Confused by Bonds and interest rates threads

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Almond
Posts: 87
Joined: Wed May 01, 2019 3:11 pm

Confused by Bonds and interest rates threads

Post by Almond » Tue Mar 10, 2020 10:17 am

So I have seen a number of threads pop up about rates go 0 or negative and thinking of moving fixed income to CD’s etc.

Here is my confusion I buy LTT as part of AA to minimize risk of equities. So far when stocks have gone down LTT have gone up thus reducing my potential loss. I have never looked at the interest on LTT.

IF I continue to buy LTT and rates go negative what is the risk? Some say the rate I buy at will be locked in, so not impacted by future negative or 0 rates? Some say if rates go negative fewer buyers as cost you to hold LTT and the share price will decrease?

Be grateful for clarity on how this works and why so many threads with people thinking of ditching bonds for CD’s


Thank you :happy

User avatar
Tyler9000
Posts: 531
Joined: Fri Aug 21, 2015 11:57 am

Re: Confused by Bonds and interest rates threads

Post by Tyler9000 » Tue Mar 10, 2020 10:42 am

Bonds make money in two ways -- interest payments and capital appreciation due to changing market rates. Long term treasuries are particularly sensitive to rate changes, so their capital appreciation (or loss) can easily dwarf the interest payment. And they get more and more volatile the lower rates go, with higher highs and lower lows similar to stock market volatility but often in the opposite direction. That can make them very useful diversifiers, but their value depends somewhat on what else is in your portfolio and how you approach investing.

People who value bonds for stable income relative to stocks may not care for long term treasuries at low rates, as the high volatility is not what they're looking for. For those investors, short term bonds or CDs may make more sense. But people who value how LTTs are capable of completely offsetting stock losses in tough times (like the last few weeks) appreciate their responsive characteristics even more at low rates. I suspect a lot of the mixed signals you read about bonds are simply a result of those two different types of investors talking about the same asset from very different investing perspectives.

For a lot more info on how bonds work, I recommend this: High Profits at Low Rates: The Benefits of Bond Convexity

dbr
Posts: 32906
Joined: Sun Mar 04, 2007 9:50 am

Re: Confused by Bonds and interest rates threads

Post by dbr » Tue Mar 10, 2020 10:57 am

Yep, the above comments underline the difference in approach of those who are looking at what the whole portfolio does and those who are looking at what an individual investment does and wanting to have at least some holding that is "safe." It can be uncomfortable to have everything one owns in a state of flux all the time. I guess a person just has to decide how they look at finance and investing. I personally land on the side of the holistic approach and don't worry too much about having CDs, etc.* For my asset allocation intermediate term bonds seem a good match.

*There is also a reasonable analysis that CDs are appropriate holdings from the point of view of overall portfolio behavior, but that analysis arises from seeing better risk/return possibilities and not from "safety."

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Confused by Bonds and interest rates threads

Post by watchnerd » Tue Mar 10, 2020 11:28 am

Almond wrote:
Tue Mar 10, 2020 10:17 am
So I have seen a number of threads pop up about rates go 0 or negative and thinking of moving fixed income to CD’s etc.

Here is my confusion I buy LTT as part of AA to minimize risk of equities. So far when stocks have gone down LTT have gone up thus reducing my potential loss. I have never looked at the interest on LTT.

IF I continue to buy LTT and rates go negative what is the risk? Some say the rate I buy at will be locked in, so not impacted by future negative or 0 rates? Some say if rates go negative fewer buyers as cost you to hold LTT and the share price will decrease?

Be grateful for clarity on how this works and why so many threads with people thinking of ditching bonds for CD’s


Thank you :happy
Are you asking about LTT bond funds or individual LTTs?

(full disclosure: I have 15% LTT in funds, per signature)
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Confused by Bonds and interest rates threads

Post by watchnerd » Tue Mar 10, 2020 11:31 am

dbr wrote:
Tue Mar 10, 2020 10:57 am
Yep, the above comments underline the difference in approach of those who are looking at what the whole portfolio does and those who are looking at what an individual investment does and wanting to have at least some holding that is "safe." It can be uncomfortable to have everything one owns in a state of flux all the time.
By bond approach (see sig) tries to hit both ends of the volatility spectrum.

LTT == highly volatile, great stock offset, risky, not safe

short TIPS == low volatility, inflation protection, pretty safe

MM / cash == zero volatility, zero correlation to anything, no inflation protection, safe as it gets
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

dbr
Posts: 32906
Joined: Sun Mar 04, 2007 9:50 am

Re: Confused by Bonds and interest rates threads

Post by dbr » Tue Mar 10, 2020 11:55 am

watchnerd wrote:
Tue Mar 10, 2020 11:31 am
dbr wrote:
Tue Mar 10, 2020 10:57 am
Yep, the above comments underline the difference in approach of those who are looking at what the whole portfolio does and those who are looking at what an individual investment does and wanting to have at least some holding that is "safe." It can be uncomfortable to have everything one owns in a state of flux all the time.
By bond approach (see sig) tries to hit both ends of the volatility spectrum.

LTT == highly volatile, great stock offset, risky, not safe

short TIPS == low volatility, inflation protection, pretty safe

MM / cash == zero volatility, zero correlation to anything, no inflation protection, safe as it gets
Why do you care if 15% of a portfolio is "safe"? I admit it would be unsettling if my checking account fluctuated randomly in balance from day to day when I am trying to cover bills due, but beyond that . . .

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Confused by Bonds and interest rates threads

Post by watchnerd » Tue Mar 10, 2020 12:16 pm

dbr wrote:
Tue Mar 10, 2020 11:55 am

Why do you care if 15% of a portfolio is "safe"? I admit it would be unsettling if my checking account fluctuated randomly in balance from day to day when I am trying to cover bills due, but beyond that . . .
Tax optionality for potential early retirement in 2-5 years.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

dbr
Posts: 32906
Joined: Sun Mar 04, 2007 9:50 am

Re: Confused by Bonds and interest rates threads

Post by dbr » Tue Mar 10, 2020 12:25 pm

watchnerd wrote:
Tue Mar 10, 2020 12:16 pm
dbr wrote:
Tue Mar 10, 2020 11:55 am

Why do you care if 15% of a portfolio is "safe"? I admit it would be unsettling if my checking account fluctuated randomly in balance from day to day when I am trying to cover bills due, but beyond that . . .
Tax optionality for potential early retirement in 2-5 years.
Interesting. I am not sure what that means -- is it what to sell when you start withdrawing in retirement?

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Confused by Bonds and interest rates threads

Post by watchnerd » Tue Mar 10, 2020 12:38 pm

dbr wrote:
Tue Mar 10, 2020 12:25 pm

Interesting. I am not sure what that means -- is it what to sell when you start withdrawing in retirement?
Yes.

In additional to the usual short/long cap gains mix, I also have ESPPs.

ESPP cap gains follow the usual 1 year holding period for short v long gains. But to change the disposition qualification, I have to hold for 2 years, else the discount will be imputed as a form of income.

Having a pool of cash and inflation protected assets gives me a buffer such that I don't have to sell things, or don't have to sell as much of them, that will incur higher tax consequences.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

dbr
Posts: 32906
Joined: Sun Mar 04, 2007 9:50 am

Re: Confused by Bonds and interest rates threads

Post by dbr » Tue Mar 10, 2020 12:41 pm

watchnerd wrote:
Tue Mar 10, 2020 12:38 pm
dbr wrote:
Tue Mar 10, 2020 12:25 pm

Interesting. I am not sure what that means -- is it what to sell when you start withdrawing in retirement?
Yes.

In additional to the usual short/long cap gains mix, I also have ESPPs.

ESPP cap gains follow the usual 1 year holding period for short v long gains. But to change the disposition qualification, I have to hold for 2 years, else the discount will be imputed as a form of income.

Having a pool of cash and inflation protected assets gives me a buffer such that I don't have to sell things, or don't have to sell as much of them, that will incur higher tax consequences.
Makes sense. Tax planning is always an exercise in detail.

Topic Author
Almond
Posts: 87
Joined: Wed May 01, 2019 3:11 pm

Re: Confused by Bonds and interest rates threads

Post by Almond » Tue Mar 10, 2020 1:15 pm

watchnerd wrote:
Tue Mar 10, 2020 11:28 am
Almond wrote:
Tue Mar 10, 2020 10:17 am
So I have seen a number of threads pop up about rates go 0 or negative and thinking of moving fixed income to CD’s etc.

Here is my confusion I buy LTT as part of AA to minimize risk of equities. So far when stocks have gone down LTT have gone up thus reducing my potential loss. I have never looked at the interest on LTT.

IF I continue to buy LTT and rates go negative what is the risk? Some say the rate I buy at will be locked in, so not impacted by future negative or 0 rates? Some say if rates go negative fewer buyers as cost you to hold LTT and the share price will decrease?

Be grateful for clarity on how this works and why so many threads with people thinking of ditching bonds for CD’s


Thank you :happy
Are you asking about LTT bond funds or individual LTTs?

(full disclosure: I have 15% LTT in funds, per signature)

Something like TLT

Topic Author
Almond
Posts: 87
Joined: Wed May 01, 2019 3:11 pm

Re: Confused by Bonds and interest rates threads

Post by Almond » Tue Mar 10, 2020 1:17 pm

Tyler9000 wrote:
Tue Mar 10, 2020 10:42 am
Bonds make money in two ways -- interest payments and capital appreciation due to changing market rates. Long term treasuries are particularly sensitive to rate changes, so their capital appreciation (or loss) can easily dwarf the interest payment. And they get more and more volatile the lower rates go, with higher highs and lower lows similar to stock market volatility but often in the opposite direction. That can make them very useful diversifiers, but their value depends somewhat on what else is in your portfolio and how you approach investing.

People who value bonds for stable income relative to stocks may not care for long term treasuries at low rates, as the high volatility is not what they're looking for. For those investors, short term bonds or CDs may make more sense. But people who value how LTTs are capable of completely offsetting stock losses in tough times (like the last few weeks) appreciate their responsive characteristics even more at low rates. I suspect a lot of the mixed signals you read about bonds are simply a result of those two different types of investors talking about the same asset from very different investing perspectives.

For a lot more info on how bonds work, I recommend this: High Profits at Low Rates: The Benefits of Bond Convexity

Thank you. your explanation was really helpful and helped me understand the article you linked👍

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Confused by Bonds and interest rates threads

Post by watchnerd » Tue Mar 10, 2020 2:35 pm

Almond wrote:
Tue Mar 10, 2020 1:15 pm
watchnerd wrote:
Tue Mar 10, 2020 11:28 am
Almond wrote:
Tue Mar 10, 2020 10:17 am
So I have seen a number of threads pop up about rates go 0 or negative and thinking of moving fixed income to CD’s etc.

Here is my confusion I buy LTT as part of AA to minimize risk of equities. So far when stocks have gone down LTT have gone up thus reducing my potential loss. I have never looked at the interest on LTT.

IF I continue to buy LTT and rates go negative what is the risk? Some say the rate I buy at will be locked in, so not impacted by future negative or 0 rates? Some say if rates go negative fewer buyers as cost you to hold LTT and the share price will decrease?

Be grateful for clarity on how this works and why so many threads with people thinking of ditching bonds for CD’s


Thank you :happy
Are you asking about LTT bond funds or individual LTTs?

(full disclosure: I have 15% LTT in funds, per signature)

Something like TLT
Long Treasury funds like TLT, VGLT, etc, will tend to go up in NAV as interest rates decline, and down in NAV as interest rates rise.

The extent to which this happens can be approximated by looking at duration.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Post Reply