Bill Gross warns about bonds. Are you worried?

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JimmyJammy
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Bill Gross warns about bonds. Are you worried?

Post by JimmyJammy » Tue Feb 03, 2015 1:56 am

Yahoo recently posted this interview with Bill Gross in which he said that bonds are basically safe for 6 to 12 months, but the 10-30 year outlook is bad:

http://finance.yahoo.com/news/bill-gros ... 12765.html

He's not the only one who has been making these kinds of statement about the future of bonds of course, given this low rate environment.

But, has this kind of talk caused anyone on these boards to reconsider the "safety" role that bonds play in their asset allocations?

stlutz
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Re: Bill Gross warns about bonds. Are you worried?

Post by stlutz » Tue Feb 03, 2015 2:04 am

The statement that you probably shouldn't buy long-term bonds has pretty much always been the common wisdom on this board, so nothing new here that requires any action.

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msi
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Re: Bill Gross warns about bonds. Are you worried?

Post by msi » Tue Feb 03, 2015 3:00 am

He wasn't just talking about long-term bonds. That was just an extreme example from earlier in his career that the writer mentioned in the article. It's an interesting interview. The practical, investment-related questions are towards the end https://www.youtube.com/watch?v=iZuXk08f_qI but he's bearish in general.

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Re: Bill Gross warns about bonds. Are you worried?

Post by Caduceus » Tue Feb 03, 2015 4:48 am

It really depends on why you are holding bonds and if you understand the function that they are playing in your portfolio.

If interest rates rise, the current value of your bond or bond funds will fall because all the fixed coupon payments will now be discounted at higher interest rates, but that doesn't mean that you have to sell. It does mean that you can re-invest those coupon payments at better rates, which will raise your actual return above the initial yield-to-maturity if held to maturity. Since long-term bonds have greater duration, you are more exposed in the short-run to capital losses than you will be from the gains on reinvestment.

In any case, Bill Gross isn't really talking to the type of investors who post on Bogleheads, since what he really wants to do is to forecast the short-term direction of interest rates (where you can make a killing in bonds). He has got it wrong so far, but that doesn't mean he won't be right this year, or the next, or the next, or well, you get the point.

I think it is better to ask yourself why you want bonds in the first place. Conventional bonds are not the best hedge against inflation risk, which might be the biggest risk in the long run; but equities are not the best hedge against volatility risk, which might be the biggest risk for a retiree in the very short run.

Personally, I hold very little bonds, but it has only a little to do with my reading of the current environment, and more to do with my long-term written investment plan.

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Re: Bill Gross warns about bonds. Are you worried?

Post by VPP » Tue Feb 03, 2015 6:52 am

Yes, Bill Gross says alot of things and changes course along with the rest of them,not to mention that data does not support his conclusion. Just in 2003 to 2007 as t bills went from 1.0% to 7.9%, 30yr bond total returns were steady. From 78-82, t bills went from 5.2% to 19.2% and 30yr bonds total returns were down a little and then gained 40% in 82. In the other direction, most recently from 08 to present t bills went from 6.7 to nothing and 30 yr had a couple of correction years. So all the theory only works in a static environment when nothing else changes. That's why there are bogleheads.

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Re: Bill Gross warns about bonds. Are you worried?

Post by YDNAL » Tue Feb 03, 2015 7:05 am

JimmyJammy wrote:Yahoo recently posted this interview with Bill Gross in which he said that bonds are basically safe for 6 to 12 months, but the 10-30 year outlook is bad:

http://finance.yahoo.com/news/bill-gros ... 12765.html
Gross is always saying something (or other).
http://www.cbsnews.com/news/will-pimcos ... -in-a-row/

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Re: Bill Gross warns about bonds. Are you worried?

Post by gd » Tue Feb 03, 2015 7:25 am

I stopped caring what he said here:
Gross said, “In the short term, bond investors are safe for six to twelve months, but not for ten to thirty years.”
Gross cites his own losses from 1979-1981 when long term interest rates soared to 15%,
The only people I listen to talking about 10-30 years from now are the ones who say they don't know. Waving around 15% is empty drama that is a strong clue he has nothing substantive to say. Interest rates are really low. They might go up within 30 years. Long bonds would then decline. Bill Gross needs to stoke his name recognition. Yahoo needs some eyeballs. Presto, internet article.

Edit. Have not and will not watch the video, but the rest of the text seems to have not noticed a shift to a services-based economy since the 30s. This is really lightweight stuff.

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Re: Bill Gross warns about bonds. Are you worried?

Post by fortyofforty » Tue Feb 03, 2015 7:36 am

From Vanguard's Brian Scott, Bond investing: Is a bear still out there? https://personal.vanguard.com/us/insigh ... ing-052014
The common definition of a bear market is a decline of 20% or more. If you use that standard, there has never been a bond market environment in any 12-month period of time that conforms to a loss of 20% or more. But when you look at investor behavior, it's fair to say that any period of time where you've realized a negative return, you might call that a bear market for bonds. So we did realize a slightly negative return in 2013. The Barclays U.S. Aggregate Bond Index declined by 2% last year.
I doubt bonds will provide an enormous return going forward, but they have a role in a portfolio.
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obgyn65
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Re: Bill Gross warns about bonds. Are you worried?

Post by obgyn65 » Tue Feb 03, 2015 7:55 am

To the OP - I am quite worried about bonds. I am even more worried about stocks.
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stemikger
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Re: Bill Gross warns about bonds. Are you worried?

Post by stemikger » Tue Feb 03, 2015 8:01 am

I was very concerned when Warren Buffett called bonds dangerous and told the average person to hold enough in cash to feel comfortable and put the rest in the S&P Index. I got out of bonds and went all in the S&P. The results were not that good. I couldn't sleep and was watching what the S&P did on a daily basis. When it went up I was so happy but when it went down I was depressed. I was just like Mr. Market and we all know that is no way to live.

I asked Vanguard this question and they believe that bonds will still do their job as diversifiers. Every asset has their season, so we have to hold our AA and give what the markets are willing to give us.

If you look at Vanguard's Target Retirement Funds, they are all using the Total Bond Market Index and it's very fair to say, Vanguard knows a lot more than me.
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Re: Bill Gross warns about bonds. Are you worried?

Post by nisiprius » Tue Feb 03, 2015 8:06 am

Here is the actual "warning."
(Gross:) Can bond prices go down? [Nods head firmly] They can. Will that happen? Uh, er, that's a possibility? [If this... if that... if the other thing... ] then a bondholder would, uh, would or should be cautious. It's growth dependent, it's central bank dependent.
I am not going change my investments because of that.

Actually my reading is that Gross and the interviewer are laughing because Gross is being obviously evasive. "In the short term, bond investors are safe for six to twelve months, but not for ten to thirty years" seems to me to be a way of not answering the question. He's saying bond investors are safe for 6-12 months, but that you can't tell what will happen over 10-30 years because it is growth dependent and central bank dependent and depends on the macroeconomic "ifs." I don't read him as saying that the outlook for 10-30 years is bad, merely that it is unpredictable.

gd wrote:...Gross cites his own losses from 1979-1981 when long term interest rates soared to 15%...
Couldn't find this. Where does he say it? Point #1: Not sure what "his own losses" were since PIMCO Total Return was not founded until 1987, but never mind. We can't look at Total Bond because it didn't exist then, either. But we can look at a Fidelity bond fund, and when we do that Morningstar also shows us the Barclay's (then Lehman, of course!) Aggregate Index which shows us how Total Bond would have done. 1979-1981 certainly were not good, and if you'd been able to anticipate what happened--which apparently Gross did not, or he would not have had "his own losses"--you could have done better, but it certainly does not look like a crippling disaster for a retirement saver.

About the same as 2008-2009 in corporate bonds, in fact. About a 10% drop, a fairly prompt recovery... marked time for a couple of years, then resumed growth. 1979-1981 in FBNDX, when a bank CD was paying over 10%, would have been worse than annoying, but it wouldn't have ruined a retirement savings program.

I do not see anything about it that would lead me to re-think "bonds are for safety."

Source: Morningstar

Image

Point #2: I remember 1979-1981, and I have the image of a bank CD bankbook paying 13% to prove it. That was the era of double-digit inflation. TIPS didn't exist then, and in a way I think it is remarkable that FBNDX and the Barclay's Aggregate index were affected as little as they were. Anyway, the real issue was inflation, not rising rates. TIPS didn't exist then. They do now.
Last edited by nisiprius on Tue Feb 03, 2015 8:23 am, edited 3 times in total.
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Toons
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Re: Bill Gross warns about bonds. Are you worried?

Post by Toons » Tue Feb 03, 2015 8:12 am

I try to stay in "daytight" mental compartments,,,and control what I can.
Worry about stocks and bonds,,,,that I have no control over,,,,30 years out? :shock:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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telemark
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Re: Bill Gross warns about bonds. Are you worried?

Post by telemark » Tue Feb 03, 2015 8:41 am

JimmyJammy wrote:But, has this kind of talk caused anyone on these boards to reconsider the "safety" role that bonds play in their asset allocations?
Nope. Ignore the noise, and this is particularly noisy noise.

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Re: Bill Gross warns about bonds. Are you worried?

Post by avenger » Tue Feb 03, 2015 8:48 am

Toons wrote:I try to stay in "daytight" mental compartments,,,and control what I can.
Worry about stocks and bonds,,,,that I have no control over,,,,30 years out? :shock:
Sage words.

And I love your signature, Toons!
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Re: Bill Gross warns about bonds. Are you worried?

Post by gd » Tue Feb 03, 2015 9:14 am

nisiprius wrote:
gd wrote:...Gross cites his own losses from 1979-1981 when long term interest rates soared to 15%...
Couldn't find this. Where does he say it?
It was cut and paste from the text, which purported to be a report of the video. If yahoo cannot accurately report their own interviews, doesn't seem like they're worth referencing.

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Re: Bill Gross warns about bonds. Are you worried?

Post by Toons » Tue Feb 03, 2015 9:16 am

avenger wrote:
Toons wrote:I try to stay in "daytight" mental compartments,,,and control what I can.
Worry about stocks and bonds,,,,that I have no control over,,,,30 years out? :shock:
Sage words.

And I love your signature, Toons!
Just tryin to keep it Real,,, :sharebeer
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pennstater2005
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Re: Bill Gross warns about bonds. Are you worried?

Post by pennstater2005 » Tue Feb 03, 2015 9:24 am

Google "Bill Gross wrong predictions". There's more than one of them.


http://lmgtfy.com/?q=Bill+gross+wrong+predictions
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Re: Bill Gross warns about bonds. Are you worried?

Post by flyingaway » Tue Feb 03, 2015 10:01 am

If he retires, he would worry about nothing.

He has different views whenever he comes to be on TV. (Yesterday it was (slow) rising interest will be good for stocks).

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Re: Bill Gross warns about bonds. Are you worried?

Post by nedsaid » Tue Feb 03, 2015 11:15 am

I am keeping my bonds but at less of a percentage than what I would normally consider. I don't view bonds as dangerous but offering less safety than before. Lower rates mean less income as a cushion and also less room for rates to drop. Less of a teeter totter effect as bonds often (though not always) go up when stocks go down.

I suppose someone could make the argument that since low bond yields predict lower economic growth and thus lower stock market returns. Vanguard and Mr. Bogle have warned us that the era of lower returns may be upon us.
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Re: Bill Gross warns about bonds. Are you worried?

Post by abuss368 » Tue Feb 03, 2015 11:31 am

I am staying the course with our bonds which approximate 30% of the portfolio. I plan to keep the allocation at 30% for the time being.

I don't view bonds as dangerous and certainly do not hold them in the same category as stocks. Vanguard are continuing to keep both Total Bond and Total International Bond in the Target and LifeStrategy funds and add TIPS as the funds approach the retirement date.

We have used a very simple bond strategy the last few years and that is Total Bond in tax advantaged and Intermediate Tax Exempt in taxable. This strategy has been very simple and allows us to sleep. These funds just do the job! If I were to consider adding any additional bond funds, it would be perhaps TIPS.

With all due respect to Mr. Gross, I do not get caught up in any predictions and I have really worked on tuning our the noise the few years. Amazing how well this does indeed work.

Best.
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Re: Bill Gross warns about bonds. Are you worried?

Post by thx1138 » Tue Feb 03, 2015 11:33 am

Gross is just noise, like all the other talking heads.

He is perhaps more noisy right now since he is trying to drum up money for his new fund and he got caught juicing the inflows to his fund with his own money. In general when someone is on the way down they get more shrill.

But you know, who knows right? If you believe in "return to the mean" then perhaps Gross is due to be right - he's been wrong an awful lot recently :)

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Re: Bill Gross warns about bonds. Are you worried?

Post by garlandwhizzer » Tue Feb 03, 2015 12:02 pm

The return on bonds is closely related to its yield if held to maturity. Current yields are at or very close to all time lows. What has been inflating bond returns for the last 22 years is ever decreasing interest rates and inflation which means ever increasing principal value of existing bonds. Interest rates on 10 year Treasuries have dropped from about 15% at their peak in the early 80s to about 1.75% now. Quite clearly that can't replay starting now at 1.75%. Bill Gross is correct in my opinion to advocate caution to bond investors about their returns over the next decade or so. They have over the past 3 decades gotten used to very nice returns but those are very unlikely to persist for the next decade. Bonds have two purposes: income and safety. The income part is probably going to be close to zero or slightly positive in real inflation adjusted returns over the next decade. The safety part will still be attractive. Those whose bond holdings are concentrated in long Treasuries could take considerable hits to principal if and when inflation finally starts heating up.

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Re: Bill Gross warns about bonds. Are you worried?

Post by nobsinvestor » Tue Feb 03, 2015 12:36 pm

garlandwhizzer wrote:The return on bonds is closely related to its yield if held to maturity. Current yields are at or very close to all time lows. What has been inflating bond returns for the last 22 years is ever decreasing interest rates and inflation which means ever increasing principal value of existing bonds. Interest rates on 10 year Treasuries have dropped from about 15% at their peak in the early 80s to about 1.75% now. Quite clearly that can't replay starting now at 1.75%. Bill Gross is correct in my opinion to advocate caution to bond investors about their returns over the next decade or so. They have over the past 3 decades gotten used to very nice returns but those are very unlikely to persist for the next decade. Bonds have two purposes: income and safety. The income part is probably going to be close to zero or slightly positive in real inflation adjusted returns over the next decade. The safety part will still be attractive. Those whose bond holdings are concentrated in long Treasuries could take considerable hits to principal if and when inflation finally starts heating up.

Garland Whizzer
Do you believe the total return for investment-grade intermediate-term bond/bond funds will at least keep pace with inflation over say at least the YTM period (say 5-8 years)?

Obviously since the 1980s, those types of bonds have outpaced inflation quite a bit as was noted. But hopefully bonds will still fulfill their role of safety and matching inflation over the YTM period.

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Re: Bill Gross warns about bonds. Are you worried?

Post by abuss368 » Tue Feb 03, 2015 1:03 pm

stemikger wrote:I was very concerned when Warren Buffett called bonds dangerous and told the average person to hold enough in cash to feel comfortable and put the rest in the S&P Index. I got out of bonds and went all in the S&P. The results were not that good. I couldn't sleep and was watching what the S&P did on a daily basis. When it went up I was so happy but when it went down I was depressed. I was just like Mr. Market and we all know that is no way to live.

I asked Vanguard this question and they believe that bonds will still do their job as diversifiers. Every asset has their season, so we have to hold our AA and give what the markets are willing to give us.

If you look at Vanguard's Target Retirement Funds, they are all using the Total Bond Market Index and it's very fair to say, Vanguard knows a lot more than me.
I had a 100% stock portfolio many years ago during our evil stock picking days. I found myself looking at the markets every few minutes. That is not investing!
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Re: Bill Gross warns about bonds. Are you worried?

Post by malabargold » Tue Feb 03, 2015 5:28 pm

well if you own bond FUNDS you owe it to yourself to know what a given increase in
rates will do to your princpal.
Just part of being an informed investor.

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Re: Bill Gross warns about bonds. Are you worried?

Post by skepticalobserver » Tue Feb 03, 2015 6:25 pm

It's fair to say that Bill Gross knows quite a bit about the bond market--but he's just another "guesser" on the direction of interest rates. Mr. Gross' main concern is accumulating funds to manage--for a fee. At this I've no doubt he's an expert.

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Re: Bill Gross warns about bonds. Are you worried?

Post by leonard » Tue Feb 03, 2015 6:29 pm

I tried to find the one that was on point, but here's a few:

1. Ignore the noise. Tune out financial news.
2. Don't try to time the market. Bond or otherwise.
3. Stay the course. Don't change AA on a whim.
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Re: Bill Gross warns about bonds. Are you worried?

Post by Artsdoctor » Tue Feb 03, 2015 6:30 pm

Bill Gross has been warning about bonds for years. He has been so wrong, so opinionated and so full of himself that it has been a very sobering, gratifying experience watching him self-destruct over the past 12 months.

Everybody has been "warning about bonds." And interest rates will definitely go up eventually. We just have no idea when. When they do, he'll probably say, "I told you so," even if it's five years from now.

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Re: Bill Gross warns about bonds. Are you worried?

Post by stemikger » Tue Feb 03, 2015 7:59 pm

abuss368 wrote:
stemikger wrote:I was very concerned when Warren Buffett called bonds dangerous and told the average person to hold enough in cash to feel comfortable and put the rest in the S&P Index. I got out of bonds and went all in the S&P. The results were not that good. I couldn't sleep and was watching what the S&P did on a daily basis. When it went up I was so happy but when it went down I was depressed. I was just like Mr. Market and we all know that is no way to live.

I asked Vanguard this question and they believe that bonds will still do their job as diversifiers. Every asset has their season, so we have to hold our AA and give what the markets are willing to give us.

If you look at Vanguard's Target Retirement Funds, they are all using the Total Bond Market Index and it's very fair to say, Vanguard knows a lot more than me.
I had a 100% stock portfolio many years ago during our evil stock picking days. I found myself looking at the markets every few minutes. That is not investing!
I agree with you Tony! Now that I regained my senses and I'm back to my 65/35 AA, I sleep like a baby. Going forward from here, I will respect my SWAN factor and Stay the Course!
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Re: Bill Gross warns about bonds. Are you worried?

Post by nisiprius » Tue Feb 03, 2015 8:11 pm

Artsdoctor wrote:...And interest rates will definitely go up eventually...
They probably will, I think they will, I expect them to, so does everyone else... but they do not have to. I don't see any logical reason why they couldn't stay low... forever.

More to the point, which people don't seem to get, if interest rates rise slowly enough, nothing much happens.
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Re: Bill Gross warns about bonds. Are you worried?

Post by fortyofforty » Tue Feb 03, 2015 8:26 pm

skepticalobserver wrote:It's fair to say that Bill Gross knows quite a bit about the bond market--but he's just another "guesser" on the direction of interest rates. Mr. Gross' main concern is accumulating funds to manage--for a fee. At this I've no doubt he's an expert.
The only positive in that assessment is that Gross will increase his funds under management--and thereby his personal fees--by providing decent returns that can be touted far and wide. If Gross underperforms repeatedly, out he goes. It's a fickle business. Gross's past performance allows him to demand fees that provide for a comfortable living today, I imagine.
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Re: Bill Gross warns about bonds. Are you worried?

Post by john94549 » Tue Feb 03, 2015 11:16 pm

Fixed-income these days is a tough market. Aside from FDIC- or NCUA-insured CDs (IRA or otherwise), sharks rule. I keep enough in bond funds to re-balance, that's it. With my IRA CDs, I have the edge, and they don't. Bond managers would love to pile into FDIC- or NCUA-insured CDs, but they can't. We can.

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Re: Bill Gross warns about bonds. Are you worried?

Post by avenger » Wed Feb 04, 2015 1:40 pm

Unfortunately you have to be right both about the direction and timing of interest rate changes.
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Re: Bill Gross warns about bonds. Are you worried?

Post by greg24 » Wed Feb 04, 2015 1:50 pm

I've heard bad things about bonds for over 5 years. Some day, those forecasters will be correct. Probably.

I have an asset allocation I am comfortable with, so I'm not worried.

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Re: Bill Gross warns about bonds. Are you worried?

Post by scone » Wed Feb 04, 2015 5:42 pm

I'm not worried about interest rate increases, particularly. The thing that kills bonds is inflation. Except for TIPS, apparently.
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Re: Bill Gross warns about bonds. Are you worried?

Post by Day9 » Wed Feb 04, 2015 5:51 pm

scone wrote:I'm not worried about interest rate increases, particularly. The thing that kills bonds is inflation. Except for TIPS, apparently.
TIPS weren't around during the high inflation period of the 70s so I would say your "apparently" is apt.
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Re: Bill Gross warns about bonds. Are you worried?

Post by Artsdoctor » Thu Feb 05, 2015 10:35 am

nisiprius wrote:
Artsdoctor wrote:...And interest rates will definitely go up eventually...
They probably will, I think they will, I expect them to, so does everyone else... but they do not have to. I don't see any logical reason why they couldn't stay low... forever.

More to the point, which people don't seem to get, if interest rates rise slowly enough, nothing much happens.
They will definitely go up. Whether or not you and I will be alive when they do remains to be seen!

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Re: Bill Gross warns about bonds. Are you worried?

Post by garlandwhizzer » Thu Feb 05, 2015 12:15 pm

nobsinvestor wrote:

Do you believe the total return for investment-grade intermediate-term bond/bond funds will at least keep pace with inflation over say at least the YTM period (say 5-8 years)?
Yes, I do believe they will at least keep pace with inflation. As inflation increases (if and when is still a question) its damage to bond and bond fund principal value will be offset after a time lag by rising yields. Variables that influence how long that time lag is include the rate of acceleration of inflation and the duration of bond holdings. Personally I believe that the intermediate duration currently gives a good yield versus safety tradeoff although some prefer a barbell approach which includes both long term bonds (for yield) and short term bonds (for principal stability).

Garland Whizzer

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Re: Bill Gross warns about bonds. Are you worried?

Post by nisiprius » Fri Feb 06, 2015 1:17 pm

nisiprius wrote:
Artsdoctor wrote:...And interest rates will definitely go up eventually...
They probably will, I think they will, I expect them to, so does everyone else... but they do not have to. I don't see any logical reason why they couldn't stay low... forever.
Along these lines, this article has some charts that make the point that even if they don't stay low forever, they could stay low for thirty or forty years--they've done it before and they could do it again:

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And in Japan:

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Meanwhile, several of Europe’s central banks have cut key interest rates below zero.
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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