Is it time to go shorter in bonds ?

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ruralavalon
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Re: Is it time to go shorter in bonds ?

Post by ruralavalon » Sat Sep 01, 2018 9:01 am

nedsaid wrote:
Fri Aug 31, 2018 3:09 pm
bltn wrote:
Fri Aug 31, 2018 1:42 pm
nedsaid wrote:
Fri Aug 31, 2018 12:53 pm
This is a hard question to answer, a big reason is that we don't know the future. I was advised almost 10 years ago to shorten the maturity of my bonds. I kept everything Intermediate Term and Investment Grade and I am glad that I did because I would have foregone a lot of interest. Yield curve was still relatively steep in those days, short bonds paid very little interest unlike today. Plus, I was still a ways from retirement and I was still reinvesting the dividends. Now that the yield curve has flattened out and there is not much difference between 2 year and 10 year interest rates, that has complicated things. With a relatively flat yield curve right now, it makes more sense to shorten maturities now than when yield curves were relatively steep. My best guess is that both inflation and interest rates will keep ticking up for a while but then again my crystal ball is cloudy. If my best guess is right then this would add even more weight to the argument that investors should shorten maturities.
I agree with this. When do you begin to transfer from intermediate bond funds to short term bond funds?
So far, I have kept everything Intermediate Term and not shifted anything towards Short Term. I may not do anything based upon what I posted above. Truth is, I just don't know. I have an informed opinion and can make educated guesses but I could be wrong.

I have been beating the drums for Large Value stocks for I don't know, four years now. The market just will not listen. We are still in a Large Growth stock market and the Growth bias seems to be holding in the International Stock markets as well. So I had good reasoning behind my opinions but the market as a whole did not agree with me.

Pretty much I am saying there is excellent reasoning behind shortening bond maturities at this time. But then again, I had excellent reasoning about Large Cap Value. I don't want to run a market timing service on the Bogleheads forum.

Note: please read Nisiprius' post above. I stayed in Intermediate Bonds rather than shorten maturities and his post above vindicates my decision. How will things fare from this point forward? Don't know. But as long as I reinvest the dividends and have a few years before retirement, it shouldn't matter much.
I plan to stay in Vanguard Intermediate-term Bond Index Fund. People have been touting short-term bonds since 2009, and have lost a lot in anticipating.
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DrivingFun
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Re: Is it time to go shorter in bonds ?

Post by DrivingFun » Sat Sep 01, 2018 9:32 am

ruralavalon wrote:
Sat Sep 01, 2018 9:01 am
nedsaid wrote:
Fri Aug 31, 2018 3:09 pm
bltn wrote:
Fri Aug 31, 2018 1:42 pm
nedsaid wrote:
Fri Aug 31, 2018 12:53 pm
This is a hard question to answer, a big reason is that we don't know the future. I was advised almost 10 years ago to shorten the maturity of my bonds. I kept everything Intermediate Term and Investment Grade and I am glad that I did because I would have foregone a lot of interest. Yield curve was still relatively steep in those days, short bonds paid very little interest unlike today. Plus, I was still a ways from retirement and I was still reinvesting the dividends. Now that the yield curve has flattened out and there is not much difference between 2 year and 10 year interest rates, that has complicated things. With a relatively flat yield curve right now, it makes more sense to shorten maturities now than when yield curves were relatively steep. My best guess is that both inflation and interest rates will keep ticking up for a while but then again my crystal ball is cloudy. If my best guess is right then this would add even more weight to the argument that investors should shorten maturities.
I agree with this. When do you begin to transfer from intermediate bond funds to short term bond funds?
So far, I have kept everything Intermediate Term and not shifted anything towards Short Term. I may not do anything based upon what I posted above. Truth is, I just don't know. I have an informed opinion and can make educated guesses but I could be wrong.

I have been beating the drums for Large Value stocks for I don't know, four years now. The market just will not listen. We are still in a Large Growth stock market and the Growth bias seems to be holding in the International Stock markets as well. So I had good reasoning behind my opinions but the market as a whole did not agree with me.

Pretty much I am saying there is excellent reasoning behind shortening bond maturities at this time. But then again, I had excellent reasoning about Large Cap Value. I don't want to run a market timing service on the Bogleheads forum.

Note: please read Nisiprius' post above. I stayed in Intermediate Bonds rather than shorten maturities and his post above vindicates my decision. How will things fare from this point forward? Don't know. But as long as I reinvest the dividends and have a few years before retirement, it shouldn't matter much.
I plan to stay in Vanguard Intermediate-term Bond Index Fund. People have been touting short-term bonds since 2009, and have lost a lot in anticipating.
Can someone who has been observing this touting since 09 explain to me how that related to overnight rates? In other words my guess is consensus on rate hikes couldn't have been very high in 09. But it is near certainty for 2 more this year and high probability of 2 more next year. I'm assuming touting in 09 was based on other factors, while now it's based on the fed funds rate. I know very little about these things but to me it seems the reasoning now is nearly full-proof. Near guarantee of rising short term rates (we're half way through this already it seems) can only result in either a flat yield curve, in which case you're not being compensated for duration risk. Or it results in the longer end of the curve having to rise to accommodate, in which case price drops are guaranteed. Long term it probably doesn't matter, but in the short term barring unforeseen circumstances I can't see how going longer duration makes any sense.

aristotelian
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Re: Is it time to go shorter in bonds ?

Post by aristotelian » Sat Sep 01, 2018 4:22 pm

DrivingFun wrote:
Sat Sep 01, 2018 9:32 am

Can someone who has been observing this touting since 09 explain to me how that related to overnight rates? In other words my guess is consensus on rate hikes couldn't have been very high in 09. But it is near certainty for 2 more this year and high probability of 2 more next year. I'm assuming touting in 09 was based on other factors, while now it's based on the fed funds rate. I know very little about these things but to me it seems the reasoning now is nearly full-proof. Near guarantee of rising short term rates (we're half way through this already it seems) can only result in either a flat yield curve, in which case you're not being compensated for duration risk. Or it results in the longer end of the curve having to rise to accommodate, in which case price drops are guaranteed. Long term it probably doesn't matter, but in the short term barring unforeseen circumstances I can't see how going longer duration makes any sense.
The scenario that people are hedging against is a stock crash that would return rates to zero. I think it is more likely that rates will continue to increase as planned, but you never know.

Another possibility is that the economy stagnates a bit and rates stay flat. In that case you will be giving up some yield by staying short.

That said, I have shortened my duration some and would do more if I had better options in my pretax accounts. I will shift back when the 10 year gets back to 3%.

sambb
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Re: Is it time to go shorter in bonds ?

Post by sambb » Sat Sep 01, 2018 4:39 pm

greg24 wrote:
Fri Aug 31, 2018 1:33 pm
Many have been attempting to time the bond market since 2008/2009 meltdown.

At some point, they may end up being correct.
well Stated

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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sat Sep 01, 2018 5:01 pm

venkman wrote:
Fri Aug 31, 2018 10:35 pm
Kevin8696 wrote:
Fri Aug 31, 2018 10:10 am
With the Fed's continuing program of raising short-term rates, the spread between the 2-yr and 10-yr Treasuries has narrowed to just 0.20% compared to a historic spread of about 2.0%. This flat yield curve has analysts saying that investors in intermediate term bond funds (such as Vanguard Total Bond Market Index Fund, VBTLX) are not being adequately compensated for the interest rate risk associated with the 6+ year duration of these funds.
If investors in intermediate bond funds aren't being adequately compensated for the duration risk, doesn't that make you wonder WHY so many investors are staying with intermediate bonds, and not moving to short-term?
No, it doesn't make me wonder why. I think that most investors don't have the slightest clue as to the impact of rising rates on an intermediate term bond fund. Most do not even understand that when rates go up, bond prices go down.

You seem to be confusing their inaction due to a lack of understanding with a conscious decision to stay with their status quo.

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Phineas J. Whoopee
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Re: Is it time to go shorter in bonds ?

Post by Phineas J. Whoopee » Sat Sep 01, 2018 5:45 pm

Kevin8696 wrote:
Sat Sep 01, 2018 5:01 pm
...
No, it doesn't make me wonder why. I think that most investors don't have the slightest clue as to the impact of rising rates on an intermediate term bond fund. Most do not even understand that when rates go up, bond prices go down.

You seem to be confusing their inaction due to a lack of understanding with a conscious decision to stay with their status quo.
Most bond investing is done not by individuals using mutual funds, but by enormous institutions which not only understand that yields, not rates, move in opposition to prices, but also have access to much more and faster information and much better analytical tools than any of us posting here do.

If they, who collectively can move markets, think they're being adequately compensated for term risk why wouldn't anybody else be, the unnamed analysts you cite notwithstanding?

PJW

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randomizer
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Re: Is it time to go shorter in bonds ?

Post by randomizer » Sat Sep 01, 2018 6:48 pm

I love these BH topics with words like "time" or "now" in the titles. :twisted:
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SavageAmusement
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Re: Is it time to go shorter in bonds ?

Post by SavageAmusement » Sat Sep 01, 2018 6:58 pm

I love the robotic repetition of dogma like “stay the course” and “don’t time the markets.” I guess it’s easier than thinking for yourself.

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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sat Sep 01, 2018 7:04 pm

Phineas J. Whoopee wrote:
Sat Sep 01, 2018 5:45 pm
Kevin8696 wrote:
Sat Sep 01, 2018 5:01 pm
...
No, it doesn't make me wonder why. I think that most investors don't have the slightest clue as to the impact of rising rates on an intermediate term bond fund. Most do not even understand that when rates go up, bond prices go down.

You seem to be confusing their inaction due to a lack of understanding with a conscious decision to stay with their status quo.
Most bond investing is done not by individuals using mutual funds, but by enormous institutions which not only understand that yields, not rates, move in opposition to prices, but also have access to much more and faster information and much better analytical tools than any of us posting here do.

If they, who collectively can move markets, think they're being adequately compensated for term risk why wouldn't anybody else be, the unnamed analysts you cite notwithstanding?

PJW
PJW... Question for you. In anticipation of a possible 1% rise in the 10-yr bond yield, how would you calculate the estimated price change for a bond fund with the following portfolio: 8.4-yr average maturity, 6.1-yr average duration, 3.1% average coupon, 3.3% yield to maturity, and SEC yield of 3.12% ?

Thanks !

livesoft
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Re: Is it time to go shorter in bonds ?

Post by livesoft » Sat Sep 01, 2018 7:07 pm

Kevin8696 wrote:
Sat Sep 01, 2018 7:04 pm
PJW... Question for you. In anticipation of a possible 1% rise in the 10-yr bond yield, how would you calculate the estimated price change for a bond fund with the following portfolio: 8.4-yr average maturity, 6.1-yr average duration, 3.1% average coupon, 3.3% yield to maturity, and SEC yield of 3.12% ?
In past threads like this one, charts were posted to show how a bond fund actually changed when interest rates went up. The charts never followed the so-called calculation for what they were supposed to do. I'm surprised such a chart has not been posted in this thread yet.
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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sat Sep 01, 2018 7:14 pm

livesoft wrote:
Sat Sep 01, 2018 7:07 pm
Kevin8696 wrote:
Sat Sep 01, 2018 7:04 pm
PJW... Question for you. In anticipation of a possible 1% rise in the 10-yr bond yield, how would you calculate the estimated price change for a bond fund with the following portfolio: 8.4-yr average maturity, 6.1-yr average duration, 3.1% average coupon, 3.3% yield to maturity, and SEC yield of 3.12% ?
In past threads like this one, charts were posted to show how a bond fund actually changed when interest rates went up. The charts never followed the so-called calculation for what they were supposed to do. I'm surprised such a chart has not been posted in this thread yet.
Yes, it would certainly be of interest to see how the theoretical change actually played out in the past.

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patrick013
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Re: Is it time to go shorter in bonds ?

Post by patrick013 » Sat Sep 01, 2018 7:20 pm

stan1 wrote:
Sat Sep 01, 2018 8:49 am
MnD wrote:
Fri Aug 31, 2018 1:00 pm
July 2016 would have been an excellent time to deploy the go shorter strategy.
Right, I was a little later that that but not too much so.

So that brings the question: what is the signal to go back to intermediate term?

Just to note I do make a half hearted attempt to market time fixed income yields myself.
Will the FED increase the FFR to 3% ? Probably.

That's all we really know.

Will the FED decrease the FFR if stocks decline ?
age in bonds, buy-and-hold, 10 year business cycle

livesoft
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Re: Is it time to go shorter in bonds ?

Post by livesoft » Sat Sep 01, 2018 7:21 pm

10-year Treasury rates went up 1% from say mid-July 2016 to mid-December 2016, but that 1% was a 73% increase in rate, so a 1% increase going forward would be a much lower percentage increase.
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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sat Sep 01, 2018 8:00 pm

livesoft wrote:
Sat Sep 01, 2018 7:21 pm
10-year Treasury rates went up 1% from say mid-July 2016 to mid-December 2016, but that 1% was a 73% increase in rate, so a 1% increase going forward would be a much lower percentage increase.
Yes, the 10-yr Treasury did take a jump in the latter part of 2016, and the intermediate bond funds got whacked.

Total Return in 2016-Q4 for the Total Bond Market Index Fund (VBTLX) was -3.17%, net of about a 0.62% interest distribution. So, almost a 4% hit to the fund price.

It took VBTLX all of 2017 to get back to even after that hit. And then came more hits in 2018-Q1 and Q2.

The Intermediate-term Bond Index Fund (VBILX) was worse. Took about a 5% price hit in 2016-Q4 and is not yet back to even after hits in 2018-Q1 and Q2.

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Re: Is it time to go shorter in bonds ?

Post by Jebediah » Sat Sep 01, 2018 9:56 pm

nisiprius wrote:
Fri Aug 31, 2018 2:08 pm
Just forget about "is it time." Stay the course.
mathwhiz wrote:
Sat Jul 18, 2009 11:36 pm
Interest rates can only go up, why go intermediate in bonds?
Post by mathwhiz » Sun Jul 19, 2009 12:36 am

I see the total bond fund and intermediate treasuries recommended a lot on here. I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit.

So isn't it wise to go short in this environment where rates can only go up?
Point #1: the poster was correct about interest rates rising.

Image

Point #2: Despite this, on the date of the posting, an investor who invested $10,000 the Vanguard Short-Term Treasury Fund on 7/19/2009 (orange) instead of the Vanguard Intermediate-Term Treasury Fund (blue),

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Image

would today, have earned a total of only $1,024.75, compared to the $2,918.46 he would have earned in intermediate-term bonds. That is to say, the short-term bond investor would have foregone almost two-thirds of the gains enjoyed by the intermediate-term investor.

Furthermore, at this point, I personally guess that interest rates probably will go up and--a stronger prediction they will go up far enough, fast enough, for long enough that I am quite likely to see a one-year loss in my intermediate-term bond fund. Nevertheless, I am staying the course because even if it were to fall by 10-15%, which is two or three times as much as it has ever dropped before, I would still be ahead of the short-term bond investor.

In order to do anything else, I would have to believe that
  • In 2009, nobody could predict what was going to happen to intermediate-term bonds, and yet
  • in 2018, anybody can predict what is going to happen to intermediate-term bonds.
That investor should have invested in long bonds.

"Term risk" also has the "term advantage" of being (usually) anti-correlated to beta and a money-maker when stocks go south.

Image

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Re: Is it time to go shorter in bonds ?

Post by Northern Flicker » Sat Sep 01, 2018 10:32 pm

Admiral.... The SEC yield is of little value. It is a hypothetical figure that assumes bond prices won't change. The fund is not "paying" 3.13% now, the latest annualized distribution yield was 2.77%, and that's what fund owners are actually being paid.
The distribution yield is what was paid out in the past. It has a fairly nebulous connection to future yield. The SEC yield is a 30-day average of the average yield of the bonds in the fund.
Risk is not a guarantor of return.

epilnk
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Re: Is it time to go shorter in bonds ?

Post by epilnk » Sat Sep 01, 2018 10:44 pm

I'm a long time member here. I was a boglehead back when bogleheads were diehards, back in the M* days. I was pretty active my first 10 years or so but got kind of tired of certain things, and more or less quit about 5 years ago. I check back in now and then to see if things have changed, maybe to see if there are fresh perspectives or insights.

Its nice to see that the exact same bond conversations are still going on. The names are mostly changed - I don't recognize many besides nisiprius, who is still making more sense than most - but I'm not really seeing anything here that I wasn't reading more than a decade ago, when interest rates had nowhere to go but up.

I still have my long duration bond funds, which many advised against 10-15 years ago (since interest rates were going up any day now). I could shorten duration. But I'm not so close to retirement. Based on this discussion I will probably stay the course. One of these days it will inevitably be the less favorable strategy. But it hasn't been so far.

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Re: Is it time to go shorter in bonds ?

Post by goblue100 » Sat Sep 01, 2018 10:54 pm

SavageAmusement wrote:
Sat Sep 01, 2018 6:58 pm
I love the robotic repetition of dogma like “stay the course” and “don’t time the markets.” I guess it’s easier than thinking for yourself.
I'm starting to understand how most people under perform the market. It's by thinking they know how to time the market. I'm pretty sure that's been proven to be the "losers game".
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sat Sep 01, 2018 11:16 pm

epilnk wrote:
Sat Sep 01, 2018 10:44 pm
I'm a long time member here. I was a boglehead back when bogleheads were diehards, back in the M* days. I was pretty active my first 10 years or so but got kind of tired of certain things, and more or less quit about 5 years ago. I check back in now and then to see if things have changed, maybe to see if there are fresh perspectives or insights.

Its nice to see that the exact same bond conversations are still going on. The names are mostly changed - I don't recognize many besides nisiprius, who is still making more sense than most - but I'm not really seeing anything here that I wasn't reading more than a decade ago, when interest rates had nowhere to go but up.

I still have my long duration bond funds, which many advised against 10-15 years ago (since interest rates were going up any day now). I could shorten duration. But I'm not so close to retirement. Based on this discussion I will probably stay the course. One of these days it will inevitably be the less favorable strategy. But it hasn't been so far.
Epilnk... welcome back !

Here's my tale of woe in the Intermediate-term Bond Index Fund (VBILX). Balance on 9/30/16 was just over $100,000. At year end 2016, it was down to $95,800. For a brief time in late 2017, I was almost in the black. Down to $97,300 earlier this year. Now I'm at $99,100 and concerned about the impact of a potential increase in the 10-yr treasury. Two years of woes and stay the course ? Or run and hide in a 2.08% money market fund until rates normalize... whatever that means. I'm 67 and retired.

Your thoughts would really be appreciated. Thanks, Kevin
Last edited by Kevin8696 on Sat Sep 01, 2018 11:49 pm, edited 1 time in total.

venkman
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Re: Is it time to go shorter in bonds ?

Post by venkman » Sat Sep 01, 2018 11:35 pm

Kevin8696 wrote:
Sat Sep 01, 2018 5:01 pm
venkman wrote:
Fri Aug 31, 2018 10:35 pm
If investors in intermediate bond funds aren't being adequately compensated for the duration risk, doesn't that make you wonder WHY so many investors are staying with intermediate bonds, and not moving to short-term?
No, it doesn't make me wonder why. I think that most investors don't have the slightest clue as to the impact of rising rates on an intermediate term bond fund. Most do not even understand that when rates go up, bond prices go down.

You seem to be confusing their inaction due to a lack of understanding with a conscious decision to stay with their status quo.
And you seem to think that duration risk is the only kind of bond risk worth hedging against. Perhaps the yield curve is flat because all those other investors think differently...

Note that I'm not saying they are right and you are wrong. I'm just saying that markets are efficient, and there's a reason the yield curve is flat other than investors are clueless.

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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sun Sep 02, 2018 12:33 am

venkman wrote:
Sat Sep 01, 2018 11:35 pm
Kevin8696 wrote:
Sat Sep 01, 2018 5:01 pm
venkman wrote:
Fri Aug 31, 2018 10:35 pm
If investors in intermediate bond funds aren't being adequately compensated for the duration risk, doesn't that make you wonder WHY so many investors are staying with intermediate bonds, and not moving to short-term?
No, it doesn't make me wonder why. I think that most investors don't have the slightest clue as to the impact of rising rates on an intermediate term bond fund. Most do not even understand that when rates go up, bond prices go down.

You seem to be confusing their inaction due to a lack of understanding with a conscious decision to stay with their status quo.
And you seem to think that duration risk is the only kind of bond risk worth hedging against. Perhaps the yield curve is flat because all those other investors think differently...

Note that I'm not saying they are right and you are wrong. I'm just saying that markets are efficient, and there's a reason the yield curve is flat other than investors are clueless.
Venkman,

Sorry, I guess I misunderstood where you were coming from. Yes, it is a bit curious that the prices are holding on intermediate bonds, especially after the market got spooked and sold off in 2013. The market still seems to have a strong appetite for yield, even in the face of interest rate risk. Also, I think a lot of the intermediate-term demand may have to do with differing time horizons, and at age 67 mine is shorter than many others. Thanks for your input/thoughts.

Btw... Are you related to Professor Peter Venkman, who uttered the famous quote... "Back off man, I'm a Scientist !". ??

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Re: Is it time to go shorter in bonds ?

Post by Northern Flicker » Sun Sep 02, 2018 12:47 am

Here's my tale of woe in the Intermediate-term Bond Index Fund (VBILX). Balance on 9/30/16 was just over $100,000. At year end 2016, it was down to $95,800. For a brief time in late 2017, I was almost in the black. Down to $97,300 earlier this year. Now I'm at $99,100 and concerned about the impact of a potential increase in the 10-yr treasury. Two years of woes and stay the course ? Or run and hide in a 2.08% money market fund until rates normalize... whatever that means. I'm 67 and retired.
Be sure to look at overall portfolio return not just individual assets. Presumably the economic forces that led to a 0.9% loss in bonds also fueled a sizable appreciation in equities. Advice on any changes without taking into account the overall portfolio is questionable for the same reason.
Risk is not a guarantor of return.

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Re: Is it time to go shorter in bonds ?

Post by SavageAmusement » Sun Sep 02, 2018 3:52 am

goblue100 wrote:
Sat Sep 01, 2018 10:54 pm
SavageAmusement wrote:
Sat Sep 01, 2018 6:58 pm
I love the robotic repetition of dogma like “stay the course” and “don’t time the markets.” I guess it’s easier than thinking for yourself.
I'm starting to understand how most people under perform the market. It's by thinking they know how to time the market. I'm pretty sure that's been proven to be the "losers game".
Given the current flatness of the yield curve and tight credit spreads, perhaps you could provide an argument as to why investors should take significant unrewarded duration risk and some credit risk for investing in an intermediate bond fund such as BND. I don’t mind taking risks, but I’d like to be compensated for it. If that thinking makes me a loser, then so be it.

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Re: Is it time to go shorter in bonds ?

Post by glock19 » Sun Sep 02, 2018 7:27 am

[/quote]


Here's my tale of woe in the Intermediate-term Bond Index Fund (VBILX). Balance on 9/30/16 was just over $100,000. At year end 2016, it was down to $95,800. For a brief time in late 2017, I was almost in the black. Down to $97,300 earlier this year. Now I'm at $99,100 and concerned about the impact of a potential increase in the 10-yr treasury. Two years of woes and stay the course ? Or run and hide in a 2.08% money market fund until rates normalize... whatever that means. I'm 67 and retired.

Your thoughts would really be appreciated. Thanks, Kevin
[/quote]

You and I are about the same point in life. I feel that while there is lot of good advice on this forum, at some point one has to do what their "gut" is telling them is right for the situation. I know........market timing, but I'm in the preservation stage.

I currently maintain a 5 year individual treasury bond ladder (hold to maturity). As issues mature it's difficult for me to justify going out to 5 year maturity when there is only a 30 basis point premium for the risk (the risk to me is an almost certain increase in short term rates). Hiding in a 2% fixed income account means that at any point that you feel a longer duration is prudent, you have the funds to make that move. You are not locked in to a longer maturity.

Can you miss out on gains. Yes, but unless we are talking about an enormous investment, I doubt it's going to make a lot of difference.

Most will disagree with me because of the "stay the course" investment plan. In the end, I'm the one that has to live with my decision.

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Re: Is it time to go shorter in bonds ?

Post by randomizer » Sun Sep 02, 2018 8:09 am

SavageAmusement wrote:
Sat Sep 01, 2018 6:58 pm
I love the robotic repetition of dogma like “stay the course” and “don’t time the markets.” I guess it’s easier than thinking for yourself.
Not only easier, but also far more likely to be effective!
87.5:12.5, EM tilt — HODL the course!

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Re: Is it time to go shorter in bonds ?

Post by dwickenh » Sun Sep 02, 2018 8:20 am

MnD wrote:
Fri Aug 31, 2018 1:00 pm
July 2016 would have been an excellent time to deploy the go shorter strategy.
And buy some Bitcoin!!

:oops:
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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Re: Is it time to go shorter in bonds ?

Post by goblue100 » Sun Sep 02, 2018 9:16 am

SavageAmusement wrote:
Sun Sep 02, 2018 3:52 am

Given the current flatness of the yield curve and tight credit spreads, perhaps you could provide an argument as to why investors should take significant unrewarded duration risk and some credit risk for investing in an intermediate bond fund such as BND. I don’t mind taking risks, but I’d like to be compensated for it. If that thinking makes me a loser, then so be it.
I'm not sure I can convince you with words. Let me try some links:
https://www.bloomberg.com/view/articles ... nomy-needs
n the middle part of that decade, the Federal Reserve executed an almost perfect soft landing for the economy, aggressively raising interest rates 300 basis points over the course of 12 months beginning in February of 1994 and then cutting them by 75 basis points beginning in July 1995. The yield curve averaged just 35 basis points from 1995 through 1999, down from 140 basis points in the first half of the decade and compared with about 50 basis points currently.
https://www.portfoliovisualizer.com/bac ... asury3=100

Even with the flat yield curve you were rewarded some for your longer duration.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Is it time to go shorter in bonds ?

Post by SavageAmusement » Sun Sep 02, 2018 10:12 am

goblue100 wrote:
Sun Sep 02, 2018 9:16 am
SavageAmusement wrote:
Sun Sep 02, 2018 3:52 am

Given the current flatness of the yield curve and tight credit spreads, perhaps you could provide an argument as to why investors should take significant unrewarded duration risk and some credit risk for investing in an intermediate bond fund such as BND. I don’t mind taking risks, but I’d like to be compensated for it. If that thinking makes me a loser, then so be it.
I'm not sure I can convince you with words. Let me try some links:
https://www.bloomberg.com/view/articles ... nomy-needs
n the middle part of that decade, the Federal Reserve executed an almost perfect soft landing for the economy, aggressively raising interest rates 300 basis points over the course of 12 months beginning in February of 1994 and then cutting them by 75 basis points beginning in July 1995. The yield curve averaged just 35 basis points from 1995 through 1999, down from 140 basis points in the first half of the decade and compared with about 50 basis points currently.
https://www.portfoliovisualizer.com/bac ... asury3=100

Even with the flat yield curve you were rewarded some for your longer duration.
That doesn’t answer the question I asked you.

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Kevin8696
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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sun Sep 02, 2018 10:14 am

goblue100 wrote:
Sun Sep 02, 2018 9:16 am
SavageAmusement wrote:
Sun Sep 02, 2018 3:52 am

Given the current flatness of the yield curve and tight credit spreads, perhaps you could provide an argument as to why investors should take significant unrewarded duration risk and some credit risk for investing in an intermediate bond fund such as BND. I don’t mind taking risks, but I’d like to be compensated for it. If that thinking makes me a loser, then so be it.
I'm not sure I can convince you with words. Let me try some links:
https://www.bloomberg.com/view/articles ... nomy-needs
n the middle part of that decade, the Federal Reserve executed an almost perfect soft landing for the economy, aggressively raising interest rates 300 basis points over the course of 12 months beginning in February of 1994 and then cutting them by 75 basis points beginning in July 1995. The yield curve averaged just 35 basis points from 1995 through 1999, down from 140 basis points in the first half of the decade and compared with about 50 basis points currently.
https://www.portfoliovisualizer.com/bac ... asury3=100

Even with the flat yield curve you were rewarded some for your longer duration.
Rewarded ? Looks like the reward for longer duration included much higher volatility, and correspondingly lower risk adjusted returns.

Check out the Sharpe and Sortino ratios in that PortfolioVisualizer example. Risk adjusted returns went down as term increased.

The max draw-down in these example portfolios went from -1.11% for the short term, to -4.86% for intermediate, to -9.56% for long-term.

It does not look to me like the intermediate and long term investors were adequately compensated for their risk.

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Re: Is it time to go shorter in bonds ?

Post by jsmoove123 » Sun Sep 02, 2018 10:26 am

Not to derail the subject at hand, but I noticed there was a 30% return for long-term in 1995 - what the heck happened? A quick Google search shows FFR 5-6%, 30-yr Treasury ~8%, inflation 2-3%, mortgage rates 8-9%.

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Re: Is it time to go shorter in bonds ?

Post by friar1610 » Sun Sep 02, 2018 10:44 am

Here's my dilemma on this issue...

Following the conventional wisdom, my wife and I have all of our modest Rollover IRAs in a bond fund, VBTLX to be specific. (And as much as I would like to have that allocation augmented by some equities, the overall [taxable vs. tax-defferred] mix we have pretty much means we can't add equities without throwing off our overall asset allocation.) Being in the RMD phase of life, we are facing the prospect of having to withdraw more each year in RMDs as the IRA balances decrease due to interest rate increases. Because our IRAs are modest compared to what some people have, this isn't going to spell financial ruin for us. But it will potentially reduce our IRA balances more rapidly than I would like.
Friar1610

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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sun Sep 02, 2018 11:17 am

jsmoove123 wrote:
Sun Sep 02, 2018 10:26 am
Not to derail the subject at hand, but I noticed there was a 30% return for long-term in 1995 - what the heck happened? A quick Google search shows FFR 5-6%, 30-yr Treasury ~8%, inflation 2-3%, mortgage rates 8-9%.
I noticed that too. Portfolio Visualizer often uses Vanguard funds as proxies for asset classes.

In the case of the long-term treasury, they use VUSTX. For the intermediate they use VFITX.

See their FAQ, https://www.portfoliovisualizer.com/faq

Checking Yahoo Finance, it looks like VUSTX really was up 30% in 1995.

https://finance.yahoo.com/quote/VUSTX/p ... ce?p=VUSTX

Those years were quite a roller coaster ride in bonds !!

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Re: Is it time to go shorter in bonds ?

Post by jsmoove123 » Sun Sep 02, 2018 12:50 pm

Kevin8696 wrote:
Sun Sep 02, 2018 11:17 am

Checking Yahoo Finance, it looks like VUSTX really was up 30% in 1995.

https://finance.yahoo.com/quote/VUSTX/p ... ce?p=VUSTX

Those years were quite a roller coaster ride in bonds !!
Is there a basic explanation on how bond funds correlate with the underlying bond holdings or the stated SEC yield for the fund?
It doesn't seem like there were 30% coupon bonds at that time - so the bulk of the 30% return comes from interest-rate sensitivity?
Seems like a totally different game than someone simply holding individual bonds to maturity, and quite unlike the way a mutual fund would compare to someone holding the individual stocks.

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Re: Is it time to go shorter in bonds ?

Post by honduranhurricane » Sun Sep 02, 2018 1:05 pm

Or into floating rates.

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Re: Is it time to go shorter in bonds ?

Post by munemaker » Sun Sep 02, 2018 1:26 pm

honduranhurricane wrote:
Sun Sep 02, 2018 1:05 pm
Or into floating rates.
Floating rate funds (such as FFHRX) are fine for a percentage of your fixed but I wouldn't bet the farm on them. They are very short term, junk rated debt.

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Re: Is it time to go shorter in bonds ?

Post by Kevin8696 » Sun Sep 02, 2018 1:56 pm

jsmoove123 wrote:
Sun Sep 02, 2018 12:50 pm
Kevin8696 wrote:
Sun Sep 02, 2018 11:17 am

Checking Yahoo Finance, it looks like VUSTX really was up 30% in 1995.

https://finance.yahoo.com/quote/VUSTX/p ... ce?p=VUSTX

Those years were quite a roller coaster ride in bonds !!
Is there a basic explanation on how bond funds correlate with the underlying bond holdings or the stated SEC yield for the fund?
It doesn't seem like there were 30% coupon bonds at that time - so the bulk of the 30% return comes from interest-rate sensitivity?
Seems like a totally different game than someone simply holding individual bonds to maturity, and quite unlike the way a mutual fund would compare to someone holding the individual stocks.
jsmoove123,

Let's break it down... Total Return for a bond fund consists of interest payments plus or minus capital gains and losses. Certainly there were no 30% coupon bonds, so the additional return came in the form of capital gains. Capital gains come from price appreciation, and price appreciation in bonds comes from a drop in market rates/yields.

Bond price movement: The longer the duration of the bond fund, the more the price moves with changes in rates/yields. Duration, the time-weighted term of the cash flows, is currently just under 17 years for VUSTX.

One rule of thumb says that the expected bond price movement for a 1% change in yields can be approximated by multiplying the duration times the expect yield change. So, a 1% increase in the market yield for a 17-yr duration bond or bond fund might result in a 17% drop in price. And the inverse would be true for a 1% drop in market yields, i.e. prices would go up 17%.

With that said, I don't know what the long bond actually did in 1995, but it looks like a 1.5% drop in market yields would go a long way to explaining the 30% total return on the fund that year.

As for SEC yield, Vanguard's site defines it as follows:

"SEC yield
A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield."

So, the SEC yield is a hypothetical figure that assumes no change in the current yield to maturity of the bonds. And since yield to maturity includes both future interest income and unrealized capital gains/losses on each bond, any change in bond prices would affect the SEC yield.

Btw, an investor holding a single bond to maturity does suffer the pains and gains of the marketplace, when yields change and his/her bond rises or falls in value. However, for an individual, this gain or loss would only be realized if the bond is sold prior to maturity. The bond will change in value with changes in market yields, just like every other bond. Mutual funds on the other hand cannot carry assets at cost, they must mark their assets to market.

Hope this helps,
Kevin

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Re: Is it time to go shorter in bonds ?

Post by goblue100 » Sun Sep 02, 2018 2:04 pm

Kevin8696 wrote:
Sun Sep 02, 2018 10:14 am

Rewarded ? Looks like the reward for longer duration included much higher volatility, and correspondingly lower risk adjusted returns.

Check out the Sharpe and Sortino ratios in that PortfolioVisualizer example. Risk adjusted returns went down as term increased.

The max draw-down in these example portfolios went from -1.11% for the short term, to -4.86% for intermediate, to -9.56% for long-term.

It does not look to me like the intermediate and long term investors were adequately compensated for their risk.
Who had more money at the end of the period? Look, everyone is free to do as they please. To me, having more money long term is my goal. I'm doubtful that most people here can outsmart the bond market, but good luck to you. If it is that easy to outsmart the bond market, how come everyone here is not in an active bond fund?
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Is it time to go shorter in bonds ?

Post by jclear » Sun Sep 02, 2018 3:21 pm

Check out the Sharpe and Sortino ratios in that PortfolioVisualizer example. Risk adjusted returns went down as term increased.
These ratios only matter when comparing portfolios that are constrained to be within tight acceptable bounds. If for some reason your only choice of portfolios was all bonds, then you could pick among these portfolios, or a mixture of them. But you wouldn’t automatically go to the portfolio with the highest ratios, you’d go to the one with the best risk/reward combination for you.
Once stocks are in the portfolio, the term advantage becomes very obvious. Highest stock proportion favors longer bonds. With a portfolio constrained to be 80/20 - without even specifying acceptable return/variance bounds - even with today’s flat curve and ecumenical about the direction of interest rates, maximizing ratios means putting all the FI into long Treasurys.

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Re: Is it time to go shorter in bonds ?

Post by nisiprius » Sun Sep 02, 2018 4:22 pm

goblue100 wrote:
Sun Sep 02, 2018 2:04 pm
...Who had more money at the end of the period? Look, everyone is free to do as they please. To me, having more money long term is my goal...
If you are not going to take risk into account, why have bonds at all? Why not 100% stocks? Why not 200% stocks (leveraged?)

If you own bonds at all, it is probably because you do care about risk, in which case you ought to care about risk-adjusted return, not raw return.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is it time to go shorter in bonds ?

Post by goblue100 » Sun Sep 02, 2018 4:38 pm

nisiprius wrote:
Sun Sep 02, 2018 4:22 pm
goblue100 wrote:
Sun Sep 02, 2018 2:04 pm
...Who had more money at the end of the period? Look, everyone is free to do as they please. To me, having more money long term is my goal...
If you are not going to take risk into account, why have bonds at all? Why not 100% stocks? Why not 200% stocks (leveraged?)

If you own bonds at all, it is probably because you do care about risk, in which case you ought to care about risk-adjusted return, not raw return.
Yes, of course for my overall portfolio I am risk conscious as I near retirement. I'm not convinced that everyone in this thread can predict the direction of the bond market, but I may well be wrong.
My best answer is to quote a wise person from earlier in this thread:
That is to say, the short-term bond investor would have foregone almost two-thirds of the gains enjoyed by the intermediate-term investor.

Furthermore, at this point, I personally guess that interest rates probably will go up and--a stronger prediction they will go up far enough, fast enough, for long enough that I am quite likely to see a one-year loss in my intermediate-term bond fund. Nevertheless, I am staying the course because even if it were to fall by 10-15%, which is two or three times as much as it has ever dropped before, I would still be ahead of the short-term bond investor.

In order to do anything else, I would have to believe that
In 2009, nobody could predict what was going to happen to intermediate-term bonds, and yet
in 2018, anybody can predict what is going to happen to intermediate-term bonds.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Is it time to go shorter in bonds ?

Post by venkman » Sun Sep 02, 2018 8:32 pm

Kevin8696 wrote:
Sun Sep 02, 2018 12:33 am
Sorry, I guess I misunderstood where you were coming from. Yes, it is a bit curious that the prices are holding on intermediate bonds, especially after the market got spooked and sold off in 2013. The market still seems to have a strong appetite for yield, even in the face of interest rate risk. Also, I think a lot of the intermediate-term demand may have to do with differing time horizons, and at age 67 mine is shorter than many others. Thanks for your input/thoughts.
Typically, the main reason for a flat yield curve is that investors are expecting an economic downturn, which would likely result in short-term rates dropping significantly. In anticipation, many investors are moving out of short-term bonds (raising ST yields) and moving into intermediate- and long-term bonds (lowering those yields). The logic being that a 2.8% yield for 10 years is worth added duration risk, when the alternative is a 2.4% yield for one year, followed by a much lower yield over the next 9 years.

This doesn't mean investors are correct about an impending downturn, but a flat yield curve doesn't mean the market is being irrational. It's just pricing in an increased likelihood of lower short-term rates in the future. And I agree, part of it is probably also due to investors being starved for yield for so long that they want to lock in the current, somewhat higher rate.

Btw... Are you related to Professor Peter Venkman, who uttered the famous quote... "Back off man, I'm a Scientist !". ??
Not technically related, but definitely username-related. :happy

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Re: Is it time to go shorter in bonds ?

Post by Dead Man Walking » Mon Sep 03, 2018 1:57 am

I have chosen to use short-term bond funds in my portfolio because I have chosen to take risk on the equity side. According to the Vanguard site, I have not achieved the returns that I could have had I invested in either the intermediate or the long-term bond index funds. If I had invested in the intermediate index fund rather than the short-term index fund, I would have seen about $3,500 greater return in the last decade. If I had chosen the long-term index fund, my return would have been about $6,800 greater. These figures are based on the 10 year return for an original investment of $10,000.

VBIRX $12,336; VBILX $15,767; VBLTX $19,104

Equity comparison VTSAX $28,339

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Re: Is it time to go shorter in bonds ?

Post by Call_Me_Op » Mon Sep 03, 2018 6:30 am

venkman wrote:
Fri Aug 31, 2018 10:35 pm
Kevin8696 wrote:
Fri Aug 31, 2018 10:10 am
With the Fed's continuing program of raising short-term rates, the spread between the 2-yr and 10-yr Treasuries has narrowed to just 0.20% compared to a historic spread of about 2.0%. This flat yield curve has analysts saying that investors in intermediate term bond funds (such as Vanguard Total Bond Market Index Fund, VBTLX) are not being adequately compensated for the interest rate risk associated with the 6+ year duration of these funds.
If investors in intermediate bond funds aren't being adequately compensated for the duration risk, doesn't that make you wonder WHY so many investors are staying with intermediate bonds, and not moving to short-term?
Reaching for yield? (Being a Devil's advocate.) :)
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Is it time to go shorter in bonds ?

Post by Northern Flicker » Mon Sep 03, 2018 2:27 pm

So, the SEC yield is a hypothetical figure that assumes no change in the current yield to maturity of the bonds. And since yield to maturity includes both future interest income and unrealized capital gains/losses on each bond, any change in bond prices would affect the SEC yield.
It is not hypothetical. It is a good estimate of current yield of the fund. If rates have been steadily rising (or falling) over the 30-days it will underestimate (or overestimate) the current yield because of the 30-day average, but the reason for the average is that when rates are volatile you don’t use the yield on a day that they spiked for 1 day as an estimate.

The SEC yield is not a guaranteed return, but it is a reasonable estimate of the expected return of the fund if held for a period of time corresponding to its duration. Some will say it slightly underestimates the expected return over the time period.

Generally, you should be focused on your overall portfolio. Nominal bonds are not a good investment for a retiree if that is all they held. They are too exposed to inflation risk. If you are 75% or more allocated to bonds, they should be TIPS.

If you have a larger allocation to stock, the role of having some term exposure with bonds is to better diversify equity risk than is accomplished with cash or short durations. If that equity risk did not materialize over some holding period, that is a win. Cash or shorter term bonds may have performed slightly better, but you don’t get a crystal ball to hold cash when stocks will go up or inflation will accelerate, and longer duration bonds when stocks will go down accompanied with falling rates. If you could do that, you would just be 100% stocks when stocks would go up and 0% when they would go down.

Had interest rates stayed lower, your bond holdings might not have lost 1% but you likely would not have seen robust equity gains either. Moreover, the good economy has led to credit spreads narrowing considerably so that VBILX handily beat intermediate treasuries such as VSIGX over the last 5 years from the credit exposure. I personally would be more worried about credit spreads widening than interest rates taking off like a rocket in terms of risk for VBILX. (If I held VBILX for bond exposure I would probably lock in the credit overperformance and move it to VSIGX right now but that is just me. I’m not recommending that explicitly).

If you have a portfolio where everything is moving in the same direction, you may not be adequately diversified. One of the emotionally difficult things to do when managing a portfolio is to accept that not everything will go up at the same time if you have a diversified portfolio. There is a strong inner drive to try to optimize each individual holding, but that rarely leads to the best long-term performance.
Last edited by Northern Flicker on Mon Sep 03, 2018 7:01 pm, edited 1 time in total.
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Re: Is it time to go shorter in bonds ?

Post by Dead Man Walking » Mon Sep 03, 2018 4:41 pm

jalbert wrote:
Mon Sep 03, 2018 2:27 pm

Generally, you should be focused on your overall portfolio. Nominal bonds are not a good investment for a retiree if that is all they held. They are too exposed to inflation risk. If you are 75% or more allocated to bonds, they should be TIPS.
For a mutual fund investor, should the allocation to TIPS be invested in Inflation-Protected Securities Fund (VIPSX) or Short-term Inflation-Protected Securities Index Fund (VTAPX)?

Since this thread deals with shortening duration risk and SEC yield, the duration and SEC yield of the two funds should probably be listed. The SEC yield of VTAPX is 0.82% and the average duration is 2.8 years; the SEC yield of VIPSX is 0.62% and the average duration is 7.8 years. Another factor which is important to Bogleheads is the expense ratio: the ER for VTAPX is 0.06%, for VIPSX 0.20%.

Given the above information, I'm leaning toward VTAPX.

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Re: Is it time to go shorter in bonds ?

Post by Northern Flicker » Mon Sep 03, 2018 6:54 pm

For a mutual fund investor, should the allocation to TIPS be invested in Inflation-Protected Securities Fund (VIPSX) or Short-term Inflation-Protected Securities Index Fund (VTAPX)?
It depends on what you are trying to accomplish with the investment and what your other holdings would be. If you are trying to diversify inflation risk in a portfolio, VTAPX is likely better. If you are trying to match the assets to your liabilities, the matter is more complex than just selecting one mutual fund.
Risk is not a guarantor of return.

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Re: Is it time to go shorter in bonds ?

Post by Dead Man Walking » Mon Sep 03, 2018 8:56 pm

jalbert wrote:
Mon Sep 03, 2018 6:54 pm
For a mutual fund investor, should the allocation to TIPS be invested in Inflation-Protected Securities Fund (VIPSX) or Short-term Inflation-Protected Securities Index Fund (VTAPX)?
It depends on what you are trying to accomplish with the investment and what your other holdings would be. If you are trying to diversify inflation risk in a portfolio, VTAPX is likely better. If you are trying to match the assets to your liabilities, the matter is more complex than just selecting one mutual fund.
Thanks for responding. My goal is to diversify inflation risk. Another reason that I thought VTAPX may be the better choice is that the average coupon for VTAPX is 0.5% compared to 0.7% for VIPSX. Most of the difference between the higher average coupon for VIPSX is eaten up by its higher expense ratio.

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Re: Is it time to go shorter in bonds ?

Post by Culbretd » Tue Sep 04, 2018 5:34 am

Knowing absolutely nothing about bonds (disclosure) would it not be better for someone in their early 30’s or 20’s to hold long term bonds in their Roth IRA along with their Stocks? We are assuming here that this is an investment that will not be touched for 30 to 40 years. Will the long term bonds not give them the most return at th end of 30 years? We are also under the assumption that they rebalance with new contributions too to keep align with the IPS. I know this would lead to a lot of volatility in the Roth IRA but if one could handle that wouldn’t the greatest return be from long term bonds?

If I’ve missed something please correct my thinking; as it seems that is what pension funds seem to do (going for long term bonds.... correct?). Now once the individual gets closer to retirement they would start to use a glide path on the bond and start to shortened the duration of course but would it not make sense to go long when you are younger?

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Re: Is it time to go shorter in bonds ?

Post by aristotelian » Tue Sep 04, 2018 6:10 am

Culbretd wrote:
Tue Sep 04, 2018 5:34 am
Knowing absolutely nothing about bonds (disclosure) would it not be better for someone in their early 30’s or 20’s to hold long term bonds in their Roth IRA along with their Stocks? We are assuming here that this is an investment that will not be touched for 30 to 40 years. Will the long term bonds not give them the most return at th end of 30 years? We are also under the assumption that they rebalance with new contributions too to keep align with the IPS. I know this would lead to a lot of volatility in the Roth IRA but if one could handle that wouldn’t the greatest return be from long term bonds?

If I’ve missed something please correct my thinking; as it seems that is what pension funds seem to do (going for long term bonds.... correct?). Now once the individual gets closer to retirement they would start to use a glide path on the bond and start to shortened the duration of course but would it not make sense to go long when you are younger?
Arguably yes. Backtesting says that you would outperform a portfolio with intermediate bonds, with lower volatility. The question is, with a long timeframe, why would you be in bonds in the first place? If you are seeking return and have a high risk tolerance, 100% stock would seem to be the ideal approach.

Most people want bonds for stability, so intermediate is the general recommendation.

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Re: Is it time to go shorter in bonds ?

Post by Culbretd » Tue Sep 04, 2018 8:14 am

aristotelian wrote:
Tue Sep 04, 2018 6:10 am
Culbretd wrote:
Tue Sep 04, 2018 5:34 am
Knowing absolutely nothing about bonds (disclosure) would it not be better for someone in their early 30’s or 20’s to hold long term bonds in their Roth IRA along with their Stocks? We are assuming here that this is an investment that will not be touched for 30 to 40 years. Will the long term bonds not give them the most return at th end of 30 years? We are also under the assumption that they rebalance with new contributions too to keep align with the IPS. I know this would lead to a lot of volatility in the Roth IRA but if one could handle that wouldn’t the greatest return be from long term bonds?

If I’ve missed something please correct my thinking; as it seems that is what pension funds seem to do (going for long term bonds.... correct?). Now once the individual gets closer to retirement they would start to use a glide path on the bond and start to shortened the duration of course but would it not make sense to go long when you are younger?
Arguably yes. Backtesting says that you would outperform a portfolio with intermediate bonds, with lower volatility. The question is, with a long timeframe, why would you be in bonds in the first place? If you are seeking return and have a high risk tolerance, 100% stock would seem to be the ideal approach.

Most people want bonds for stability, so intermediate is the general recommendation.
Very valid point. Thank you for pointing that out. Everyday I read this site i learn something new or think about things in a different way.
Last edited by Culbretd on Tue Sep 04, 2018 12:24 pm, edited 1 time in total.

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