What is all the recent talk about a bond bubble?

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elb1
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What is all the recent talk about a bond bubble?

Post by elb1 » Mon Nov 13, 2017 2:17 pm

I know if you buy a bond and keep it to maturity, your return is total dividend, with no possible loss (except default).
I know if you have a bond fund, it is different.
I know that a bond fund can be short, medium, or long term, and each has its pros and cons.

So what is going on with all this coverage of the bubble and its "eminent" dreadful result? (I have VBMFX Admiral.)

I am not losing sleep over it, just curious.

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CaliJim
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Re: What is all the recent talk about a bond bubble?

Post by CaliJim » Mon Nov 13, 2017 2:32 pm

All the recent talk about a bond bubble is pretty much like the not so recent talk about a bond bubble. :P

https://www.google.com/search?sitesearc ... ond+bubble
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arcticpineapplecorp.
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Re: What is all the recent talk about a bond bubble?

Post by arcticpineapplecorp. » Mon Nov 13, 2017 2:37 pm

did a search on google under the search bar for "bond bubble" and here's what I came up with:

https://www.google.com/search?sitesearc ... ond+bubble

looks like the oldest one that came up on the first page questioning a "bond bubble" goes back to March 22, 2009.

source: viewtopic.php?t=34914

So it seems some have been anticipating a bond bubble for a very long time. That doesn't mean one won't occur at some point (or not). But what would one have missed out on if they got out of bonds March 22, 2009 instead of staying in them from then until now (using VBTLX vanguard total bond market index fund admiral shares, as the example):

Yep, you'd be up 39.32% since then. Stay the course. Pick an asset allocation that you can stick with and avoid the noise.

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source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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Caduceus
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Re: What is all the recent talk about a bond bubble?

Post by Caduceus » Mon Nov 13, 2017 3:07 pm

People just mean that bonds are overvalued relative to equities (that's true), or they use it as shorthand to communicate that they anticipate bond prices will fall soon.

Bond "bubbles" can't be bubbles the same way equities and real estate can, unless we are talking about high-yield junk bonds, in which case, it's a matter of mispricing the issues based on credit quality, and they can be very bubbly indeed.

I am holding cash over bonds currently, but if you were in a diversified short or medium-duration bond fund, I would not lose any sleep over it. But I think the odds are good that these bond holdings will not perform well at all in the next decade.

Random Walker
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Re: What is all the recent talk about a bond bubble?

Post by Random Walker » Mon Nov 13, 2017 3:24 pm

Elb1,
A bond fund is just a collection of individual bonds, so they are inherently the same. If you hold a bond to maturity, you get the principal back. But that does not mean that if bond prices fall you will not be affected. If bond prices fall, interest rates will rise. Although you will get your full principal back at maturity, in the interim you are locked into fixed payments at a lower rate than the prevailing rate. There is an opportunity cost to the bond you are holding: the inability to reinvest that money in a new bond yielding the new higher rate.

Dave

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marathonwmn
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Re: What is all the recent talk about a bond bubble?

Post by marathonwmn » Mon Nov 13, 2017 3:26 pm

If I'm holding Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) for retirement income, how will that plan be affected if "the bubble bursts?

Thank you.
The race goes not to the swift, but to those who keep on running. . .

Da5id
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Re: What is all the recent talk about a bond bubble?

Post by Da5id » Mon Nov 13, 2017 3:29 pm

If you (where you is a pundit) call something a bubble, you set up the following:

1) The bubble doesn't materialize. You never mention your call again, and hope people don't remember it. Or you say "you called it too early but it is still coming"
2) The bubble materializes (say bond prices tank). You get invited to talk shows and write a book. Profit!

Wishy washy statements don't help you get noticed as a pundit. Bold predictions have a better chance of doing so :)

Caduceus
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Re: What is all the recent talk about a bond bubble?

Post by Caduceus » Mon Nov 13, 2017 3:33 pm

Random Walker wrote:
Mon Nov 13, 2017 3:24 pm
Elb1,
A bond fund is just a collection of individual bonds, so they are inherently the same. If you hold a bond to maturity, you get the principal back. But that does not mean that if bond prices fall you will not be affected. If bond prices fall, interest rates will rise. Although you will get your full principal back at maturity, in the interim you are locked into fixed payments at a lower rate than the prevailing rate. There is an opportunity cost to the bond you are holding: the inability to reinvest that money in a new bond yielding the new higher rate.

Dave
I think there's a typo there regarding the nature of bond re-investment, which applies to coupon payments. If interest rates rise and bond prices fall, the coupons are fixed, but the reinvestment yield will rise as the coupons can be re-directed toward bonds of similar credit quality with higher yields. That is why the yield to maturity is higher than the original projected yield of any given bond issue in a rising rate environment.

Random Walker
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Re: What is all the recent talk about a bond bubble?

Post by Random Walker » Mon Nov 13, 2017 4:07 pm

Ya, what he said :-)

Dave

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SimpleGift
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Re: What is all the recent talk about a bond bubble?

Post by SimpleGift » Mon Nov 13, 2017 4:35 pm

elb1 wrote:
Mon Nov 13, 2017 2:17 pm
So what is going on with all this coverage of the bubble and its "eminent" dreadful result? (I have VBMFX Admiral.)
No doubt interest rates are near historical lows and bond prices near historical highs. The fear is that sharply rising interest rates could cause bond prices to drop and bond funds to lose value. But to use the word "bubble" for bonds seems a bit of an exaggeration. The chart below shows the worst historical percent drawdowns for bonds (in blue) and for stocks (in orange) since 1976:
The worst drawdown for the Barclays Aggregate Bond Index was -12.7% in 1979-80, when inflation was raging out of control, bond investors were panicked, and interest rates rose 4.6% within 6 months. Interestingly, by the end of 1980, bond values had recovered and investors did not see a negative calendar year return at that time.

The point is that, in the current environment, interest rates are not going to be zooming up multiple percentage points within a few months. Global growth and investment rates are not terribly strong today, inflation is low, and the supply of global capital is abundant. Sure, interest rates may trend somewhat higher in the years to come — but it's hard to see the bursting of any "bubble" in a diversified, high-quality bond fund like VBMFX.
Cordially, Todd

Nate79
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Re: What is all the recent talk about a bond bubble?

Post by Nate79 » Mon Nov 13, 2017 6:19 pm

Recent? Uh, ok.

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Kevin M
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Re: What is all the recent talk about a bond bubble?

Post by Kevin M » Mon Nov 13, 2017 8:29 pm

arcticpineapplecorp. wrote:
Mon Nov 13, 2017 2:37 pm
did a search on google under the search bar for "bond bubble" and here's what I came up with:
<snip>
looks like the oldest one that came up on the first page questioning a "bond bubble" goes back to March 22, 2009.
Yeah, bond yields are not particularly low now compared to the years since 2009. On 3/23/2009, the 5-year Treasury yield was 1.69%. It did increase as high as 2.95% on 6/8/2009, but then it fell below 0.6% in 2012. As of today the yield is 2.08%.

Image

Bond funds have done OK during during the time since a bond bubble was first mentioned here, and for all we know the next eight years might be similar to the last eight years, with yields rising and falling along the way, but ending up in about the same place. Or maybe yields will trend higher, and bond funds will have a few years of losses--no one really knows. We do know that if yields trend higher, the higher yields will eventually compensate for the capital losses, and we'll end up with higher returns if we hold long enough.

Kevin
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nedsaid
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Re: What is all the recent talk about a bond bubble?

Post by nedsaid » Mon Nov 13, 2017 9:07 pm

elb1 wrote:
Mon Nov 13, 2017 2:17 pm
I know if you buy a bond and keep it to maturity, your return is total dividend, with no possible loss (except default).
I know if you have a bond fund, it is different.
I know that a bond fund can be short, medium, or long term, and each has its pros and cons.

So what is going on with all this coverage of the bubble and its "eminent" dreadful result? (I have VBMFX Admiral.)

I am not losing sleep over it, just curious.
Stock people tend to be optimistic by nature, look at how many optimistic earnings estimates by analysts fail to pan out. The investment professionals who work on the bond side tend to be pessimists, somehow they see the cloud in every silver lining. Bad news is always around the corner. Hard for me to believe that professional bond traders and analysts could experience anything approaching euphoria. They might barely crack a smile and that is about it, as good as it gets. Everyone shouting "bond bubble" is as opposite of euphoria as I can imagine. Someone else pointed out there has been talk of a bond bubble since 2009. Where is the euphoria and enthusiasm associated with a bubble? You might see excessive optimism in junk bonds but they are sort of like fake stocks anyways.
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livesoft
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Re: What is all the recent talk about a bond bubble?

Post by livesoft » Mon Nov 13, 2017 9:19 pm

I bought more bond fund shares today with the dividends paid last week. I like bond bubbles like this one since bond funds have dropped about 1% since September 8th.

I would not be surprised if the folks spreading news about a bond bubble are just trying to talk the prices down so that they can buy more of them.
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Stormbringer
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Re: What is all the recent talk about a bond bubble?

Post by Stormbringer » Tue Nov 14, 2017 2:01 am

Kevin M wrote:
Mon Nov 13, 2017 8:29 pm
As of today the yield is 2.08%.
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
"Compound interest is the most powerful force in the universe." - Albert Einstein

dbr
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Re: What is all the recent talk about a bond bubble?

Post by dbr » Tue Nov 14, 2017 10:18 am

Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
Kevin M wrote:
Mon Nov 13, 2017 8:29 pm
As of today the yield is 2.08%.
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
Why would you be scratching your head. CDs are a different market from bonds, much smaller with serious restrictions on how much money can be absorbed there and what the economic incentives and influences are for the different participants. Also the relative yields in CDs and bonds are not the same in different periods of time. Lots of people on this forum are suggesting that CDs are a viable option for fixed income for individual investors. They will have their own considerations which an individual might or might not find advantageous.

A lot of investors are not that concerned with the exact return from fixed income as any difference of real significance for the portfolio is better controlled by stock/bond allocation. Interest rates are low for all fixed income, and that is a problem that does not have a fix. The exception is people whose portfolio is so dominated by fixed income and whose needs are so sensitive to yield that they have to make distinctions.

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Re: What is all the recent talk about a bond bubble?

Post by friar1610 » Tue Nov 14, 2017 10:27 am

Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
Kevin M wrote:
Mon Nov 13, 2017 8:29 pm
As of today the yield is 2.08%.
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
Your state income tax (or lack of it) could be the tiebreaker if you are comparing CDs with Treasuries.
Friar1610

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Kevin M
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Re: What is all the recent talk about a bond bubble?

Post by Kevin M » Tue Nov 14, 2017 12:06 pm

Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
Kevin M wrote:
Mon Nov 13, 2017 8:29 pm
As of today the yield is 2.08%.
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
Yes, which is why I've been favoring CDs over bond funds for the last seven years or so. The CD premiums now are OK for the best CDs, but not nearly as rich as they've been at other times over the last few years. With a good 5-year CD at 2.50%, that's a yield premium of about 40 basis points over the 5-year Treasury. Nothing to sneeze at, but my average yield premium for CDs bought since late 2010 is over 110 basis points, and for CDs bought more recently it's over 150 basis points, but deals like that haven't been around for awhile now. Treasury yields are higher and good 5-year CD rates are lower.

Nevertheless, term risk hasn't really shown up much in the last seven years, nor has credit risk, so bond funds have done well. These risks may or may not show up more in the next seven years, but on a risk-adjusted basis, CDs still are a good deal if you have the flexibility and willingness to incorporate them into your portfolio; especially direct CDs with good early withdrawal terms.

Kevin
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Da5id
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Re: What is all the recent talk about a bond bubble?

Post by Da5id » Tue Nov 14, 2017 12:16 pm

I-bonds (current composite yield 2.58%) are also competitive with treasuries/CDs... I-bonds do have limitations, but they are a fair enough deal these days despite the 0.1% fixed component of the rate.

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Earl Lemongrab
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Re: What is all the recent talk about a bond bubble?

Post by Earl Lemongrab » Tue Nov 14, 2017 12:28 pm

Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
For one thing, I've never heard of a "CD fund". So people might not want to spend the personal management time to handle a bunch of CDs. Another is people like me. I have 700k+ in fixed-income in a 401(k). I can't buy CDs there.
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Kevin M
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Re: What is all the recent talk about a bond bubble?

Post by Kevin M » Tue Nov 14, 2017 12:38 pm

Earl Lemongrab wrote:
Tue Nov 14, 2017 12:28 pm
Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
For one thing, I've never heard of a "CD fund". So people might not want to spend the personal management time to handle a bunch of CDs. Another is people like me. I have 700k+ in fixed-income in a 401(k). I can't buy CDs there.
Excellent points. This is why I mentioned that you must have the flexibility (e.g., most fixed income not tied up in a 401k/403b) and willingness (to deal with managing the CDs) for them to be a good deal for you. So for many people, CDs are not going to be an option, and it's useful for us to have these discussions about concerns about bonds, whether or not we use the term "bond bubble" (which I generally don't).

Kevin
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Stormbringer
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Re: What is all the recent talk about a bond bubble?

Post by Stormbringer » Tue Nov 14, 2017 1:19 pm

Kevin M wrote:
Tue Nov 14, 2017 12:38 pm
Earl Lemongrab wrote:
Tue Nov 14, 2017 12:28 pm
Stormbringer wrote:
Tue Nov 14, 2017 2:01 am
What seems crazy is that I can earn more on a 5-year CD, with FDIC insurance no risk of loss of principal. It leaves me scratching my head a bit as to why I would want to buy a bond at all and not just buy CDs.
For one thing, I've never heard of a "CD fund". So people might not want to spend the personal management time to handle a bunch of CDs. Another is people like me. I have 700k+ in fixed-income in a 401(k). I can't buy CDs there.
Excellent points. This is why I mentioned that you must have the flexibility (e.g., most fixed income not tied up in a 401k/403b) and willingness (to deal with managing the CDs) for them to be a good deal for you. So for many people, CDs are not going to be an option, and it's useful for us to have these discussions about concerns about bonds, whether or not we use the term "bond bubble" (which I generally don't).

Kevin
I have about $400K in bonds in my Schwab Solo 401k. I have no restrictions on what I can buy (any fund, any individual stock, etc.). Are you allowed to buy CDs in a retirement account like that? Is there a reason not to?
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Kevin M
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Re: What is all the recent talk about a bond bubble?

Post by Kevin M » Tue Nov 14, 2017 1:34 pm

Stormbringer wrote:
Tue Nov 14, 2017 1:19 pm
I have about $400K in bonds in my Schwab Solo 401k. I have no restrictions on what I can buy (any fund, any individual stock, etc.). Are you allowed to buy CDs in a retirement account like that? Is there a reason not to?
Based on what you've said, I see no reason you could not buy brokered CDs. However, I assume that the funds have to stay with the Solo 401k provider, so you could not buy CDs directly from banks and credit unions (direct CDs). Currently, I see somewhat better rates for the best direct CDs than what I see for brokered CDs at Vanguard. Also, good direct CDs have an early withdrawal option that reduces the term risk below that of a brokered CD.

Still, you generally have been able to get a decent yield premium on brokered CDs over Treasuries of same maturity. Treasuries are more liquid though, so you can think of this as an illiquidity premium.

Kevin
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