from being an indicator of the future.
I do admit that the future is gray, but we should not be blind to what is currently going on.
My premise is that we can make some assumptions based on what the Fed is telling us now, and based on that arrive at reasonable conclusions.
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.

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Re: Short versus Intermediate Term Bond

Post by ruralavalon » Sat Jul 21, 2018 9:55 am

Always passive wrote:
Sat Jul 21, 2018 8:17 am
22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
If I thought that the past can tell something about the future, I would not have placed the question. What happened is great, but that is far from being an indicator of the future.
I do admit that the future is gray, but we should not be blind to what is currently going on.
My premise is that we can make some assumptions based on what the Fed is telling us now, and based on that arrive at reasonable conclusions.
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.
Before it was a "given" that the Fed would continue to raise rates for 1,2,3 years.

Now it's "assumptions". That is more accurate, but predictions about what the Fed will do are really opinions.

I do agree with Taylor and others that any good short-term or intermediate-term bond fund will do.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Short versus Intermediate Term Bond

Post by LMBFlorida » Sat Jul 21, 2018 3:01 pm

22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
Thank you, how often are the dividend typically reinvested? I am new to the total bonds funds (previously used target date funds for this) and my balances have been falling this year. My lack of knowledge is part of the reason I am looking for other types of funds to supplement the bond portion of my portfolio. Details in my Where to invest 100K? thread.

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sat Jul 21, 2018 3:55 pm

Always passive wrote:
Sat Jul 21, 2018 8:17 am
22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
If I thought that the past can tell something about the future, I would not have placed the question. What happened is great, but that is far from being an indicator of the future.
I do admit that the future is gray, but we should not be blind to what is currently going on.
My premise is that we can make some assumptions based on what the Fed is telling us now, and based on that arrive at reasonable conclusions.
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.
The expected rate of increase is already priced in to the yield curve. Nothing you have said suggests that you feel that rates are likely to rise faster than what the market expects. If that's the case, you should be matching your duration to your liabilities, which are probably not short term. That said, there is value to the optionality of short term, which may be what's behind your thinking, as opposed to safety.

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Re: Short versus Intermediate Term Bond

Post by abuss368 » Sat Jul 21, 2018 5:38 pm

LMBFlorida wrote:
Sat Jul 21, 2018 3:01 pm
Thank you, how often are the dividend typically reinvested? I am new to the total bonds funds (previously used target date funds for this) and my balances have been falling this year. My lack of knowledge is part of the reason I am looking for other types of funds to supplement the bond portion of my portfolio. Details in my Where to invest 100K? thread.
Vanguard Total Bond Index pays a dividend monthly.
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Re: Short versus Intermediate Term Bond

Post by Always passive » Sun Jul 22, 2018 7:37 am

ruralavalon wrote:
Sat Jul 21, 2018 9:55 am
Always passive wrote:
Sat Jul 21, 2018 8:17 am
22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
If I thought that the past can tell something about the future, I would not have placed the question. What happened is great, but that is far from being an indicator of the future.
I do admit that the future is gray, but we should not be blind to what is currently going on.
My premise is that we can make some assumptions based on what the Fed is telling us now, and based on that arrive at reasonable conclusions.
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.
Before it was a "given" that the Fed would continue to raise rates for 1,2,3 years.

Now it's "assumptions". That is more accurate, but predictions about what the Fed will do are really opinions.

I do agree with Taylor and others that any good short-term or intermediate-term bond fund will do.
Please do not pick my words to make your case. Maybe in court my two statements are different. In both I intended to say the same.

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Re: Short versus Intermediate Term Bond

Post by Always passive » Sun Jul 22, 2018 7:39 am

gmaynardkrebs wrote:
Sat Jul 21, 2018 3:55 pm
Always passive wrote:
Sat Jul 21, 2018 8:17 am
22twain wrote:
Sat Jul 21, 2018 7:33 am
LMBFlorida wrote:
Sat Jul 21, 2018 7:11 am
But it [Total Bond Market] is currently at 10.43 which is down more than 7% since the ~2012 high of 11.23.
With dividends reinvested, it's up by 8.1% since 11/20/2012, per a Morningstar growth chart.
If I thought that the past can tell something about the future, I would not have placed the question. What happened is great, but that is far from being an indicator of the future.
I do admit that the future is gray, but we should not be blind to what is currently going on.
My premise is that we can make some assumptions based on what the Fed is telling us now, and based on that arrive at reasonable conclusions.
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.
The expected rate of increase is already priced in to the yield curve. Nothing you have said suggests that you feel that rates are likely to rise faster than what the market expects. If that's the case, you should be matching your duration to your liabilities, which are probably not short term. That said, there is value to the optionality of short term, which may be what's behind your thinking, as opposed to safety.
Although I will stick with short term bonds, I do thank you. Your explanation is highly convincing.

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Re: Short versus Intermediate Term Bond

Post by UpperNwGuy » Sun Jul 22, 2018 9:04 am

Nothing in OP's post has convinced me of the superiority of short term bonds for the long term investor. I plan to stay the course with my intermediate term bonds.

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Re: Short versus Intermediate Term Bond

Post by alpenglow » Sun Jul 22, 2018 9:44 am

I've bought a number of ~3% 3 year brokered CDs. I have a lot of trouble going all in on Total Bond with a duration of 6.1 yrs and an SEC yield of 3%. Maybe I'm making the right choice and maybe I'm not. Either way, it probably won't be a big deal. I still hold some Total Bond and Short-Term Corporate Bond for rebalancing.

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Re: Short versus Intermediate Term Bond

Post by abuss368 » Sun Jul 22, 2018 9:52 am

UpperNwGuy wrote:
Sun Jul 22, 2018 9:04 am
Nothing in OP's post has convinced me of the superiority of short term bonds for the long term investor. I plan to stay the course with my intermediate term bonds.
There have been informative articles over the past few years showing how investors who selected a short term bond fund or cash equivalents actually cost themselves investment returns compared to investors in intermediate term bond funds. Investors have been waiting for the past decade for the bond carnage to begin.
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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 11:14 am

abuss368 wrote:
Sun Jul 22, 2018 9:52 am
UpperNwGuy wrote:
Sun Jul 22, 2018 9:04 am
Nothing in OP's post has convinced me of the superiority of short term bonds for the long term investor. I plan to stay the course with my intermediate term bonds.
There have been informative articles over the past few years showing how investors who selected a short term bond fund or cash equivalents actually cost themselves investment returns compared to investors in intermediate term bond funds. Investors have been waiting for the past decade for the bond carnage to begin.
Yep.

Long term investors should own long term bonds if they own any bonds at all. It’s right there in the name.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 12:10 pm

vineviz wrote:
Sun Jul 22, 2018 11:14 am
abuss368 wrote:
Sun Jul 22, 2018 9:52 am
UpperNwGuy wrote:
Sun Jul 22, 2018 9:04 am
Nothing in OP's post has convinced me of the superiority of short term bonds for the long term investor. I plan to stay the course with my intermediate term bonds.
There have been informative articles over the past few years showing how investors who selected a short term bond fund or cash equivalents actually cost themselves investment returns compared to investors in intermediate term bond funds. Investors have been waiting for the past decade for the bond carnage to begin.
Yep.

Long term investors should own long term bonds if they own any bonds at all. It’s right there in the name.
In theory, I agree with you, but...I can't hep but think that a 3% 30Y T-bond is a sucker bet. Or, to put it more analytically, the downside risk is simply too high when you can get a 10Y at 2.9%. (I would think it's the same for high grade corporates, but I don't mess with them, for other reasons.) Even though I believe that the Treasury bond market prices about as efficiently as any market can, there are two unusual factors pushing the long bond "artificially" low: (1) the short-long leveraged carry trade; (2) non-price sensitive purchasers (banks; some insurance companies; China/emerging market central banks). For me, I'll stick with 10Ys, or possibly longer duration TIPS, even though my liabilities would match better with the 30.

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Re: Short versus Intermediate Term Bond

Post by patrick013 » Sun Jul 22, 2018 12:20 pm

Always passive wrote:
Sun Jul 22, 2018 7:39 am
Although I will stick with short term bonds, I do thank you. Your explanation is highly convincing.
If the Fed tentative policy statement becomes reality without
interruption a 3 year CD going into ticker BLV at maturity
would make me smile as well. No duration risk, TRSY10
supposed to be over 4% then, Corp coupon bonds somewhat
higher.

That is the highest expectation. A modified buy-and-hold
for me.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Short versus Intermediate Term Bond

Post by mega317 » Sun Jul 22, 2018 12:42 pm

Always passive wrote:
Sat Jul 21, 2018 8:17 am
My conclusion is that short term bonds are a safer, much safer, investment and that the price, if any, for being wrong, will be minimal.
This is true, for at least some definitions of safe, at all times regardless of what's happening with rates or anything else.

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 12:57 pm

vineviz wrote:
Tue Jul 17, 2018 2:04 pm
Always passive wrote:
Tue Jul 17, 2018 1:58 pm
Vanguard shows that the Short Term Bond ETF (BSV) has an estimated YTM of 2.8 years and a duration of 2.7 years, while the Intermediate Term Bond ETF (BIV) has an estimated YTM of 3.4% but a duration of 6.4 years. Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?
First, there are no "givens" in investing.

Second, even if the Fed continues to increase the Fed Funds rates increases that really doesn't really drive short and intermediate yields directly. Even during periods during which the Fed raises its overnight rate, long term bonds have historically produced higher total returns than intermediate or short term bonds. As long as your investment horizon is longer than the duration of the bonds you investing in, at least when it comes to treasuries, there isn't actually much incremental risk to holding the longer duration instruments.
Given that at one point in the not so distant past, long bonds were referred to as "certificates of confiscation," I suspect that there is more to the story than your post would lead one to believe. :)

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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 1:34 pm

gmaynardkrebs wrote:
Sun Jul 22, 2018 12:57 pm
Given that at one point in the not so distant past, long bonds were referred to as "certificates of confiscation," I suspect that there is more to the story than your post would lead one to believe. :)
People have all sorts of feelings about bonds. I prefer to make my investment decisions based on data.

The effective federal funds rate has increased in 20 years of the past 40 years. The average return of long term treasuries during those 20 years was 6.87%, and the average return of short term treasuries was 5.61%.

And in the other 20 "falling rate" years, long term treasuries returned 11.84% vs only 6.82%.

So even if you could pick the years in which rates rose, you'd still be noticeably worse off with short term bonds than long term bonds. And if you were wrong in picking which environment was coming (which, as we all know, is highly probable) then you'd be WAY worse off.

Long term investors who hold bonds should hold long term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by LadyGeek » Sun Jul 22, 2018 1:40 pm

This thread is now in the Investing - Theory, News & General forum (general question).
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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 2:15 pm

vineviz wrote:
Sun Jul 22, 2018 1:34 pm
gmaynardkrebs wrote:
Sun Jul 22, 2018 12:57 pm
Given that at one point in the not so distant past, long bonds were referred to as "certificates of confiscation," I suspect that there is more to the story than your post would lead one to believe. :)
People have all sorts of feelings about bonds. I prefer to make my investment decisions based on data.

The effective federal funds rate has increased in 20 years of the past 40 years. The average return of long term treasuries during those 20 years was 6.87%, and the average return of short term treasuries was 5.61%.

And in the other 20 "falling rate" years, long term treasuries returned 11.84% vs only 6.82%.

So even if you could pick the years in which rates rose, you'd still be noticeably worse off with short term bonds than long term bonds. And if you were wrong in picking which environment was coming (which, as we all know, is highly probable) then you'd be WAY worse off.

Long term investors who hold bonds should hold long term bonds.
I am unclear as to why one would choose that as the appropriate data set, unless one is planning to flip their 30 year bonds every year. More fundamentally, it's no secret that the last 35-40 years have been highly favorable to long bonds due to declining interest rates. Of course they look good, almost no matter when you buy/sell them, when we've had a decline from the mid-teens under Volker, to the 3% we now "enjoy." Instead, it would be far more insightful to look overlapping 30 year periods going back longer than just the last 40 years. There is very good data, going back through much of the 20th century. If I am not mistaken, there have been a significant number of 30 year periods where buy and hold long bond investors got massively creamed. With long rates at 3% (having been closer to 2% just a few years ago), one would have to be quite an optimist to see the next 30 years as you apparently do for long bond investors.

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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 2:22 pm

gmaynardkrebs wrote:
Sun Jul 22, 2018 2:15 pm
vineviz wrote:
Sun Jul 22, 2018 1:34 pm
gmaynardkrebs wrote:
Sun Jul 22, 2018 12:57 pm
Given that at one point in the not so distant past, long bonds were referred to as "certificates of confiscation," I suspect that there is more to the story than your post would lead one to believe. :)
People have all sorts of feelings about bonds. I prefer to make my investment decisions based on data.

The effective federal funds rate has increased in 20 years of the past 40 years. The average return of long term treasuries during those 20 years was 6.87%, and the average return of short term treasuries was 5.61%.

And in the other 20 "falling rate" years, long term treasuries returned 11.84% vs only 6.82%.

So even if you could pick the years in which rates rose, you'd still be noticeably worse off with short term bonds than long term bonds. And if you were wrong in picking which environment was coming (which, as we all know, is highly probable) then you'd be WAY worse off.

Long term investors who hold bonds should hold long term bonds.
I am unclear as to why one would choose that as the appropriate data set, which looks at interim returns, unless one is planning to flip their 30 year bonds every year.
The OP includes this gem, which makes this an appropriate data set: "Given thyat it is a given that the Fed will continue increasing short term rates, why would anyone go that long for 0.6%. Why not go short and wait (1,2,3 years) until the Fed stabilizes interest rates?"
gmaynardkrebs wrote:
Sun Jul 22, 2018 2:15 pm
Of course they look good, almost no matter when you buy/sell them, when we've had a decline from the mid-teens under Volker, to the 3% we now "enjoy."
Despite the perception that we have experienced a steady decline in rates over the past 40 years, an actual examination will reveal (as I mentioned) that the fed funds rate had declined in roughly as many years as it has increased.

It's true that long-term bonds did MUCH better in falling rate years than in rising rate years, as I mentioned.

It's also true that long-term bonds did better in rising rate years than short-term bonds did.

So if short-term bonds underperform long-term bonds in both falling rate and rising rate environments, it's unclear to me why a rational long-term investor would ever prefer the short-term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 2:37 pm

vineviz wrote:
Sun Jul 22, 2018 2:22 pm
So if short-term bonds underperform long-term bonds in both falling rate and rising rate environments, it's unclear to me why a rational long-term investor would ever prefer the short-term bonds.
Short answer: because long term bonds are riskier. That is why they pay a higher interest rate.

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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 2:42 pm

gmaynardkrebs wrote:
Sun Jul 22, 2018 2:37 pm
vineviz wrote:
Sun Jul 22, 2018 2:22 pm
So if short-term bonds underperform long-term bonds in both falling rate and rising rate environments, it's unclear to me why a rational long-term investor would ever prefer the short-term bonds.
Short answer: because long term bonds are riskier. That is why they pay a higher interest rate.
Stocks are even riskier yet: should we not own those either?

Seriously, a long-term investor is precisely the kind of investor who can profitably assume the term risk of longer term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by patrick013 » Sun Jul 22, 2018 3:03 pm

vineviz wrote:
Sun Jul 22, 2018 1:34 pm
Long term investors who hold bonds should hold long term bonds.
Right now conditions are more favorable for shorter
term maturities but will become more favorable for
longer term maturities at a later date. End result is
a better entry point, more profits, and minimized
duration loss. A better overall strategy. Of course
not a 100% buy and hold strategy. Sometimes short
is better than long and sometimes long is more desirable
than short. :)

Image
age in bonds, buy-and-hold, 10 year business cycle

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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 3:58 pm

patrick013 wrote:
Sun Jul 22, 2018 3:03 pm
vineviz wrote:
Sun Jul 22, 2018 1:34 pm
Long term investors who hold bonds should hold long term bonds.
Right now conditions are more favorable for shorter
term maturities but will become more favorable for
longer term maturities at a later date. End result is
a better entry point, more profits, and minimized
duration loss. A better overall strategy. Of course
not a 100% buy and hold strategy. Sometimes short
is better than long and sometimes long is more desirable
than short. :)
My advice was for long-term investors, not day traders or market timers.

If someones investment strategy includes phrases like "right now", "favorable ... at a later date", and "better entry point" then they aren't the people I was addressing.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by patrick013 » Sun Jul 22, 2018 4:10 pm

vineviz wrote:
Sun Jul 22, 2018 3:58 pm
patrick013 wrote:
Sun Jul 22, 2018 3:03 pm
vineviz wrote:
Sun Jul 22, 2018 1:34 pm
Long term investors who hold bonds should hold long term bonds.
Right now conditions are more favorable for shorter
term maturities but will become more favorable for
longer term maturities at a later date. End result is
a better entry point, more profits, and minimized
duration loss. A better overall strategy. Of course
not a 100% buy and hold strategy. Sometimes short
is better than long and sometimes long is more desirable
than short. :)
My advice was for long-term investors, not day traders or market timers.

If someones investment strategy includes phrases like "right now", "favorable ... at a later date", and "better entry point" then they aren't the people I was addressing.
I am a long term investor but I follow secular trends, not timing
signals. Stats rarely look at basic secular trends as far as I can tell.
Another 10% loss for BLV very possible looks like to me.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Short versus Intermediate Term Bond

Post by columbia » Sun Jul 22, 2018 4:42 pm

Intermediate treasuries will provide larger bounce back during the next crash, if that kind of event seems inevitable (to you).

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 4:48 pm

vineviz wrote:
Sun Jul 22, 2018 2:42 pm
gmaynardkrebs wrote:
Sun Jul 22, 2018 2:37 pm
vineviz wrote:
Sun Jul 22, 2018 2:22 pm
So if short-term bonds underperform long-term bonds in both falling rate and rising rate environments, it's unclear to me why a rational long-term investor would ever prefer the short-term bonds.
Short answer: because long term bonds are riskier. That is why they pay a higher interest rate.
Stocks are even riskier yet: should we not own those either?

Seriously, a long-term investor is precisely the kind of investor who can profitably assume the term risk of longer term bonds.
Depends on the investor's risk tolerance. Risk averse investors can rationally to choose an asset other than the one that maximizes the geometric mean of expected returns, which in this case, probably is the long bond. Different strokes, as they say...

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Re: Short versus Intermediate Term Bond

Post by Theoretical » Sun Jul 22, 2018 8:49 pm

vineviz wrote:
Sun Jul 22, 2018 1:34 pm
gmaynardkrebs wrote:
Sun Jul 22, 2018 12:57 pm
Given that at one point in the not so distant past, long bonds were referred to as "certificates of confiscation," I suspect that there is more to the story than your post would lead one to believe. :)
People have all sorts of feelings about bonds. I prefer to make my investment decisions based on data.

The effective federal funds rate has increased in 20 years of the past 40 years. The average return of long term treasuries during those 20 years was 6.87%, and the average return of short term treasuries was 5.61%.

And in the other 20 "falling rate" years, long term treasuries returned 11.84% vs only 6.82%.

So even if you could pick the years in which rates rose, you'd still be noticeably worse off with short term bonds than long term bonds. And if you were wrong in picking which environment was coming (which, as we all know, is highly probable) then you'd be WAY worse off.

Long term investors who hold bonds should hold long term bonds.
The problem is that you’re looking at nominal rates and not real returns. Intermediate to long bonds got mauled in both the US and UK from the 1940s to 1982, to the tune of 40-60% real drawdowns. Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.

Now long TIPS are a different animal, and I think they could make things very interesting in an inflationary scenario because of how they preserve capital year over year.

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Re: Short versus Intermediate Term Bond

Post by vineviz » Sun Jul 22, 2018 8:54 pm

Theoretical wrote:
Sun Jul 22, 2018 8:49 pm
Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.
This is not only untrue but is mathematically impossible.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Sun Jul 22, 2018 10:18 pm

vineviz wrote:
Sun Jul 22, 2018 8:54 pm
Theoretical wrote:
Sun Jul 22, 2018 8:49 pm
Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.
This is not only untrue but is mathematically impossible.
It's complex, because Fed policy suppressed both short and long terms yields until about 1952. I'm not sure which maturities suffered the most in that period, The inflation that began in the mid 1960s and ended with Volker in the early 80s, most surely wreaked havoc for those who invested in 30 year bonds in the 1960s, if not earlier. Moreover, for small savers, regulation Q was suppressing demand deposits well into negative real territory. Recall also, that the minimum for treasury auctions was $100,000 dollars, which meant that the Feds financial repression came primarily at the expense of banks and institutions, as opposed to the average investor. We still have a degree of financial repression today, which has been a boon to long bond investors since at least 2008, if not earlier. Bottom line, to me, we have had enormous amount of central bank intervention for most of the last 60 years, which may or may not continue. One can talk about economic factors such as growth, inflation, and wage growth ad nauseum, but the the reality is that the Fed is still the only game in town, and is likely to be that for a long, long time. That affects assessments of the expected returns on all risk assets, including stocks as well as bonds. I question whether one can sensibly talk about matching duration to liabilities anymore based on standard security analysis of the Graham Dodd variety.At the very least, one must take that into account, and add large range of error into our investing decisions.

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Re: Short versus Intermediate Term Bond

Post by willthrill81 » Mon Jul 23, 2018 3:00 pm

vineviz wrote:
Sun Jul 22, 2018 8:54 pm
Theoretical wrote:
Sun Jul 22, 2018 8:49 pm
Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.
This is not only untrue but is mathematically impossible.
No, it is indeed accurate.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/

The same cannot be said of long-term bonds. Long-term Treasuries lost a whopping 46.5% of their real value between Jan., 1978, and Sep., 1981.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Short versus Intermediate Term Bond

Post by vineviz » Mon Jul 23, 2018 3:10 pm

willthrill81 wrote:
Mon Jul 23, 2018 3:00 pm
vineviz wrote:
Sun Jul 22, 2018 8:54 pm
Theoretical wrote:
Sun Jul 22, 2018 8:49 pm
Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.
This is not only untrue but is mathematically impossible.
No, it is indeed accurate.
An asset cannot have a lower nominal return but a higher real return than another asset over the same period of time.

It violates the basic laws of subtraction.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Short versus Intermediate Term Bond

Post by willthrill81 » Mon Jul 23, 2018 3:12 pm

vineviz wrote:
Mon Jul 23, 2018 3:10 pm
willthrill81 wrote:
Mon Jul 23, 2018 3:00 pm
vineviz wrote:
Sun Jul 22, 2018 8:54 pm
Theoretical wrote:
Sun Jul 22, 2018 8:49 pm
Short bonds have lower raw returns but are much closer to or not as far from inflationary forces.
This is not only untrue but is mathematically impossible.
No, it is indeed accurate.
An asset cannot have a lower nominal return but a higher real return than another asset over the same period of time.

It violates the basic laws of subtraction.
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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