FED Raises Rates - Sky Falls! Bond Prices are UP!

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Grt2bOutdoors
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FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Grt2bOutdoors » Wed Dec 14, 2016 3:08 pm

Should I sell my bonds? Should I sell my equities? Should I buy more bonds? Should I buy more equities? Better yet, should I pile into commodities? Should I not care? :)
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by financial.freedom » Wed Dec 14, 2016 3:14 pm

What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by kenner » Wed Dec 14, 2016 3:15 pm

Grt2bOutdoors wrote:Should I sell my bonds? Should I sell my equities? Should I buy more bonds? Should I buy more equities? Better yet, should I pile into commodities? Should I not care? :)


Yes; you should not care, assuming you have a risk-appropriate long-term investment portfolio.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by TravelGeek » Wed Dec 14, 2016 3:17 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


But is that the only factor influencing the market today?

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by McGilicutty » Wed Dec 14, 2016 3:27 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


It's that old maxim: "buy the rumour, sell the news". Plus, the Fed went from projecting 2 rate hikes next year to 3.

By the way, bond prices are down now. The bond bubble has definitely been pricked.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by financial.freedom » Wed Dec 14, 2016 3:28 pm

TravelGeek wrote:
financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


But is that the only factor influencing the market today?


No, but isn't it the main factor cited today?

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by financial.freedom » Wed Dec 14, 2016 3:29 pm

McGilicutty wrote:
financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


It's that old maxim: "buy the rumour, sell the news". Plus, the Fed went from projecting 2 rate hikes next year to 3.

By the way, bond prices are down now. The bond bubble has definitely been pricked.


Yes, that's what I was thinking. The 3 rate hikes was perhaps not priced in, or the amount of the hikes.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by nedsaid » Wed Dec 14, 2016 3:31 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


Funny how that works. There is an old saying, "Buy on the rumor, sell on the news." That might be what is happening today. Give it a few days, the markets will get over this, and you will hardly know that anything had happened.

It is really weird because the Federal Reserve has done everything but place full page ads and hire skywriters to tell us they were going to do this. This was the worst kept secret in Washington D.C. and yet the markets are acting surprised! This is what I mean that markets are not always rational.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Quark » Wed Dec 14, 2016 3:43 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.

The market prices in its judgement about what will happen in the future. The market's expectations may or may not turn out to be correct. If there's new information, the market adjusts. You can do better than the market if you're better about predicting the future. Few if any are able to do this consistently.

Today's movement appeared to be about more than just the rate increase. The market appears to have expected two increases in 2017 (based on prior Fed statements), but today's Fed announcement suggests three. That's a significant difference. A more hawkish Fed, as evidenced by its 2017 expectations and Yellen's press conference, is news that apparently was not priced in.

A very significant part of the Fed's influence depends on the market's expectations of what the Fed wants and will do. In other words, the market moves based on what it thinks will happen. Today's event have changed that view.

Of course markets don't think, but anthropomorphism is an easy aid to understanding what's going on.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by best2u » Wed Dec 14, 2016 3:55 pm

Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by jalbert » Wed Dec 14, 2016 4:13 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.

Priced in is a probabilistic statement, and reflects that currently known information is priced in. The Fed statement that accompanied the increase included a change of language with new information to be priced in. It is possible that the market was pricing in the change from the Fed projecting 2 more increases in 2017 to projecting 3 more increases in 2017.

But having information fully priced in today is never a deterministic prediction of future changes.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by steadyeddy » Wed Dec 14, 2016 4:16 pm

financial.freedom wrote:
TravelGeek wrote:
financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


But is that the only factor influencing the market today?


No, but isn't it the main factor cited today?


The market does have all available information priced in, but it still moves every day. Are you saying the market should not trade up or down unless it is surprised about something? Less than 1% movement today seems to me like a confirmation that the rate increase was baked in. A 5% decline would have indicated surprise.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Levett » Wed Dec 14, 2016 4:38 pm

Pick your behavioral bias.

Just watch the headlines. :wink:

Lev

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Phineas J. Whoopee » Wed Dec 14, 2016 4:40 pm

With respect to today's stock market changes, and I looked up an S&P 500 chart which showed a spike in the few minutes after the as-scheduled Fed announcement, then a drop which persisted until close, two things:

1) It is not at all unusual for the immediate aftermath of new information to see a change in one direction, followed by a slightly-more-reasoned change the other way - simplifying assumptions are one thing, and traders trying to get in ahead of each other to exploit very short-term opportunities are another; and

2) Nobody knows nothin'.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Doc » Wed Dec 14, 2016 5:23 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.

The yield on the five jumped some 5 bps on the news and another 4 or so for the rest of the session. That's almost 0.5% in the price. "[T]he market has things priced in." Not so much in my opinion.

Chart:
http://finance.yahoo.com/chart/%5EFVX#e ... IjFkIn0%3D
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by KyleAAA » Wed Dec 14, 2016 5:47 pm

The Fed was widely expected to raise rates today but the mention of potentially raising rates 3 times next year was not widely predicted. But even if the information were priced in, there's always a probability it won't happen so you would expect that to be baked in as well. So once the probable becomes definite you'd still expect the market to move somewhat.

That said, there are a billion other things happening today that have nothing to do with the Fed that also impact market levels. It's impossible to tease out what what's due to the Fed announcement and what's due to the billions of other factors.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Rager1 » Wed Dec 14, 2016 8:13 pm

Nobody knows nothing.

Ed

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Grt2bOutdoors » Wed Dec 14, 2016 8:41 pm

Rager1 wrote:Nobody knows nothing.

Ed


+1 You can say that again.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by MEA » Thu Dec 15, 2016 10:43 am

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.



Yes the Fed has been telegraphing a quarter point rate hike but they also insist that they are data dependent. The Fed has access to data that the market doesn't have access to. It is impossible for the market to price in information that it doesn't have access to. Until it does.
It is speculators speculating on other speculators speculations. It is a tale told by an idiot, full of sound and fury signifying nothing.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by swguy » Thu Dec 15, 2016 8:55 pm

So this "pricing in" of the Feds news pushed equities higher, including Financials. Apparently the elation was muted, so gains were less substantial than yesterday's. Bonds tanked, ~.5%. Just another day in the market.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Dottie57 » Thu Dec 15, 2016 9:17 pm

best2u wrote:Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

It certainly hurt my parents retirement.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by jalbert » Tue Jan 17, 2017 3:11 pm

financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


As of latest market close, vsigx (intermediate treasuries) is up 13 bp since Dec 9, the day of the Fed action. Short-term volatility aside, it looks like the market did have the Fed rate increase priced in quite well.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by livesoft » Tue Jan 17, 2017 3:15 pm

jalbert wrote:
financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


As of latest market close, vsigx (intermediate treasuries) is up 13 bp since Dec 9, the day of the Fed action. Short-term volatility aside, it looks like the market did have the Fed rate increase priced in quite well.

But Vanguard Total Bond Index is up 1.5% since the closing low on 12/16/2017. Intraday lows of BND that week were a nice rebalancing opportunity.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Doc » Wed Jan 18, 2017 8:13 am

jalbert wrote:
financial.freedom wrote:What's interesting to me is that folks on this forum state the market has things "priced in." It seemed the rate increase would have been priced in yesterday, yet markets are down today.


As of latest market close, vsigx (intermediate treasuries) is up 13 bp since Dec 9, the day of the Fed action. Short-term volatility aside, it looks like the market did have the Fed rate increase priced in quite well.

See "Why did my fund drop so much in value?" Year end cap gains distribution? A better indicator of the priced in effect might be the yield on the five year T-notes.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by z3r0c00l » Wed Jan 18, 2017 8:24 am

Dottie57 wrote:
best2u wrote:Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

It certainly hurt my parents retirement.


It would be interesting to see numbers on this one. People are looking at the nominal interest rate and not considering the real interest rate after inflation. Inflation has been low for years now. 5 year CDs typically just beat inflation before taxes, sometimes doing less and sometimes more when inflation drops out like in 2009. Interest rates will probably go up, but so will inflation. Has the spread between the two really changed that much?

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by jalbert » Wed Jan 18, 2017 2:49 pm

See "Why did my fund drop so much in value?" Year end cap gains distribution? A better indicator of the priced in effect might be the yield on the five year T-notes.

I was using total return from Dec 9 open to Jan 13 close, not share price changes. That is as good of an indication as any that the fed action was mostly priced in. There is no single perfectly accurate measure of information having been priced in because information publicized since the announcement is also now priced in. The performance livesoft quoted is likely from Dec 10 or 11 to Jan 17.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by onthecusp » Wed Jan 18, 2017 2:59 pm

Dottie57 wrote:
best2u wrote:Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

It certainly hurt my parents retirement.


In what way? I would certainly like to learn from the past even if it is not perfectly predictive of the future.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Dottie57 » Wed Jan 18, 2017 3:30 pm

onthecusp wrote:
Dottie57 wrote:
best2u wrote:Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

It certainly hurt my parents retirement.


In what way? I would certainly like to learn from the past even if it is not perfectly predictive of the future.


My dad was not a knowledgable investor and was afraid of stocks. He felt they were too volatile/risky.

So all Retirement money is in individual bonds. Of course the really well paying bonds that paid enough for my parents to live on have gone away. So now bonds have to be sold and the bonds are dwindling.

Later in life my dad was diagnosed with Alzheimer's. I was really afraid all of the money would go to a memory care facility and my mom left with only SS. The selling of bonds has really scared my mom too. She comes from a line of long lived people and could live to 100.

This is all to say that the suppression of interest has indeed hurt people like my parents.

I think mom will need to move into assisted living in the next year. If she sells the house, I hope to persuade her to purchase an SPIA with the proceeds to boost her income. We'll see how that goes.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Doc » Wed Jan 18, 2017 6:02 pm

jalbert wrote:
See "Why did my fund drop so much in value?" Year end cap gains distribution? A better indicator of the priced in effect might be the yield on the five year T-notes.

I was using total return from Dec 9 open to Jan 13 close, not share price changes. That is as good of an indication as any that the fed action was mostly priced in. There is no single perfectly accurate measure of information having been priced in because information publicized since the announcement is also now priced in. The performance livesoft quoted is likely from Dec 10 or 11 to Jan 17.


I figured that is what you did. But the ^FVX (Yahoo's "ticker") is really interesting. The yield jumped just prior to the election and jumped again shortly before the FOMC announcement and then went back down some around Christmas. But the changes came before either event so I would say the yield increase was baked in but like a souffle sometimes it collapses. :D

(I like the ^FVX and the ^TNX charts so much that I have them as a widget on our TV.) :mrgreen:
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by best2u » Sat Jan 21, 2017 11:57 am

onthecusp wrote:
Dottie57 wrote:
best2u wrote:Maybe some sanity will come back to interest rates. Money should have a cost similar to everything else that is worth having. The free ride for borrowers and blatant disrespect for savers does not equate to economic prosperity. It causes the dislocation of capital and adds unwarranted risk to the economy. JMO

It certainly hurt my parents retirement.


In what way? I would certainly like to learn from the past even if it is not perfectly predictive of the future.[/quote]

If your query was to me I will give you an example of dislocation of capital. When interest rates become too cheap the farm economy will over spend on many of their inputs. They will bid up the price for land, fertilizer, machinery beyond the useful utility of the item. The operators that use cash on hand for these purchases will be OK. They will just quit spending when their ready cash is used up. Farming is a capital intensive endeavor. Many operators will use debt to flow some of their purchases. As interest rates return to normal levels, operations become unprofitable because of the increased cost of debt service. (Remember they purchased at higher prices than warranted and penciled these purchases at less than normal cost of money.) Then some of the operations become insolvent. The liquidation of these assets has many negative ripples through the industry and affects related industries like farm suppliers and ag banks. In the 1980's the federal government used tax payer funds to return stability to the agriculture industry. Consumers paid not only in tax dollars but higher cost of food as a result. This is over simplified but it is an example of what happens.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by onthecusp » Tue May 30, 2017 4:13 pm

I know this thread got kind of old, but I realized I lost track of it and wanted to thank Dottie57 and best2u for their answers to my short question.

The large scale economic consequences of low interest rates that best2u describes are interesting and affect many people. Many individuals making similar decisions around one data point has tremendous power.
best2u wrote: If your query was to me I will give you an example of dislocation of capital. When interest rates become too cheap the farm economy will over spend on many of their inputs. They will bid up the price for land, fertilizer, machinery beyond the useful utility of the item. The operators that use cash on hand for these purchases will be OK. They will just quit spending when their ready cash is used up. Farming is a capital intensive endeavor. Many operators will use debt to flow some of their purchases. As interest rates return to normal levels, operations become unprofitable because of the increased cost of debt service. (Remember they purchased at higher prices than warranted and penciled these purchases at less than normal cost of money.) Then some of the operations become insolvent. The liquidation of these assets has many negative ripples through the industry and affects related industries like farm suppliers and ag banks. In the 1980's the federal government used tax payer funds to return stability to the agriculture industry. Consumers paid not only in tax dollars but higher cost of food as a result. This is over simplified but it is an example of what happens.
I used to think of these things as simply cyclical but with the complex interactions throughout the economy there is nothing simple about it. Thanks for the example.


I was thinking about my own unfolding retirements vs. Dottie57's parents when I asked the question. I am increasing the Bond part of my AA here in the last year or two before retirement.

That is a truly unfortunate result for your parents and would have been easy to fall into when rates were high and there was no Bogleheads group out there to consult with.
Dottie57 wrote:My dad was not a knowledgable investor and was afraid of stocks. He felt they were too volatile/risky.

So all Retirement money is in individual bonds. Of course the really well paying bonds that paid enough for my parents to live on have gone away. So now bonds have to be sold and the bonds are dwindling.

Later in life my dad was diagnosed with Alzheimer's. I was really afraid all of the money would go to a memory care facility and my mom left with only SS. The selling of bonds has really scared my mom too. She comes from a line of long lived people and could live to 100.

This is all to say that the suppression of interest has indeed hurt people like my parents.

I think mom will need to move into assisted living in the next year. If she sells the house, I hope to persuade her to purchase an SPIA with the proceeds to boost her income. We'll see how that goes.
I appreciate the perspective and chance to learn.


So, the Fed is meeting again in mid-June, prospects for 2 more rate hikes this year. I'm increasing bonds.
Where / when to invest this month's 401k contribution? Retirement about 2 years off.

1. Right now in my usual mix of short and medium bond fund? (Stick to the Plan)
2. Now but just in short term and diversify later?
3. Hold off till after the meeting?

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by Grt2bOutdoors » Tue May 30, 2017 5:02 pm

Stick to your plan.
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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by onthecusp » Tue May 30, 2017 6:07 pm

Grt2bOutdoors wrote:Should I sell my bonds? Should I sell my equities? Should I buy more bonds? Should I buy more equities? Better yet, should I pile into commodities? Should I not care? :)
I shall stay the (circular) course! :sharebeer
Last edited by onthecusp on Tue May 30, 2017 7:32 pm, edited 1 time in total.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by nisiprius » Tue May 30, 2017 6:22 pm

This thread started on December 14th, 2016. That's a very short time ago. Intermediate-term bond funds can and have lost money over six-month periods. Nevertheless... since the thread started...
  • My Total Bond fund (VBTLX, blue) made money.
  • My TIPS fund (VIPSX, orange) made money.
  • People in PIMCO Total Return (PTTRX, green), the actively managed bond fund that people fled when star manager Bill Gross left, made money.
  • People in the freewheeling Janus Unconstrained Bond Fund (JUCIX, maroon) the go-anywhere do-anything bond fund Bill Gross went to, made money.
  • People who avoided mortgage-backed securities by using Vanguard Intermediate-Term Bond Index Fund (VBIIX, navy blue), made money.
  • People who embraced mortgage-backed securities by using the Vanguard GNMA fund, (VFIIX, pastel blue), made money.
  • People who went with straight Treasuries, Vanguard Intermediate-Term Treasury fund (VFITX, scarlet), made money.
  • And all them made a lot more money than they'd have made in a money market mutual fund (VMFXX, yellow).
Don't overthink bond funds.

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Re: FED Raises Rates - Sky Falls! Bond Prices are UP!

Post by NibbanaBanana » Tue May 30, 2017 9:17 pm

"Interest rates are imponderable." - John Bogle

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