Bond Market - Historical Worst Case ... When? What?

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elgaeb051
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Bond Market - Historical Worst Case ... When? What?

Post by elgaeb051 » Mon May 23, 2011 11:01 am

Anyone know the answers to these two questions? And/or can point me to resources. I tried to search it out but am running into some difficulties.

- When was the greatest yearly decrease in the bond market?

- What was the percentage decrease?

The reason I am asking is because I want to look at the historical worst case scenario.

- E

e5116
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Re: Bond Market - Historical Worst Case ... When? What?

Post by e5116 » Mon May 23, 2011 11:06 am

elgaeb051 wrote:Anyone know the answers to these two questions? And/or can point me to resources. I tried to search it out but am running into some difficulties.

- When was the greatest yearly decrease in the bond market?

- What was the percentage decrease?

The reason I am asking is because I want to look at the historical worst case scenario.

- E
According to Vanguard:

Historic risk/return (1926–2010)
Average return 5.5%
Best year 32.6% (1982)
Worst year –8.1% (1969)
Years with a loss 13 of 85 (15.3%)

https://personal.vanguard.com/us/insigh ... llocations
For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975 and the Barclays U.S. Aggregate Bond Index thereafter.

Valuethinker
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Re: Bond Market - Historical Worst Case ... When? What?

Post by Valuethinker » Mon May 23, 2011 11:14 am

elgaeb051 wrote:Anyone know the answers to these two questions? And/or can point me to resources. I tried to search it out but am running into some difficulties.

- When was the greatest yearly decrease in the bond market?

- What was the percentage decrease?

The reason I am asking is because I want to look at the historical worst case scenario.

- E
Do look at 1994. It was the year the Fed slammed on the brakes and caught the bond market completely off guard as the Fed tried to 'get ahead of the curve'.

From memory, US 30 year dropped -20%.

The actual bear market began in 1993 from memory and ended around Q3 1994 so you really need monthly or better data.

Remember bonds yield c. 4% less now so they will both be:

- more sensitive to interest rate changes
- giving lower total returns pa

I like 1994 because inflation was relatively low, it did not in fact accelerate as the Fed feared, and the conditions of 1993 were of euphoria after a long period of very low, near zero, US interest rates. All conditions that could be duplicated now.

it was also a horrible year and within current investors' memory of bond markets.

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Taylor Larimore
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Vanguard Total Bond Market Index Fund

Post by Taylor Larimore » Mon May 23, 2011 11:18 am

Hi E:
When was the greatest yearly decrease in the bond market?
Vanguard's Total Bond Market Index Fund inception date was 12-11-86. It's worst annual loss was -2.66% in 1994. It gained +16.0% in 1995.

Past returns do not guarantee future returns.
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Sheepdog
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Post by Sheepdog » Mon May 23, 2011 11:28 am

Valuethinker,
1994 was down, but 1995 recovered that loss and gained more. Here is the history in that period.....up and down.

Vanguard Long Term Treasury dropped -7.0% in 1994; gained 30.1% in 1995; lost -1.3% in 1996; gained 13.9% in 1997; gained 13.1% in 1998 and lost -8.7% in 1999.
Jim
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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Post by nisiprius » Mon May 23, 2011 11:28 am

1) The really salient datum is not single-year losses, but the slow grinding losses of 1940-1981.

2) Oddly enough, I don't have your answer but just for laughs I looked at the worst single-day losses some time ago. Haven't posted this before because I'm worried about accuracy and because the periods don't match. This is price data on the Vanguard Total Bond and Total Stock Market mutual funds, which I take as high-fidelity reproductions of their respective indices, from Yahoo Finance. And, subject to fact-checking, it looks as if--defining "single-day loss" as "close to close, sometimes meaning a weekend, adjusted for dividends, according to Yahoo Finance"--

--the worst single-day loss for Total Bond from 1990 to 2011 was -1.59% on 4/4/1994

--the worst single-day loss for Total Stock from 1996 to 2011 was -9.19% on 11/28 to 12/1/2008.

I'm a little worried about that though because I don't think there was a 9% drop on a single day even in 2008. Still, here's what Yahoo shows and it's a 9.19% drop from 20.56 to 18.67.

Image
Last edited by nisiprius on Mon May 23, 2011 1:11 pm, edited 1 time in total.
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Munir
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Post by Munir » Mon May 23, 2011 12:05 pm

nisiprius wrote:1) The really salient datum is not single-year losses, but the slow grinding losses of 1940-1981.

2) Oddly enough, I don't have your answer but just for laughs I looked at the worst single-day losses some time ago. Haven't posted this before because I'm worried about accuracy and because the periods don't match. This is price data on the Vanguard Total Bond and Total Stock Market mutual funds, which I take as high-fidelity reproductions of their respective indices, from Yahoo Finance. And, subject to fact-checking, it looks as if--defining "single-day loss" as "close to close, sometimes meaning a weekend, adjusted for dividends, according to Yahoo Finance"--

--the worst single-day loss for Total Bond from 1990 to 2011 was -1.59% on 4/4/1994

--the worst single-day loss for Total Stock from 1996 to 2011 was -9.19% on 10/28 to 12/1/2008.

I'm a little worried about that though because I don't think there was a 9% drop on a single day even in 2008. Still, here's what Yahoo shows and it's a 9.19% drop from 20.56 to 18.67.

Image
Nisi,

You mean 11/28-12/1/2008 for TSM, don't you?

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Post by matt » Mon May 23, 2011 12:43 pm

nisiprius wrote: I'm a little worried about that though because I don't think there was a 9% drop on a single day even in 2008.
Oh, it happened all right. There was a couple days where the market was down over 8% and a couple days when it was up over 8%. We probably won't see anything that fun again for a while.

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Post by dnaumov » Mon May 23, 2011 12:57 pm

People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf

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nisiprius
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Post by nisiprius » Mon May 23, 2011 1:12 pm

Munir wrote:Nisi,

You mean 11/28-12/1/2008 for TSM, don't you?
:oops: Yeah.
dnaumov wrote:People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf
I don't think I did that. My first point was that the salient period was not single months, but 1940-1981, which I described it as "slow grinding losses." Not very sugary.

Note, too, that as William J. Bernstein describes in only two centuries, from 1801 to 1900, bonds earned an average real return of 5.23% versus 6.76% for stocks.
Last edited by nisiprius on Mon May 23, 2011 1:21 pm, edited 3 times in total.
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Post by fishnskiguy » Mon May 23, 2011 1:13 pm

How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

And you know what? Nobody would touch them with a ten foot pole.

Chris
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Post by nisiprius » Mon May 23, 2011 1:21 pm

fishnskiguy wrote:How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

And you know what? Nobody would touch them with a ten foot pole.

Chris
So, what's the rest of the story? What ultimately happened to those bonds? Thirty years from 1981 is now, did bondholders somehow get stiffed during the breakup, or did their bonds just mature and pay the face value, or what?
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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Post by dnaumov » Mon May 23, 2011 1:25 pm

nisiprius wrote:
dnaumov wrote:People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf
I don't think I did that. My first point was that the salient period was not single months, but 1940-1981, which I described it as "slow grinding losses." Not very sugary.

Note, too, that as William J. Bernstein describes in only two centuries, from 1801 to 1900, bonds earned an average real return of 5.23% versus 6.76% for stocks.
You didn't, but a lot of people on this forum seem to like sugarcoating bond history and pointing that "bond massacres" are all very minor (in comparison to stocks) and that they nearly always quickly rebound back to where they were, while the reality is definately not that.

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Post by fishnskiguy » Mon May 23, 2011 2:00 pm

nisiprius wrote:
fishnskiguy wrote:How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

And you know what? Nobody would touch them with a ten foot pole.

Chris
So, what's the rest of the story? What ultimately happened to those bonds? Thirty years from 1981 is now, did bondholders somehow get stiffed during the breakup, or did their bonds just mature and pay the face value, or what?
It was 20 years from 1981 or 2001. I believe they were called at par before the breakup, but I'm not sure. I quit looking at individual bonds with the proliferation of bond funds in the mid 1980's.

Chris
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Post by bluemarlin08 » Mon May 23, 2011 5:30 pm

I bought those bonds in 81 on margin with proceeds from the sale of a business interest. Lost the entire investment with margin calls coming every day. Novice learns hard lesson.

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Post by Johm221122 » Tue May 24, 2011 9:12 am

If your worried about worst case by bond(treasury direct)cd or Ibond

elgaeb051
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Post by elgaeb051 » Tue May 24, 2011 2:43 pm

Thank you all for your responses!

I wanted the info as I was looking for worst case scenarios to bounce against possible asset allocation numbers.

- E

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Post by Stonebr » Tue May 24, 2011 2:54 pm

Worst case is not captured in one year returns. Worst case might be the decade that ended in summer 1982, total returns adjusted for inflation. That kind of long term decline will destroy wealth a lot more thoroughly than any one year drop.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

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Post by Opponent Process » Tue May 24, 2011 3:04 pm

elgaeb051 wrote:Thank you all for your responses!

I wanted the info as I was looking for worst case scenarios to bounce against possible asset allocation numbers.

- E
did you find anything on this thread to be actionable?
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37

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Post by Zigster » Tue May 24, 2011 3:07 pm

Stonebr's point is correct and may be a timely concern now given what seems (to me) like the reemergence of 1970's-like Stagflation when bond returns were significantly less than government-reported inflation (CPI-U) in 1973, 1974, 1977, 1978, 1979 and 1980. Result was that $1,000 of bonds in 1972 was only worth $719 in 1980 (in constant, 1972 $) even though nominal value was about $1,600 (in 1980 $).

Of course, what the future holds in very cloudy. But Stonebr's point about multi-year impacts is where OP may want to focus.

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