Bonds don't seem to hedge against downturns anymore

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K8ya
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Bonds don't seem to hedge against downturns anymore

Post by K8ya »

Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
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Re: Bonds don't seem to hedge against downturns anymore

Post by Tigermoose »

If you hold on to your bonds they will recover their lost value through the increased yield that is the corresponding component of the fall in their price. You have to hold them to maturity, or in the case of a bond fund, to the “duration” of the bond fund.

Stocks have traditionally recovered, but we have no guarantee like we do with bonds.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Taylor Larimore »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
K8ya:

Vanguard Total Bond Market Index Fund gained +5% in "08." No one knows what it will do this year.

Best wishes.
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aaaaaa111111
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Re: Bonds don't seem to hedge against downturns anymore

Post by aaaaaa111111 »

I went from overall 95/5 to 80/20 (from 90/10 to 50/50 in my IRAs, by switching to an earlier target date fund; taxable is 100/0) in late January and, yeah, it hasn't felt great. It's done little to nothing to soften the fall, in fact the bond-heavy accounts have been lower than my all-stock account on almost every day this year. I'm worried that adding bonds has simultaneously failed to mitigate the losses *and* will slow down the eventual recovery, which feels like the worst of both worlds. I'm not going to make any changes since I can't withdraw from the retirement accounts for another 20 years (my objective is to retire ASAP, but that'd be off the taxable) and hopefully they'll have recovered by then, but it has been irritating to see.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Tom_T »

Vanguard Total Bond's total return YTD is currently -11.48%
Vanguard Total Stock Market's total return YTD is currently -23.65%

Not ideal, but if you had all stocks, you obviously would be in much worse shape. And, if priced-in rates stabilize, then TBM's return for the year will gradually improve with every month's income.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Call_Me_Op »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
You are over-generalizing. Bonds provide ballast but more so when stock declines are due to reasons other than rising interest rates. So the correct way to think about it is that bonds provide a hedge against stock declines to varying degrees depending upon the situation.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Elysium »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
They didn't fall in '08. In fact the highest quality US Treasury bonds were up most of the year. LTT had double digit gains, so did ITT. It was a deflationary recession which works well for nominal bonds. Rates will not be rising in deflationary spirals instead they'll go down.

This year is different, we do not have anything in recent history to look back at from our own experience, so people don't get it. But the 70's inflation is the closest. Even then bonds didn't fall as much as they have done this year, mainly because the rates were going up from a higher baseline. This time we are going up from an extreme low point, was almost close to zero. When rates jump up from lower baseline like now, the effect on price decline is more profound, but going forward we should see lesser effect as the rates go up each percentage point up. They are almost above 3% across the board on average across maturities. This should help bonds become a better ballast in the future.

Last six months have been painful for bond investors, no question, but this is a pain we had to have in order to get to a point where they become a more useful tool. Which they are becoming now, although inflation is staying for a while, so it's still not going to be easy.
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Re: Bonds don't seem to hedge against downturns anymore

Post by sls239 »

I suspect you are misunderstanding.

Bonds do not have a negative correlation with stocks, they simply have a low positive correlation. That is they are not expected to go up because stocks went down. They are expected to simply do their own thing.

And that is how diversification works. A negative correlation with stocks would mean that the asset over the long term would lose money. Nobody wants that.

Bonds are what you can invest in that still tends to grow over time, but also is fairly *independent* of stock movement.
Last edited by sls239 on Mon Jun 20, 2022 10:12 am, edited 1 time in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by nedsaid »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
This is a good lesson for all of us. Asset classes, particularly in times of crisis, don't have to behave according to investor expectations. What you have found is that much of the time bonds cushion downturns in stocks but it doesn't happen all of the time. It looks like we are headed towards a 1970's era Stagflation which was not a friendly environment for either stocks or bonds. There are times when even the basic concept of diversification doesn't seem to work. What we are experiencing now isn't permanent, this too will pass. You just have to be patient.
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Re: Bonds don't seem to hedge against downturns anymore

Post by dbr »

It isn't seem. It is fact. Bonds don't go up when stocks go down so that the combination of the two does not have up and down excursions anymore.

The only way I know to get past thinking like that is to have in mind the statistics of return which include the expected mean, the expected likely excursions from the mean in every year, which are huge, the possible correlation or lack of it between stocks and bonds, and the degree to which extremes can materialize. While current conditions are an experience investors would have preferred not materialize no one should invest without understanding that current conditions can easily happen.

As of today the YTD of stocks ranges from -32% for growth stocks to -13% fpr value stocks and the YTD for bonds from -23% for long term corporate to -11% for total bond to -8% for intermediate TIPS to -1% for short TIPS.
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Re: Bonds don't seem to hedge against downturns anymore

Post by deikel »

You need to look at what situation you started off with:

We were in a super low Inflation situation for way too long (below Fed target at the same time quantitative easing made money available for cheap), so bonds were low yield for a long time

Now we drift towards a higher inflation, probably above the Fed target for a while with increasing rates - but existing low yields for long term bonds.

Previous downturns had long term bonds at fairly high yields (for the downturn, but lower for the upturn) and with or without high inflation.

So, it seems reasonable that bonds behave differently now, then they did in other downturns. Despite that, they have reacted 'less bad' then stocks and the higher yields will average is over time - hence the suggestion on this board since years to prepare and shift into short term bonds.

stocks and bonds are not orthogonal investment classes - almost no investment class is truly orthogonal, they are all related to different degrees and hence a mix of the (divesting) is the only way to have some buffer.

Or to phrase it another way, for the last 10 years, bonds were very similar to cash and as such, they lost a lot of their benefit. Once the economy overheats the next time around (this time with high yields/inflation), they become interesting again for the following downturn - right now, they serve little purpose to me.
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Re: Bonds don't seem to hedge against downturns anymore

Post by nisiprius »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
They're not doing it now, I agree.

But they certainly did hold up in 2008. I'm not sure what you're saying about 2008.

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And they held up in 2000.

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And in 2018.

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And in 2020.

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But not in 2022, I agree.
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Re: Bonds don't seem to hedge against downturns anymore

Post by antiqueman »

They haven’t held up because of fast rise in interest rates.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
I think you are misunderstanding the purpose. In 2008, bonds gained value because the Fed slashed the FF rate from 4~5% to 0%. In 2022, the Fed can't do that - if anything, they have to raise the FF rate.

*I'm fully aware the FF rate is not the Ten or any other duration, no need to comment on that point.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

antiqueman wrote: Mon Jun 20, 2022 9:10 pm They haven’t held up because of fast rise in interest rates.
This. We're experiencing a reversal of decades of declining bonds yields. Fed Balance sheet started running off last week. And the Fed seems intent on raising the Fed Funds rate. The last time we saw the run off the balance sheet was 2018.

We're in uncharted waters. No one can know what's going to happen next. If you believe the idea that nobody knows nothing, then making a decision between bonds and equities is really rough right now. We have no clue how this is going to end in the short term.
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Re: Bonds don't seem to hedge against downturns anymore

Post by ApeAttack »

If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.

Edit: My comment was focused on the case of holding bonds to maturity (e.g., a six month bond purchased in Jan and maturing in June would have produced positive nominal value). The resale value of individual bonds certainly has gone down.
Last edited by ApeAttack on Mon Jun 20, 2022 9:44 pm, edited 1 time in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
I thought individual bonds are also down YTD too, if you talk YTD?

Just because they'll be made whole years later doesn't mean they are hunky dory right now.
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Re: Bonds don't seem to hedge against downturns anymore

Post by smectym »

Elysium wrote: Mon Jun 20, 2022 9:59 am
K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
They didn't fall in '08. In fact the highest quality US Treasury bonds were up most of the year. LTT had double digit gains, so did ITT. It was a deflationary recession which works well for nominal bonds. Rates will not be rising in deflationary spirals instead they'll go down.

This year is different, we do not have anything in recent history to look back at from our own experience, so people don't get it. But the 70's inflation is the closest. Even then bonds didn't fall as much as they have done this year, mainly because the rates were going up from a higher baseline. This time we are going up from an extreme low point, was almost close to zero. When rates jump up from lower baseline like now, the effect on price decline is more profound, but going forward we should see lesser effect as the rates go up each percentage point up. They are almost above 3% across the board on average across maturities. This should help bonds become a better ballast in the future.

Last six months have been painful for bond investors, no question, but this is a pain we had to have in order to get to a point where they become a more useful tool. Which they are becoming now, although inflation is staying for a while, so it's still not going to be easy.
A sensible summary. It continues to be impossible to predict the future course of bond prices; but the self-regulating mechanism of lower bond prices = higher bond yields = bonds are more attractive = more bond demand = return to more stable bond prices, while subject to cross-currents and jagged charts, is probably still intact. If you are reinvesting your bond dividends they’re buying more shares at the lower prices and higher dividend yield. I think investors will be surprised at how soon their bond losses start to look less ghastly.

I hope so, anyway. I’ve taken the hit myself.
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Re: Bonds don't seem to hedge against downturns anymore

Post by skeptical »

ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
True, but that is comparing two different things - selling one thing right now, holding the other for some time.

The following is also true:
If you sold your individual bond right now, you would "lose" money as compared to what it was worth at the beginning of the year.
If you priced your individual bond right now it would have a paper loss compared to YTD
If you hold your bond fund for the length of its avg duration, you will have positive nominal growth if rates stabilize right now.
If you hold your individual bond fund, it will produce less income than if you bought a new one right now.

So, if you sell both right now, you will have equivalent losses.
If you hold both for duration, you will have equivalent results (assuming interest rates stabilize right now)

You do not lose money on either if you do not sell either, but both the bond fund and the individual bond are worth less now than they were YTD.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
You've also locked in a lower return as new bonds with higher rates would be paying more. And you probably aren't keeping up with inflation. Basically, bonds have failed as a ballast and failed to keep up with inflation. That's a big deal.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

rockstar wrote: Mon Jun 20, 2022 9:43 pm
ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
You've also locked in a lower return as new bonds with higher rates would be paying more. And you probably aren't keeping up with inflation. Basically, bonds have failed as a ballast and failed to keep up with inflation. That's a big deal.
Bond funds are part of the problem. When investors cluelessly buy them up, the price gets expensive (low yields).
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Re: Bonds don't seem to hedge against downturns anymore

Post by ApeAttack »

rockstar wrote: Mon Jun 20, 2022 9:43 pm
ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
You've also locked in a lower return as new bonds with higher rates would be paying more. And you probably aren't keeping up with inflation. Basically, bonds have failed as a ballast and failed to keep up with inflation. That's a big deal.
OP was focused on bonds losing nominal value, so that's what I addressed.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

Marseille07 wrote: Mon Jun 20, 2022 9:44 pm
rockstar wrote: Mon Jun 20, 2022 9:43 pm
ApeAttack wrote: Mon Jun 20, 2022 9:24 pm If you purchased individual bonds and held them to maturity, your bonds would have produced positive nominal growth. It is bonds funds that lost money YTD.
You've also locked in a lower return as new bonds with higher rates would be paying more. And you probably aren't keeping up with inflation. Basically, bonds have failed as a ballast and failed to keep up with inflation. That's a big deal.
Bond funds are part of the problem. When investors cluelessly buy them up, the price gets expensive (low yields).
They have been told that when equities drop bond funds hold their value. This was mostly true until it wasn't.

This is probably why Buffett keeps his bond portfolio to a duration within a year.
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Re: Bonds don't seem to hedge against downturns anymore

Post by whodidntante »

That sounds awful. Reckon bond funds could fall further if'n yields go up some more?
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

whodidntante wrote: Mon Jun 20, 2022 9:55 pm That sounds awful. Reckon bond funds could fall further if'n yields go up some more?
Bond yields should in theory be higher by the end of the year if the Fed keeps running off its balance sheet. They bought across the entire curve. Of course, if folks sell stocks and buy bonds, that should put some downward pressure on yields.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

rockstar wrote: Mon Jun 20, 2022 9:57 pm
whodidntante wrote: Mon Jun 20, 2022 9:55 pm That sounds awful. Reckon bond funds could fall further if'n yields go up some more?
Bond yields should in theory be higher by the end of the year if the Fed keeps running off its balance sheet. They bought across the entire curve. Of course, if folks sell stocks and buy bonds, that should put some downward pressure on yields.
Yeah that's the thing, the investors can say "I don't care about -5% real, let me buy bonds" then they could do so.

I don't think the yield curve would invert, so they'd be playing with fire at that point.
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Re: Bonds don't seem to hedge against downturns anymore

Post by protagonist »

Tom_T wrote: Mon Jun 20, 2022 8:40 am Vanguard Total Bond's total return YTD is currently -11.48%
Vanguard Total Stock Market's total return YTD is currently -23.65%

Not ideal, but if you had all stocks, you obviously would be in much worse shape. And, if priced-in rates stabilize, then TBM's return for the year will gradually improve with every month's income.
I would think that to be an effective hedge, bonds would have to have a negative correlation with stocks rather than just being less volatile because they are , historically, less risky. If they decline in value and rise in value in tandem, just one more than the other, then they have a positive correlation. If you just want to soften the blow, you could get the same effect just by owning less stock....you don't need bonds.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

protagonist wrote: Mon Jun 20, 2022 10:34 pm
Tom_T wrote: Mon Jun 20, 2022 8:40 am Vanguard Total Bond's total return YTD is currently -11.48%
Vanguard Total Stock Market's total return YTD is currently -23.65%

Not ideal, but if you had all stocks, you obviously would be in much worse shape. And, if priced-in rates stabilize, then TBM's return for the year will gradually improve with every month's income.
I would think that to be an effective hedge, bonds would have to have a negative correlation with stocks rather than just being less volatile because they are , historically, less risky. If they decline in value and rise in value in tandem, just one more than the other, then they have a positive correlation. If you just want to soften the blow, you could get the same effect just by owning less stock....you don't need bonds.
They have zero correlation.

Yes, it would be great if they had negative correlation, but they don't.

They don't have a positive correlation. They don't decline or rise in tandem, so I don't know why you brought that up.

Even with zero correlation, bonds can be an effective hedge, because they work very differently than stocks.

Bond funds self-correct. Yes, rates have gone up, and bond fund values are down... But they will start paying out more, so they will make it back.

There is no self-repair mechanism like that for stocks.

It's not a bad idea to have a bunch of different durations in your fixed income side... Cash (no duration), short-term bonds (they self-correct faster, but pay less), intermediate, and long.

But if you own intermediate or long bonds, then it should be money you don't need for an intermediate time or a long time.
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Re: Bonds don't seem to hedge against downturns anymore

Post by protagonist »

HomerJ wrote: Mon Jun 20, 2022 10:47 pm

They don't have a positive correlation. They don't decline or rise in tandem, so I don't know why you brought that up.

I think you misunderstood my post. I did not say they intrinsically did have a positive correlation, likely a consequence of rapidly rising interest rates and high inflation.
I was addressing Tom_T's post which showed that , at least currently, they are moving in tandem (stocks down, bonds down), and thus are , currently, positively correlated. My point was just that to be an effective hedge the correlation needs to be negative, isn't that correct? Otherwise you will get the same effect merely by owning less stock. What I seem to recall (correct me if I am wrong...I might be...) is that, since the 90s, stock and bond prices have for the most part had a positive correlation. Interest rates have tumbled from historic highs to historic lows over the past 40 years or so .
Why do you assume that bond values will self-correct (in a limited amount of time) if interest rates continue to rise from historic lows? Did they self-correct from the mid-40s through the early 80s when interest rates rose to historic highs?
Last edited by protagonist on Mon Jun 20, 2022 11:46 pm, edited 3 times in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by protagonist »

Tigermoose wrote: Mon Jun 20, 2022 8:07 am If you hold on to your bonds they will recover their lost value through the increased yield that is the corresponding component of the fall in their price.
The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
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Re: Bonds don't seem to hedge against downturns anymore

Post by ApeAttack »

protagonist wrote: Mon Jun 20, 2022 11:22 pm
Tigermoose wrote: Mon Jun 20, 2022 8:07 am If you hold on to your bonds they will recover their lost value through the increased yield that is the corresponding component of the fall in their price.
The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
Sure, but OP was talking about nominal losses.
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Re: Bonds don't seem to hedge against downturns anymore

Post by protagonist »

ApeAttack wrote: Mon Jun 20, 2022 11:26 pm
protagonist wrote: Mon Jun 20, 2022 11:22 pm
Tigermoose wrote: Mon Jun 20, 2022 8:07 am If you hold on to your bonds they will recover their lost value through the increased yield that is the corresponding component of the fall in their price.
The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
Sure, but OP was talking about nominal losses.
Yes, but nominal losses are not important. Real losses are. That is the point I am trying to make.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

protagonist wrote: Mon Jun 20, 2022 11:22 pm The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
This is the bottom line. If one wants bonds, just hold directly till maturity and collect the coupon rate. No free lunch here.

Bond funds *eventually* recover, but this might not happen until after your retirement horizon. Holding directly lets you control the duration.
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Re: Bonds don't seem to hedge against downturns anymore

Post by CuriousTacos »

sls239 wrote: Mon Jun 20, 2022 10:04 am A negative correlation with stocks would mean that the asset over the long term would lose money.
That is incorrect. A negative correlation means that: when one asset is above its own expected return, then the other asset is likely below its own expected return. Both can have a positive expected return, even the same expected return.
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Re: Bonds don't seem to hedge against downturns anymore

Post by CuriousTacos »

protagonist wrote: Mon Jun 20, 2022 11:01 pm My point was just that to be an effective hedge the correlation needs to be negative, isn't that correct? Otherwise you will get the same effect merely by owning less stock.
I suppose it depends on how you define an "effective hedge", but generally speaking, as long as bonds have a correlation w/ stocks of less than 1.0 and a reasonable expected return, then some amount of them will provide a benefit (unless you need to be 100% stocks to achieve your goals). The lower the correlation (and higher the expected return) the better, but 0 isn't some magical threshold.

I suppose if you assume they have an expected return of 0, and you assume cash also has an expected return of 0, then bonds would likely need a negative correlation with stocks in order to be a better diversifier than cash, but I wouldn't assume that bonds have an expected return of 0.
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Re: Bonds don't seem to hedge against downturns anymore per

Post by Parkinglotracer »

One needs to look at current economic conditions with gov buying bonds monthly and interfering with normal capital markets then curtailing
- this economic perversion has caused the fed to rapidly raise rates and set the expectations rates will rise more hence intermediate bonds taking a 10%+ hit this year. Hence nothing normal has happened recently with bonds.

This time is different always applies (this will set some people off) somewhat as each time is a little different. What can we do? We can remain diversified in our stock and fixed income assets - fixed income buy some securities that have less interest rate risk like short term bonds/ bond funds, CDs, myga, g fund, etc.

It’s a crazy mixed up world oh my LOLA …
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Re: Bonds don't seem to hedge against downturns anymore

Post by dcabler »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
They were never guaranteed to do this in the first place. In the very long term they have almost 0 correlation, but that doesn't mean that in the short term they can't move together.

I'm sure that nobody would have complained in 1985 when Total Stock Market was up 33% and Total Bond Market were up 22%
Or in 1986 when Total stock market was up 16% and Total Bond were up 15%
Or in 1989 when Total Stock was up 29% and total Bond were up 14%
Or in 1995 when Total stock was up 36% and total Bond were up 18%
etc.

Source: Simba's Spreadsheet available on this forum.

In other words, if both can move upwards together in a pretty big way, then why is it a stretch of the imagination to believe that they could likewise both move downwards together in a pretty big way?

Cheers
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

Marseille07 wrote: Mon Jun 20, 2022 10:06 pm
rockstar wrote: Mon Jun 20, 2022 9:57 pm
whodidntante wrote: Mon Jun 20, 2022 9:55 pm That sounds awful. Reckon bond funds could fall further if'n yields go up some more?
Bond yields should in theory be higher by the end of the year if the Fed keeps running off its balance sheet. They bought across the entire curve. Of course, if folks sell stocks and buy bonds, that should put some downward pressure on yields.
Yeah that's the thing, the investors can say "I don't care about -5% real, let me buy bonds" then they could do so.

I don't think the yield curve would invert, so they'd be playing with fire at that point.
The Fed bought up the entire curve. If they want to manipulate yields across the curve, they can do so. But it’s really early. We’re less than a week into the burn down of their balance sheet. It’s guess at this point.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Tigermoose »

protagonist wrote: Mon Jun 20, 2022 11:22 pm
Tigermoose wrote: Mon Jun 20, 2022 8:07 am If you hold on to your bonds they will recover their lost value through the increased yield that is the corresponding component of the fall in their price.
The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
That could definitely happen - continued rising rates. Or it might not. Who really can predict?

Anyways, bonds for me are more of a deflationary shock absorber; they are not meant to offset an inflationary environment. I have real estate and commodities for that. I "expect" different assets to perform differently in different economic and political environments.
  • Stocks - great for economic growth periods (prosperity)
  • Treasury Bonds - great for economic recessions and depressions (decline)
  • Real estate, commodities, and real assets - great for inflationary periods like now (fractional reserve banking)
We should not expect bonds to perform well in a high and rising inflationary period.
Institutions matter
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9-5 Suited
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Re: Bonds don't seem to hedge against downturns anymore

Post by 9-5 Suited »

The really, truly important lessons for me are below:

(1) Don't have false expectations about asset class performance based on past correlations. This was the primary structural criticism of portfolios like the HFEA, which were terribly exposed to a negative economic cycle that was driven by inflation/rising rates. Bonds and stocks can move in the same direction, and for longer than you expect, when rate changes align with stock market performance.

(2) Even despite bonds and stocks falling together, bonds still provide ballast to the portfolio by reducing the losses at least YTD. This is not trivial.

(3) Bonds have recovery mechanisms built into the instrument, as maturity draws nearer and/or coupons are re-invested at higher rates, your bonds will recover in due time. This underscores the critical nature of duration matching bonds to liabilities as outlined by user vineviz in his seminal thread on the topic: viewtopic.php?t=287627
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Re: Bonds don't seem to hedge against downturns anymore

Post by WoodSpinner »

Marseille07 wrote: Tue Jun 21, 2022 12:14 am
protagonist wrote: Mon Jun 20, 2022 11:22 pm The crucial piece missing in that equation, is that if the increased yield , combined with the fall in value, does not keep up with inflation you can still wind up with a large real loss though, correct? And interest rates often rise in times of rising inflation, resulting in falling bond values.
That is why many people who want to focus on mitigating risk invest in inflation-protected bonds despite the compromise in yield.
This is the bottom line. If one wants bonds, just hold directly till maturity and collect the coupon rate. No free lunch here.

Bond funds *eventually* recover, but this might not happen until after your retirement horizon. Holding directly lets you control the duration.
While true it’s much more complicated than a bond fund ….

You have to figure out how to reinvest the coupon, manage your target duration and decide if the yield curve suggests an early sale makes sense. Lastly, you really need to understand Credit Risk if you are investing in Munis or Commercial Bonds (as opposed to Treasuries) — you can easily end up with a much riskier bond portfolio than what you were intending.

You still have to ignore the drop in value of your individual bonds and how they affect the overall portfolio.

Personally, this is a conundrum I am facing. My IPS calls for me to invest in Vanguard Intermediate Treasuries but it’s been painful these last 6 months. A trade off between simplicity and interest rate risk….

WoodSpinner
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

9-5 Suited wrote: Tue Jun 21, 2022 11:14 am The really, truly important lessons for me are below:

(1) Don't have false expectations about asset class performance based on past correlations. This was the primary structural criticism of portfolios like the HFEA, which were terribly exposed to a negative economic cycle that was driven by inflation/rising rates. Bonds and stocks can move in the same direction, and for longer than you expect, when rate changes align with stock market performance.

(2) Even despite bonds and stocks falling together, bonds still provide ballast to the portfolio by reducing the losses at least YTD. This is not trivial.

(3) Bonds have recovery mechanisms built into the instrument, as maturity draws nearer and/or coupons are re-invested at higher rates, your bonds will recover in due time. This underscores the critical nature of duration matching bonds to liabilities as outlined by user vineviz in his seminal thread on the topic: viewtopic.php?t=287627
You can’t duration match with bond funds as the duration never declines. It’s fixed.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

HomerJ wrote: Tue Jun 21, 2022 11:43 am
rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.

What If rates go up next year? You are stuck in catch up mode, rather than making money.
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Re: Bonds don't seem to hedge against downturns anymore

Post by arcticpineapplecorp. »

if you torture the data long enough it will tell you whatever you want. So let's look at some data points to give you some benefit of the doubt that total bond did fall in 2008 if that's what you believe. Because it did fall. But not nearly as much as stocks and that's the point, just as it was pointed out bonds have fallen far less than stocks this year too.

if you start at the highest point for total bond in 2008 (not sure why, but we'll start there at 9/8/2008) and look at the low point for total bond in 2008, that would be 11/2/2008 total bond did in fact lose 4.25% (between 9/8/2008-11/2/2008):

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

of course total stock fell 23% during this same time period:

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

Of course if we continue til the end of 2008 we see that total bond (from the arbitrary starting point of 9/8/2008 had recovered by 12/4/2008 and then continued growing to end up 2.55% between 9/8/2008-12/31/2008:

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

total stock on the other hand DID NOT recover by either 12/4/2008 or 12/31/2008 and was down 37.5% between 9/8/2008-12/31/2008:

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

And if we look from the peak of stocks 10/12/2007 you wouldn't have recovered (with dividends reinvested but no new money added) until 2/24/2012:

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

If you look at the entire year 2008 which you cite we see:

Bonds MADE 5.14% in 2008:

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

whereas total stock LOST 37%:

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

Bonds did just fine in 2008, despite the assertion. Yes they fell, but far less than stocks and recovered MUCH faster than stocks did. You can't say total bond didn't help in 2008, not without showing the proof.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

rockstar wrote: Tue Jun 21, 2022 11:48 am
HomerJ wrote: Tue Jun 21, 2022 11:43 am
rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.

What If rates go up next year? You are stuck in catch up mode, rather than making money.
Well, you make a good point, but each time rates go up, the bond fund pays out more and more.

And if they keep going up, at some point, you don't care about the "value" of your bond fund as much, because they will be throwing off enough dividends to fund your withdrawals from dividends alone.

I'd love to see 4%-5% dividends from my bond funds again. Makes the whole "3%-4% withdrawal" plan pretty easy if stocks are throwing off 1.5% and bonds are throwing off 5% in interest every year.
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Re: Bonds don't seem to hedge against downturns anymore

Post by dbr »

rockstar wrote: Tue Jun 21, 2022 11:48 am
HomerJ wrote: Tue Jun 21, 2022 11:43 am
rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.

What If rates go up next year? You are stuck in catch up mode, rather than making money.
In the particular case of interest rates rising at a constant rate the fund will exceed the value it would have had after about twice the duration. If along that path there are also downturns in interest rates then the process occurs faster. In an extreme world where interest rates increase faster than linear without drop backs it would take longer. I'm not sure if there is a mathematical scenario where one never breaks even but it would have to be extreme. For practical purposes interest rate increases do make money for the investor more so than staying stuck with low rates.

Of course there is also an option open to anyone of buying and holding bonds to maturity knowing when one starts what the outcome will be. That known in advance result could be a certain loss of money, but you know when you do it.

As an investor it is pointless to get upset with assets because they don't do what we want. If a person's overall objective is to make a lot of money not every asset is a good choice for that purpose.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

HomerJ wrote: Tue Jun 21, 2022 12:07 pm
rockstar wrote: Tue Jun 21, 2022 11:48 am
HomerJ wrote: Tue Jun 21, 2022 11:43 am
rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.

What If rates go up next year? You are stuck in catch up mode, rather than making money.
Well, you make a good point, but each time rates go up, the bond fund pays out more and more.

And if they keep going up, at some point, you don't care about the "value" of your bond fund as much, because they will be throwing off enough dividends to fund your withdrawals from dividends alone.

I'd love to see 4%-5% dividends from my bond funds again. Makes the whole "3%-4% withdrawal" plan pretty easy if stocks are throwing off 1.5% and bonds are throwing off 5% in interest every year.
The rate goes up, but the dollars collected remains fixed unless the fund is buying and selling bonds. But then you have no idea what you’re going to make.
Last edited by rockstar on Tue Jun 21, 2022 12:23 pm, edited 1 time in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

dbr wrote: Tue Jun 21, 2022 12:15 pm
rockstar wrote: Tue Jun 21, 2022 11:48 am
HomerJ wrote: Tue Jun 21, 2022 11:43 am
rockstar wrote: Tue Jun 21, 2022 11:33 am You can’t duration match with bond funds as the duration never declines. It’s fixed.
Sure you can.

Short-term fund gets back to even faster than an Intermediate fund.

What If rates go up next year? You are stuck in catch up mode, rather than making money.
In the particular case of interest rates rising at a constant rate the fund will exceed the value it would have had after about twice the duration. If along that path there are also downturns in interest rates then the process occurs faster. In an extreme world where interest rates increase faster than linear without drop backs it would take longer. I'm not sure if there is a mathematical scenario where one never breaks even but it would have to be extreme. For practical purposes interest rate increases do make money for the investor more so than staying stuck with low rates.

Of course there is also an option open to anyone of buying and holding bonds to maturity knowing when one starts what the outcome will be. That known in advance result could be a certain loss of money, but you know when you do it.

As an investor it is pointless to get upset with assets because they don't do what we want. If a person's overall objective is to make a lot of money not every asset is a good choice for that purpose.
Every year you’re trying to break even is another year where inflation is dragging down the buying power of your portfolio. The catch with trying to get back to break even is that your position continues to lose you buying power.
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Re: Bonds don't seem to hedge against downturns anymore

Post by 9-5 Suited »

rockstar wrote: Tue Jun 21, 2022 11:33 am
9-5 Suited wrote: Tue Jun 21, 2022 11:14 am The really, truly important lessons for me are below:

(1) Don't have false expectations about asset class performance based on past correlations. This was the primary structural criticism of portfolios like the HFEA, which were terribly exposed to a negative economic cycle that was driven by inflation/rising rates. Bonds and stocks can move in the same direction, and for longer than you expect, when rate changes align with stock market performance.

(2) Even despite bonds and stocks falling together, bonds still provide ballast to the portfolio by reducing the losses at least YTD. This is not trivial.

(3) Bonds have recovery mechanisms built into the instrument, as maturity draws nearer and/or coupons are re-invested at higher rates, your bonds will recover in due time. This underscores the critical nature of duration matching bonds to liabilities as outlined by user vineviz in his seminal thread on the topic: viewtopic.php?t=287627
You can’t duration match with bond funds as the duration never declines. It’s fixed.
Not true at all. You can’t duration match with a single bond fund that targets a static duration. You absolutely can with a mixture of a long and short fund, at least to a reasonable degree of proximity if you value simplicity above true LMP style portfolios.
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