U.S. bonds in freefall

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bligh
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U.S. bonds in freefall

Post by bligh » Fri Feb 02, 2018 11:18 am

With the "U.S. Stocks in freefall" thread and the "bitcoin in freefall" thread and with BND at a multi year low, I didn't want bonds to feel left out.

Anyway, I have three questions:

- What does everyone think of EE Bonds in the current environment? Obviously they become less attractive as we watch the yields rise.. I have been wondering whether to buy my allocation of EE Bonds this year. I am glad I didn't plough in the money in the first week of Jan like I was planning to. The 20 year treasury yield is approaching ~3% and this is getting really close to the 3.53% yield on the 20 year EE Bonds. The advantage the EE Bonds still hold is the tax deferment. The big disadvantage is the steep early withdrawal penalty. I plan to wait and watch the yields. If the 20 year treasury yield rises to 3% and hovers around there I was thinking of skipping EE Bonds this year. Do you guys agree with that approach?

- Tax loss harvesting. I have some intermediate term municipal bonds I am looking to tax lost harvest. I was thinking of selling them and moving the funds into a limited term municipal bond for a couple of months and then switching back. Is there a dollar amount at which it makes sense to TLH? How long do you wait before locking in the losses for TLH purposes?

- Will Mortgage interest rates rise as interest rates do? If so, this is going to put downward pressure on the housing market right? I wouldn't expect house prices to tank like they did in 2008 but at least halt their advance if not give up a few percent of their gains.

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Re: U.S. bonds in freefall

Post by azanon » Fri Feb 02, 2018 11:29 am

Help me understand how BND is at a multi-year low. Did a quick check at morningstar, and BND is positive at 1-yr, 3-yr, 5-yr and 10-yr.

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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 02, 2018 11:38 am

azanon wrote:
Fri Feb 02, 2018 11:29 am
Help me understand how BND is at a multi-year low. Did a quick check at morningstar, and BND is positive at 1-yr, 3-yr, 5-yr and 10-yr.
BND prices, not total return.
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Re: U.S. bonds in freefall

Post by azanon » Fri Feb 02, 2018 11:40 am

triceratop wrote:
Fri Feb 02, 2018 11:38 am
azanon wrote:
Fri Feb 02, 2018 11:29 am
Help me understand how BND is at a multi-year low. Did a quick check at morningstar, and BND is positive at 1-yr, 3-yr, 5-yr and 10-yr.
BND prices, not total return.
Ahh ok. Of course that's meaningless, since one would surely include the bond's yield in performance measurement. Heck, that's the generally accepted method for estimating future bond return. That would indirectly mean the price is considered a null.

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Re: U.S. bonds in freefall

Post by zeugmite » Fri Feb 02, 2018 11:59 am

I think the rate at which yields have risen does cause some concern about policy surprise. If nothing else I would like to understand what changed in one month.

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Re: U.S. bonds in freefall

Post by moshe » Fri Feb 02, 2018 12:04 pm

zeugmite wrote:
Fri Feb 02, 2018 11:59 am
I think the rate at which yields have risen does cause some concern about policy surprise. If nothing else I would like to understand what changed in one month.
Future inflation expectations. Also, as more deficit spending is expected that means that more US bonds would need to be sold. More supply, lower prices, higher yields, etc.

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Re: U.S. bonds in freefall

Post by livesoft » Fri Feb 02, 2018 12:13 pm

bligh wrote:
Fri Feb 02, 2018 11:18 am
- Tax loss harvesting. I have some intermediate term municipal bonds I am looking to tax lost harvest. I was thinking of selling them and moving the funds into a limited term municipal bond for a couple of months and then switching back. Is there a dollar amount at which it makes sense to TLH? How long do you wait before locking in the losses for TLH purposes?
This was one of the most common TLH questions the last time everyone wanted to TLH muni bond funds in Nov-Dec 2016. For instance: viewtopic.php?t=203905

Go ahead and do it. If bonds drop further, then you just sell the tax-exempt fund you bought and TLH back into what you have now. Easy. Worry-free.
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Re: U.S. bonds in freefall

Post by zeugmite » Fri Feb 02, 2018 12:16 pm

moshe wrote:
Fri Feb 02, 2018 12:04 pm
zeugmite wrote:
Fri Feb 02, 2018 11:59 am
I think the rate at which yields have risen does cause some concern about policy surprise. If nothing else I would like to understand what changed in one month.
Future inflation expectations. Also, as more deficit spending is expected that means that more US bonds would need to be sold. More supply, lower prices, higher yields, etc.

~Moshe
Inflation expectation hasn't moved as much as real yields, though. I'll dig up the numbers.

On 9/8/2017
TIPS yield --
5yr - 0.01
10yr - 0.25
30yr - 0.79

Treasury yield --
5yr - 1.64
10yr - 2.06
30yr - 2.67

Breakeven inflation --
5yr - 1.63
10yr - 1.81
30yr - 1.88

On 12/29/2017
TIPS yield --
5yr - 0.34
10yr - 0.44
30yr - 0.73

Treasury yield --
5yr - 2.20
10yr - 2.40
30yr - 2.74

Breakeven inflation --
5yr - 1.86
10yr - 1.96
30yr - 2.01

On 2/1/2018
TIPS yield --
5yr - 0.63
10yr - 0.67
30yr - 0.86

Treasury yield --
5yr - 2.56
10yr - 2.78
30yr - 3.01

Breakeven inflation --
5yr - 1.93
10yr - 2.11
30yr - 2.15
Last edited by zeugmite on Fri Feb 02, 2018 12:36 pm, edited 2 times in total.

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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 02, 2018 12:20 pm

zeugmite wrote:
Fri Feb 02, 2018 12:16 pm
moshe wrote:
Fri Feb 02, 2018 12:04 pm
zeugmite wrote:
Fri Feb 02, 2018 11:59 am
I think the rate at which yields have risen does cause some concern about policy surprise. If nothing else I would like to understand what changed in one month.
Future inflation expectations. Also, as more deficit spending is expected that means that more US bonds would need to be sold. More supply, lower prices, higher yields, etc.

~Moshe
Inflation expectation hasn't moved as much as real yields, though. I'll dig up the numbers.
It's not hard to do this with a combination of Breakeven Inflation and the daily yield curve. I bought some 5-year treasuries today with a real yield of about 0.59% (the Feb 2 numbers for inflation expectations aren't online yet). On August 30, 2017 my real yield would have been 0.15%.
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Re: U.S. bonds in freefall

Post by lack_ey » Fri Feb 02, 2018 12:30 pm

triceratop wrote:
Fri Feb 02, 2018 12:20 pm
It's not hard to do this with a combination of Breakeven Inflation and the daily yield curve. I bought some 5-year treasuries today with a real yield of about 0.59% (the Feb 2 numbers for inflation expectations aren't online yet). On August 30, 2017 my real yield would have been 0.15%.
Are you saying that you bought nominal Treasuries or that you bought TIPS? If the former, that's a statement that both are priced for the same expected return?

It seems that should be the case under risk-neutral conditions, but that's not quite accurate, is it? I've been trying to determine and asking about the magnitude of the potential liquidity premium that would push up nominals relative to TIPS, and inflation risk premium that would do the reverse.

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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 02, 2018 12:32 pm

lack_ey wrote:
Fri Feb 02, 2018 12:30 pm
triceratop wrote:
Fri Feb 02, 2018 12:20 pm
It's not hard to do this with a combination of Breakeven Inflation and the daily yield curve. I bought some 5-year treasuries today with a real yield of about 0.59% (the Feb 2 numbers for inflation expectations aren't online yet). On August 30, 2017 my real yield would have been 0.15%.
Are you saying that you bought nominal Treasuries or that you bought TIPS? If the former, that's a statement that both are priced for the same expected return?

It seems that should be the case under risk-neutral conditions, but that's not quite accurate, is it? I've been trying to determine and asking about the magnitude of the potential liquidity premium that would push up nominals relative to TIPS, and inflation risk premium that would do the reverse.
I bought nominal treasuries. And yes, it is such a statement. I have been following your inquiries with some interest but I do not have much to contribute. To first order would you agree they are priced for the same expected return? I guess I assume it's about zero, which is not to say that I believe it is zero but that I have no better information.
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Re: U.S. bonds in freefall

Post by saltycaper » Fri Feb 02, 2018 12:44 pm

triceratop wrote:
Fri Feb 02, 2018 12:32 pm

I guess I assume it's about zero, which is not to say that I believe it is zero but that I have no better information.
Isn't that saying nominal bond holders are not rewarded for taking inflation risk? i.e., there is no inflation risk premium?
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Re: U.S. bonds in freefall

Post by saltycaper » Fri Feb 02, 2018 12:49 pm

zeugmite wrote:
Fri Feb 02, 2018 12:16 pm

Inflation expectation hasn't moved as much as real yields, though. I'll dig up the numbers.
Using breakeven rates as a measure of inflation expectations ignores other risk premia, so actual expectations may differ.
Quod vitae sectabor iter?

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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 02, 2018 1:17 pm

saltycaper wrote:
Fri Feb 02, 2018 12:44 pm
triceratop wrote:
Fri Feb 02, 2018 12:32 pm

I guess I assume it's about zero, which is not to say that I believe it is zero but that I have no better information.
Isn't that saying nominal bond holders are not rewarded for taking inflation risk? i.e., there is no inflation risk premium?
What would you say is the definitive method of estimating the inflation risk premium? I read a short note on this and left more confused than when I started; can economists really not even say whether the premia is positive or negative at any given time?
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Re: U.S. bonds in freefall

Post by bligh » Fri Feb 02, 2018 2:48 pm

livesoft wrote:
Fri Feb 02, 2018 12:13 pm
bligh wrote:
Fri Feb 02, 2018 11:18 am
- Tax loss harvesting. I have some intermediate term municipal bonds I am looking to tax lost harvest. I was thinking of selling them and moving the funds into a limited term municipal bond for a couple of months and then switching back. Is there a dollar amount at which it makes sense to TLH? How long do you wait before locking in the losses for TLH purposes?
This was one of the most common TLH questions the last time everyone wanted to TLH muni bond funds in Nov-Dec 2016. For instance: viewtopic.php?t=203905

Go ahead and do it. If bonds drop further, then you just sell the tax-exempt fund you bought and TLH back into what you have now. Easy. Worry-free.
Thanks, I'll go ahead and do it then. I am actually excited to see yields finally creeping up. Which is making it harder for me to pull the trigger on EE Bonds this year.

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Re: U.S. bonds in freefall

Post by saltycaper » Fri Feb 02, 2018 2:55 pm

triceratop wrote:
Fri Feb 02, 2018 1:17 pm

What would you say is the definitive method of estimating the inflation risk premium? I read a short note on this and left more confused than when I started; can economists really not even say whether the premia is positive or negative at any given time?
Ha. I have no idea what the definitive method would be. I doubt there is one.

Maybe you are confused about the note (I am too) because it is poorly written, IMO, observing something about "inflation compensation" and then applying it to "inflation risk premium," even though the authors themselves define the terms differently. They say, for instance, that if the inflation risk premium is positive, Treasury pays a premium to issue nominal bonds relative to TIPS. But I do not think that is necessarily true. They mention "other factors", footnoted with some squishy qualifiers like "may" and "usually", but apparently ignore them. I see no attempt to quantify the liquidity premium.

Regarding chart three, discussion starts with, "To take a closer look at potential changes in the inflation risk premium..." (Underline added.) But note the input into the beta function is inflation compensation. And, note the conclusion is a suggestion "that the risk premium associated with inflation compensation has become substantially more negative." But again they do not consider any other factors, including a potential liquidity premium, within inflation compensation.

It's possible my reading comprehension has just gone to pot. I mean, they are smarter than I am, and certainly more knowledgeable about the topic, so I must be missing something.

They do note that their consumption model may not align with investor expectations. Kind of an understatement to me.

I suppose deflation concerns could drive the inflation risk premium to be negative because investors are not just trying to preserve real dollars, they are trying to make as many of them as possible, and if they think they can do that by purchasing the nominal instrument instead of the real one, that's what they'll do. Thank you for that thought. Still, I'm not sure I'd buy a nominal treasury bond and think I'm going to get the real rate on TIPS. If the real rate on TIPS is what I want, I'd rather buy the TIPS and know that's what I'll get. I understand you might expect it but be okay if you don't get it.
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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 02, 2018 3:20 pm

Thanks for those thoughts. I don't exactly expect nominals to perform like TIPS were expectations correct, but, it's a proxy for what to expect. Mostly I prefer nominals because TIPS have had problems in equity crises and with a 90/10 portfolio that is what I care about most. My future earnings are more than an enough inflation hedge at this point in my life.
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Re: U.S. bonds in freefall

Post by saltycaper » Fri Feb 02, 2018 3:25 pm

I would feel the same way with a 90/10 portfolio.
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Re: U.S. bonds in freefall

Post by zeugmite » Fri Feb 02, 2018 3:42 pm

saltycaper wrote:
Fri Feb 02, 2018 12:49 pm
zeugmite wrote:
Fri Feb 02, 2018 12:16 pm

Inflation expectation hasn't moved as much as real yields, though. I'll dig up the numbers.
Using breakeven rates as a measure of inflation expectations ignores other risk premia, so actual expectations may differ.
This can be answered from historical data. I think nominals did not get more total return than TIPS? If anything it might have been the other way around. But as somebody else pointed out there is a liquidity penalty of TIPS to consider, so maybe that and the inflation risk premium cancel out.

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Re: U.S. bonds in freefall

Post by saltycaper » Fri Feb 02, 2018 3:54 pm

zeugmite wrote:
Fri Feb 02, 2018 3:42 pm

This can be answered from historical data. I think nominals did not get more total return than TIPS? If anything it might have been the other way around. But as somebody else pointed out there is a liquidity penalty of TIPS to consider, so maybe that and the inflation risk premium cancel out.
Even if we know the historical returns and historical inflation rates, we still don't know what portion of the breakeven rate was due to inflation expectations or risk premia (liquidity, inflation risk, etc.) It seems hard enough to measure the risk premia relative to one another let alone to measure them with enough precision to arrive at some other factor--the expectation inflation rate.
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Re: U.S. bonds in freefall

Post by willthrill81 » Fri Feb 02, 2018 4:24 pm

bligh wrote:
Fri Feb 02, 2018 2:48 pm
Thanks, I'll go ahead and do it then. I am actually excited to see yields finally creeping up. Which is making it harder for me to pull the trigger on EE Bonds this year.
If I had bought EE bonds about a year ago like some here were recommending, I'd be nervous at this point. That 3.53% yield for a 20 year bond doesn't look especially attractive right now considering that 20 year bond yields are 2.97% today and with full liquidity.
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Re: U.S. bonds in freefall

Post by Noobvestor » Fri Feb 02, 2018 4:31 pm

willthrill81 wrote:
Fri Feb 02, 2018 4:24 pm
bligh wrote:
Fri Feb 02, 2018 2:48 pm
Thanks, I'll go ahead and do it then. I am actually excited to see yields finally creeping up. Which is making it harder for me to pull the trigger on EE Bonds this year.
If I had bought EE bonds about a year ago like some here were recommending, I'd be nervous at this point. That 3.53% yield for a 20 year bond doesn't look especially attractive right now considering that 20 year bond yields are 2.97% today and with full liquidity.
Tax-deferred and more than .5% higher yield. Not nervous. Let's say for the sake of argument that 20-year bonds go up to 4% over the next year or so. That would still put them around the break-even point with last year's EE bonds, as I understand it: viewtopic.php?t=151634
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Re: U.S. bonds in freefall

Post by bligh » Wed Feb 14, 2018 5:08 pm

Just tax los harvested my Intermediate Tax Exempt fund to Limited Term Tax Exempt.

Still holding off on the EE Bonds purchase. Seems less and less likely that I will pull the trigger on those guys this year even though a good part of me wants to.

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Re: U.S. bonds in freefall

Post by whodidntante » Wed Feb 14, 2018 10:07 pm

Do you know how you lose money in a bond fund? 0.3% at a time.

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Re: U.S. bonds in freefall

Post by cfs » Thu Feb 15, 2018 9:34 pm

No worries about bonds in freefall when you are 100% in equities. Good luck, y gracias por leer ~cfs~
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Re: U.S. bonds in freefall

Post by willthrill81 » Thu Feb 15, 2018 10:45 pm

cfs wrote:
Thu Feb 15, 2018 9:34 pm
No worries about bonds in freefall when you are 100% in equities.
:sharebeer
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Re: U.S. bonds in freefall

Post by Doom&Gloom » Thu Feb 15, 2018 10:51 pm

cfs wrote:
Thu Feb 15, 2018 9:34 pm
No worries about bonds in freefall when you are 100% in equities. Good luck, y gracias por leer ~cfs~
No dry powder, eh?

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Re: U.S. bonds in freefall

Post by willthrill81 » Thu Feb 15, 2018 10:57 pm

Doom&Gloom wrote:
Thu Feb 15, 2018 10:51 pm
cfs wrote:
Thu Feb 15, 2018 9:34 pm
No worries about bonds in freefall when you are 100% in equities. Good luck, y gracias por leer ~cfs~
No dry powder, eh?
Ever heard of dry powder drag? :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: U.S. bonds in freefall

Post by RRAAYY3 » Thu Feb 15, 2018 11:17 pm

willthrill81 wrote:
Thu Feb 15, 2018 10:57 pm
Doom&Gloom wrote:
Thu Feb 15, 2018 10:51 pm
cfs wrote:
Thu Feb 15, 2018 9:34 pm
No worries about bonds in freefall when you are 100% in equities. Good luck, y gracias por leer ~cfs~
No dry powder, eh?
Ever heard of dry powder drag? :wink:
Hmmm ... Dry powder “drag” ... Bond “stability”

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Re: U.S. bonds in freefall

Post by Grt2bOutdoors » Thu Feb 15, 2018 11:45 pm

whodidntante wrote:
Wed Feb 14, 2018 10:07 pm
Do you know how you lose money in a bond fund? 0.3% at a time.
Much better than losing it 3% at a time. And don’t say it can’t happen....
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Re: U.S. bonds in freefall

Post by whodidntante » Fri Feb 16, 2018 12:18 am

Grt2bOutdoors wrote:
Thu Feb 15, 2018 11:45 pm
whodidntante wrote:
Wed Feb 14, 2018 10:07 pm
Do you know how you lose money in a bond fund? 0.3% at a time.
Much better than losing it 3% at a time. And don’t say it can’t happen....
But was it a Friday?

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Re: U.S. bonds in freefall

Post by Always passive » Fri Feb 16, 2018 1:13 am

I think that this very recent article may provide some comfort to those that fear the bond market...

https://www.marketwatch.com/story/why-i ... 2018-02-13

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Re: U.S. bonds in freefall

Post by pokebowl » Fri Feb 16, 2018 1:32 am

Doom&Gloom wrote:
Thu Feb 15, 2018 10:51 pm

No dry powder, eh?
I understand investors using bonds as a means to limit volatility in their portfolios and or as a means to store value (not a bitcoin joke promise) on money they can't afford to lose. That being said, I've known many who use the terms "dry powder" or "reserves" to take advantage of market dips. To date, I have not met anyone who has successfully pulled off such a market timing feat. Not in 2008, 2011, 2015 or last week. Many see the falling knife and wait for the bottom only to miss it, which leads to:
willthrill81 wrote:
Thu Feb 15, 2018 10:57 pm

Ever heard of dry powder drag? :wink:
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Re: U.S. bonds in freefall

Post by triceratop » Fri Feb 16, 2018 1:42 am

pokebowl wrote:
Fri Feb 16, 2018 1:32 am
Doom&Gloom wrote:
Thu Feb 15, 2018 10:51 pm

No dry powder, eh?
I understand investors using bonds as a means to limit volatility in their portfolios and or as a means to store value (not a bitcoin joke promise) on money they can't afford to lose. That being said, I've known many who use the terms "dry powder" or "reserves" to take advantage of market dips. To date, I have not met anyone who has successfully pulled off such a market timing feat. Not in 2008, 2011, 2015 or last week. Many see the falling knife and wait for the bottom only to miss it, which leads to:
willthrill81 wrote:
Thu Feb 15, 2018 10:57 pm

Ever heard of dry powder drag? :wink:
I bought VTI at 131.85 during this dip. Of course, it was only a small portion of my bonds that I shifted to VTI.
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