Why investors shouldn’t panic over falling bond prices

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BuyAndHoldOn
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Why investors shouldn’t panic over falling bond prices

Post by BuyAndHoldOn » Sat Feb 17, 2018 7:34 am

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

This is the main point
“Since 1993, the Bloomberg Barclays US Aggregate Index, dominated by government and investment-grade corporate bonds, fell 1.2% on average during months when yields increased by at least 0.3%. But it rose 2.6% over the next six months,” AllianceBernstein wrote.

....

And matching the holding period to the average duration of a bond fund is a good way to assure positive returns.

Duration is the time it takes for investors to recover their initial investment from the cash flows, or interest payments, of a bond. Because of interest payments, the duration of a bond is shorter than its maturity and the higher the yield, the shorter the duration. The longer the duration of the bond, the more sensitive its price is to changes in interest rates.

The AllianceBernstein analysts calculated the impact of a larger selloff on bond fund returns and found that “investors who take a long view can rest easy.”

“A year after the 1% spike [in yields], the seven-year U.S. Treasury, whose duration is similar to the U.S. Aggregate’s, would be down almost 2%. But over time, higher yields lead to higher returns. Our analysis suggested that investors who sat tight for three years and reinvested their coupons could have earned a cumulative return of 6%. Six years later, the return in our analysis was nearly 17%,” AllianceBerstein wrote.


I thought this stat was interesting.
Since 1923, the 10-year Treasury note has never seen a nominal annual loss of more than 12%, according to Ben Carlson of Ritholtz Wealth Management. That’s smaller than typical correction in stocks of around 15%.
source: http://awealthofcommonsense.com/2016/08 ... ify-bonds/
Last edited by BuyAndHoldOn on Sat Feb 17, 2018 8:03 am, edited 2 times in total.

long_gamma
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Re: Why investors shouldn’t panic over falling bond prices

Post by long_gamma » Sat Feb 17, 2018 7:53 am

Portfolio visualizer shows max. drawdown of 15.76% from mid 1979 to beginning of 1980.

In real terms it has lost plenty.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

Scooter57
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Re: Why investors shouldn’t panic over falling bond prices

Post by Scooter57 » Sat Feb 17, 2018 11:22 am

Consider the source. Alliance Bernstein has a stake in keeping investors buying bonds and bond funds.

All this backtestng is bogus because a 1% rate increase when bonds are at 8% is very different than one at 2%. Plus we are in a completely different market environment now with people day trading bond ETFs and derivatives. Bonds in the 1980s were sold very differently.

Nobody knows nothing is a much safer approach. There's no harm in sticking with money market funds and CDs either. The yield on bond funds right now does not compensate you for the additional risk.

rai
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Re: Why investors shouldn’t panic over falling bond prices

Post by rai » Sun Feb 18, 2018 5:03 pm

So what's a person to do?

I'm sitting at 25% bonds which are 50-60% total bond fund plus some short term, and intermediate term government and intermediate term corporate VG funds.

I'm looking at being invested for the next 20-35 years (current age = 52).

Am I to worry about a dip in the short term or forget whatever happens in the short term?
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

livesoft
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Re: Why investors shouldn’t panic over falling bond prices

Post by livesoft » Sun Feb 18, 2018 5:06 pm

Doesn't this suggest that investors should get out of Total US Bond index funds, then buy back in after it drops another 2% whether that takes 1 month or 1 year? Doing that would not be panicking, but would be a rational decision to get off a dead horse.

The one year return of Total US Bond Index fund, short-term corporate bond index fund, and Vanguard Prime MM fund are all about 1% right now. :twisted:
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Re: Why investors shouldn’t panic over falling bond prices

Post by BlueEars » Sun Feb 18, 2018 5:15 pm

BuyAndHoldOn wrote:
Sat Feb 17, 2018 7:34 am
https://www.marketwatch.com/story/why-i ... 2018-02-13

This is the main point
“Since 1993, the Bloomberg Barclays US Aggregate Index, dominated by government and investment-grade corporate bonds, fell 1.2% on average during months when yields increased by at least 0.3%. But it rose 2.6% over the next six months,” AllianceBernstein wrote.
...
Have not read the article but what happened in the 1950 to 1980 period? Rates were on an upward path back then. Quite different from 1980 to 2018.

Let's face it, we don't know what the rate path will be for the next 5 years.

pascalwager
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Re: Why investors shouldn’t panic over falling bond prices

Post by pascalwager » Sun Feb 18, 2018 10:34 pm

livesoft wrote:
Sun Feb 18, 2018 5:06 pm
Doesn't this suggest that investors should get out of Total US Bond index funds, then buy back in after it drops another 2% whether that takes 1 month or 1 year? Doing that would not be panicking, but would be a rational decision to get off a dead horse.

The one year return of Total US Bond Index fund, short-term corporate bond index fund, and Vanguard Prime MM fund are all about 1% right now. :twisted:
I would wait for advice from Vanguard, Allan Roth, and Taylor Larimore.

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Re: Why investors shouldn’t panic over falling bond prices

Post by Scooter57 » Sun Feb 18, 2018 11:25 pm

Vanguard is not an unbiased source now that they have put a fortune into attracting new customers. If the new customers pull their money outoff bond funds it's a problem for them.

If you rely on the advice of anyone without understanding exactky what you own and how it is expected to work you will make poor decisions. I don't say this from a liofty height. I say it as someone who made a lot of dmb mistakes over the years when I only read a few books about index fund investing and didn,t' know how much I didn't know. Considering the impact on our lives, it's criminal that there is no requirement that our educations provide one year of study of markets and investing!

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Re: Why investors shouldn’t panic over falling bond prices

Post by venkman » Mon Feb 19, 2018 12:38 am

Scooter57 wrote:
Sun Feb 18, 2018 11:25 pm
Vanguard is not an unbiased source now that they have put a fortune into attracting new customers. If the new customers pull their money outoff bond funds it's a problem for them.
If Vanguard operates its funds at cost and doesn't charge 12b-1 fees, where are they getting the money to attract new customers?

More to the point, why would they even be trying to attract new customers? From a service standpoint, they seem to be struggling to keep up with all the new customers who keep coming in on their own.

dkturner
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Re: Why investors shouldn’t panic over falling bond prices

Post by dkturner » Mon Feb 19, 2018 10:00 am

venkman wrote:
Mon Feb 19, 2018 12:38 am
Scooter57 wrote:
Sun Feb 18, 2018 11:25 pm
Vanguard is not an unbiased source now that they have put a fortune into attracting new customers. If the new customers pull their money outoff bond funds it's a problem for them.
If Vanguard operates its funds at cost and doesn't charge 12b-1 fees, where are they getting the money to attract new customers?

More to the point, why would they even be trying to attract new customers? From a service standpoint, they seem to be struggling to keep up with all the new customers who keep coming in on their own.
Just a wild guess, but it may have something to do with the financial incentives management have. If your compensation is tied to the rate of growth in assets under management (or even worse, growth of new money coming into the firm) It may explain all the Vanguard ads touting low expenses.

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Re: Why investors shouldn’t panic over falling bond prices

Post by Scooter57 » Mon Feb 19, 2018 3:25 pm

dkturner wrote:
Mon Feb 19, 2018 10:00 am

Just a wild guess, but it may have something to do with the financial incentives management have. If your compensation is tied to the rate of growth in assets under management (or even worse, growth of new money coming into the firm) It may explain all the Vanguard ads touting low expenses.
That sound about right. They show me ads everywhere I go online so they must have a significant ad budget. The infrastructure cost associated with their huge expansion over the past couple years must outweigh any cost savings to individual investors in the form of lower fund expenses.

I liked them a lot better when they were small, cute, and cuddly. I've been with them since the 1980s.

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Re: Why investors shouldn’t panic over falling bond prices

Post by pascalwager » Tue Feb 20, 2018 2:10 am

livesoft wrote:
Sun Feb 18, 2018 5:06 pm
Doesn't this suggest that investors should get out of Total US Bond index funds, then buy back in after it drops another 2% whether that takes 1 month or 1 year? Doing that would not be panicking, but would be a rational decision to get off a dead horse.

The one year return of Total US Bond Index fund, short-term corporate bond index fund, and Vanguard Prime MM fund are all about 1% right now. :twisted:
I didn't get out of TBM, but I brought down the duration by combining it (1:2) with the VG short-term bond index fund. I think I can live with 3.8 years, nearly the same as my DFA Global Bond fund.

I had one- and two-year DFA bond funds for over 15 years so I'm used to the low yields, barely beating inflation then, not even doing that now. In my experience, DFA advisors prefer to minimize term risk by using only short term bond funds.

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Re: Why investors shouldn’t panic over falling bond prices

Post by JBTX » Tue Feb 20, 2018 2:27 am

BuyAndHoldOn wrote:
Sat Feb 17, 2018 7:34 am
https://www.marketwatch.com/story/why-i ... 2018-02-13

This is the main point
“Since 1993, the Bloomberg Barclays US Aggregate Index, dominated by government and investment-grade corporate bonds, fell 1.2% on average during months when yields increased by at least 0.3%. But it rose 2.6% over the next six months,” AllianceBernstein wrote.

....

And matching the holding period to the average duration of a bond fund is a good way to assure positive returns.

Duration is the time it takes for investors to recover their initial investment from the cash flows, or interest payments, of a bond. Because of interest payments, the duration of a bond is shorter than its maturity and the higher the yield, the shorter the duration. The longer the duration of the bond, the more sensitive its price is to changes in interest rates.

The AllianceBernstein analysts calculated the impact of a larger selloff on bond fund returns and found that “investors who take a long view can rest easy.”

“A year after the 1% spike [in yields], the seven-year U.S. Treasury, whose duration is similar to the U.S. Aggregate’s, would be down almost 2%. But over time, higher yields lead to higher returns. Our analysis suggested that investors who sat tight for three years and reinvested their coupons could have earned a cumulative return of 6%. Six years later, the return in our analysis was nearly 17%,” AllianceBerstein wrote.


I thought this stat was interesting.
Since 1923, the 10-year Treasury note has never seen a nominal annual loss of more than 12%, according to Ben Carlson of Ritholtz Wealth Management. That’s smaller than typical correction in stocks of around 15%.
source: http://awealthofcommonsense.com/2016/08 ... ify-bonds/
All of this was done during a long cycle of decreasing rates, so it isn’t shocking that losses from
a temporary upward blip in would reverse fairly quickly as the rates went back on their long term downward trend.

Also the point about real returns is valid. From a nominal perspective late 70s-early 80s bonds didn’t look so bad. From a real return they got slaughtered.

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

https://www.minneapolisfed.org/communit ... rates-1913

From 1976 to 1981 the 10 year T bond nominal price including compounded interest was basically flat.

Cumulative CPI inflation was 60% during that time frame.

The result is they lost 38% in real value during that 5 year period.

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Re: Why investors shouldn’t panic over falling bond prices

Post by in_reality » Tue Feb 20, 2018 4:15 am

JBTX wrote:
Tue Feb 20, 2018 2:27 am
Also the point about real returns is valid. From a nominal perspective late 70s-early 80s bonds didn’t look so bad. From a real return they got slaughtered.

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

https://www.minneapolisfed.org/communit ... rates-1913

From 1976 to 1981 the 10 year T bond nominal price including compounded interest was basically flat.

Cumulative CPI inflation was 60% during that time frame.

The result is they lost 38% in real value during that 5 year period.
The general rule for bonds is to hold to duration so you can recover from NAV losses which occur from rising rates. I don't think it's any surprise to see a loss after a rate hike. For funds of course, it's more complicated at subsequent hikes will extend the time to recovery.

In any case, the data you point to shows that subsequent returns included:

1982 32.81% <--vs cpi 6.1%
1985 25.71% <--vs cpi 3.5%
1986 24.28% <--vs cpi 1.9%

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Re: Why investors shouldn’t panic over falling bond prices

Post by Tamarind » Tue Feb 20, 2018 5:43 am

Scooter57 wrote:
Mon Feb 19, 2018 3:25 pm
That sound about right. They show me ads everywhere I go online so they must have a significant ad budget.
Not to detract from your main point, but you would be surprised how little it takes to do that. If they have a competent ad buyer (more likely team thereof), the marginal cost of showing you another retargeting ad is measured in hundredths or thousandths of a cent. If you clear your cookies and stop clicking on ads, you'll stop seeing them and VG will not have to pay for them. :twisted:

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Re: Why investors shouldn’t panic over falling bond prices

Post by visualguy » Tue Feb 20, 2018 8:29 am

Scooter57 wrote:
Sat Feb 17, 2018 11:22 am
Consider the source. Alliance Bernstein has a stake in keeping investors buying bonds and bond funds.

All this backtestng is bogus because a 1% rate increase when bonds are at 8% is very different than one at 2%. Plus we are in a completely different market environment now with people day trading bond ETFs and derivatives. Bonds in the 1980s were sold very differently.

Nobody knows nothing is a much safer approach. There's no harm in sticking with money market funds and CDs either. The yield on bond funds right now does not compensate you for the additional risk.
+1 It's rewardless risk. Stick to CDs and stable value funds where possible.

Also, my advice is to take a part of the overall portfolio and diversify to direct real estate if you're ok with being a landlord. Good returns (including at times of inflation) in the right locations, and good tax treatment.

Greg in Idaho
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Re: Why investors shouldn’t panic over falling bond prices

Post by Greg in Idaho » Tue Feb 20, 2018 12:20 pm

I believe I understand that with (**predictions of**) increasing rates and higher inflation, risks of bond values dropping is there...but lower prices and higher yields have an upside don't they?

Wouldn't it be better to be being bonds or bond funds now, compared to a year ago?

venkman
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Re: Why investors shouldn’t panic over falling bond prices

Post by venkman » Tue Feb 20, 2018 11:23 pm

dkturner wrote:
Mon Feb 19, 2018 10:00 am
Just a wild guess, but it may have something to do with the financial incentives management have. If your compensation is tied to the rate of growth in assets under management (or even worse, growth of new money coming into the firm) It may explain all the Vanguard ads touting low expenses.
But how much of a financial incentive for growth does Vanguard have? If they operate at cost, it doesn't matter how much they grow. They're going to continue to take in exactly what it costs them to run the funds.

There might be some incentive to grow the funds to take advantage of economies of scale, but there's only so much more they can squeeze out of that. Plus, those ER costs are borne by the fund shareholders, so there's no direct financial incentive for Vanguard to reduce them.

JustinR
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Re: Why investors shouldn’t panic over falling bond prices

Post by JustinR » Tue Feb 20, 2018 11:46 pm

So you guys are saying now would not be a good time to buy bonds to rebalance? What should we do if our AA is off-balance? Leave it for now?

What metrics should we look at to see if we should or shouldn't buy bonds?

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Re: Why investors shouldn’t panic over falling bond prices

Post by ogd » Wed Feb 21, 2018 12:01 am

JustinR wrote:
Tue Feb 20, 2018 11:46 pm
So you guys are saying now would not be a good time to buy bonds to rebalance? What should we do if our AA is off-balance? Leave it for now?
Go ahead and rebalance - that's why you have an AA. You should in fact feel better now buying bonds at 2.65% (@5 years) than a year ago at 1.9%, when none of these panic threads existed, it's an objectively better time. People overweigh recent past far too much in both bonds and stocks and things always "are falling" instead of "have fallen", etc. Pay no attention to recent trends -- nobody has cracked the code on how to time the market.
JustinR wrote: What metrics should we look at to see if we should or shouldn't buy bonds?
The only one should be -- as always -- do you have an objectively better investment with the same qualities that you can use? Typically, this involves something not available to the market at large, or the market will have priced bonds and investment X accordingly. Examples are: CDs bought directly for the bank with a relatively low early withdrawal penalty (an early withdrawal option does actually reduce interest rate risk far below the N years stated in the term), or stable value funds with yields considerably higher than short term Treasuries in your 401k. The first option requires extra effort, but it's effort actually well spent, unlike trying to time the bond market.

If one such opportunity shows up, then -- as always -- it's even worth moving existing bonds to it sometimes.

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Re: Why investors shouldn’t panic over falling bond prices

Post by JustinR » Wed Feb 21, 2018 12:14 am

ogd wrote:
Wed Feb 21, 2018 12:01 am
JustinR wrote: What metrics should we look at to see if we should or shouldn't buy bonds?
The only one should be -- as always -- do you have an objectively better investment with the same qualities that you can use? Typically, this involves something not available to the market at large, or the market will have priced bonds and investment X accordingly. Examples are: CDs bought directly for the bank with a relatively low early withdrawal penalty (an early withdrawal option does actually reduce interest rate risk far below the N years stated in the term), or stable value funds with yields considerably higher than short term Treasuries in your 401k. The first option requires extra effort, but it's effort actually well spent, unlike trying to time the bond market.

If one such opportunity shows up, then -- as always -- it's even worth moving existing bonds to it sometimes.
Which number should I be looking at when comparing bonds to CDs?

Like on this page: https://personal.vanguard.com/us/FundsS ... true#tab=1

Should I be comparing the APR of a CD to the equivalent average annual returns on the bonds (in this case 2.02% for 1yr)?

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Re: Why investors shouldn’t panic over falling bond prices

Post by ogd » Wed Feb 21, 2018 12:31 am

JustinR wrote:
Wed Feb 21, 2018 12:14 am
Should I be comparing the APR of a CD to the equivalent average annual returns on the bonds (in this case 2.02% for 1yr)?
Use SEC yield for funds. The other numbers are backward looking, like it would be to say "last year I made 2.5% in a 1 year CD at X Bank" -- well, that was then and I need to look at the APR of the CD I'm buying now. The SEC yield is the rough equivalent of that APR.

Make sure to compare duration so it's apples to apples. A 7 year duration fund is entitled to make more than a 2 year CD, as it's taking more interest rate risk and that's often rewarded. Interestingly enough, on rare occasions the market values the ability of the 7 year fund to keep up a certain yield for 7 years more than the short term of the 2 year CD ("reinvestment risk" is the counterpart of "interest rate risk"), usually before a recession. But I digress.

CDs are govt-insured up to 250k, so the direct equivalent is a Treasury ("Government") fund. VBTLX is slightly riskier from a credit perspective, but no by much.

If state tax is an issue, the govt-invested funds of portions thereof are exempt from state tax, whereas CDs pay it. Worth a slight adjustment. But always worth looking at munis in these cases too.

Finally, an early withdrawal option reduces the interest rate risk of a CD to very small, on the scale of the early withdrawal penalty (e.g. half a year), provided you're willing to call the bank and break CDs ruthlessly if bond yields go up. This (again) is the greatest quality of CDs bought directly from a bank.

Hope this helps!

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Re: Why investors shouldn’t panic over falling bond prices

Post by JustinR » Wed Feb 21, 2018 6:20 am

ogd wrote:
Wed Feb 21, 2018 12:31 am
JustinR wrote:
Wed Feb 21, 2018 12:14 am
Should I be comparing the APR of a CD to the equivalent average annual returns on the bonds (in this case 2.02% for 1yr)?
Use SEC yield for funds. The other numbers are backward looking, like it would be to say "last year I made 2.5% in a 1 year CD at X Bank" -- well, that was then and I need to look at the APR of the CD I'm buying now. The SEC yield is the rough equivalent of that APR.

Make sure to compare duration so it's apples to apples. A 7 year duration fund is entitled to make more than a 2 year CD, as it's taking more interest rate risk and that's often rewarded. Interestingly enough, on rare occasions the market values the ability of the 7 year fund to keep up a certain yield for 7 years more than the short term of the 2 year CD ("reinvestment risk" is the counterpart of "interest rate risk"), usually before a recession. But I digress.

CDs are govt-insured up to 250k, so the direct equivalent is a Treasury ("Government") fund. VBTLX is slightly riskier from a credit perspective, but no by much.

If state tax is an issue, the govt-invested funds of portions thereof are exempt from state tax, whereas CDs pay it. Worth a slight adjustment. But always worth looking at munis in these cases too.

Finally, an early withdrawal option reduces the interest rate risk of a CD to very small, on the scale of the early withdrawal penalty (e.g. half a year), provided you're willing to call the bank and break CDs ruthlessly if bond yields go up. This (again) is the greatest quality of CDs bought directly from a bank.

Hope this helps!
So the 2.90% SEC yield on VBTLX isn't that bad, right? Better than CDs right now. Thanks for all your help understanding this!

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Re: Why investors shouldn’t panic over falling bond prices

Post by Scooter57 » Wed Feb 21, 2018 10:47 am

JustinR wrote:
Wed Feb 21, 2018 6:20 am

So the 2.90% SEC yield on VBTLX isn't that bad, right? Better than CDs right now. Thanks for all your help understanding this!
Absolutely not. Go have a look at Vanguard's summary of the funds performance which you'll find here:

https://investor.vanguard.com/mutual-fu ... nd-returns

As you can see, while the interest payment of the Total Bond Market Index Fund is 2.90%, the YTD loss is -2.15%. So your real gain had you bought that CD Jan 2 would be .75%. With a duration of 6.1, the fund isn't going to be recovering fast unless there is a shock drop in the economy that stops the Fed from raising rates. Not likely to happen for another year or two. The inflation measures the Fed tracks have risen dramatically. Employment is more than full. There are more than whispers that the Fed may raise rates 4 or even 5 times this year if inflation continues, which given the rise in oil prices is likely to happen. Three .25% rises are already expected. This suggests that the NAV of the Total Bond Market Index could drop a bunch more. WIth a 6.1 duration, a one point rise in interest rates is predicted to result in a 6% drop in NAV.

The worst you experience with a bank or credit uniton CD would be to withdraw it early, in which case you'd pay an early withdrawal penalty of no more than 1 year's interest (if it is a long CD) or 6 months interest if short. Your principle remains intact.

Brokered CDs aren't really CDs. They are bonds and you don't have the early withdrawal option which is what makes CDs such a good investment when increasing inflation is a possibility.

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Re: Why investors shouldn’t panic over falling bond prices

Post by Toons » Wed Feb 21, 2018 10:50 am

Panic Over Money?
Take Charge Of The Mind.
It is "Money".
Not life.






:idea: :idea:
"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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BuyAndHoldOn
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Re: Why investors shouldn’t panic over falling bond prices

Post by BuyAndHoldOn » Wed Feb 21, 2018 5:03 pm

BlueEars wrote:
Sun Feb 18, 2018 5:15 pm

Have not read the article but what happened in the 1950 to 1980 period? Rates were on an upward path back then. Quite different from 1980 to 2018.

Let's face it, we don't know what the rate path will be for the next 5 years.
Nope, we sure don't. I bought shorter-term bonds (VMLTX) in 2014 to prepare for rising rates. They mostly showed up this year.

JBTX wrote:
Tue Feb 20, 2018 2:27 am


All of this was done during a long cycle of decreasing rates, so it isn’t shocking that losses from
a temporary upward blip in would reverse fairly quickly as the rates went back on their long term downward trend.

Also the point about real returns is valid. From a nominal perspective late 70s-early 80s bonds didn’t look so bad. From a real return they got slaughtered.

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

https://www.minneapolisfed.org/communit ... rates-1913

From 1976 to 1981 the 10 year T bond nominal price including compounded interest was basically flat.

Cumulative CPI inflation was 60% during that time frame.

The result is they lost 38% in real value during that 5 year period.
I understand. But rates were rising during the 1990s and the ~Mid 2000s. I don't know the future, but I think that is/was a reasonable facsimile for what is going on today. I don't think rates will be FOREVER going up unless inflation gets out of hand.


I will feel pretty foolish if the 10-year/other treasuries keeps rising rapidly, however :| Bonds are part of my AA to offset equity risk, economic risk/job loss, and return more than cash. These steep increases in yield don't make me feel like I am meeting my objectives. I think/hope I am long(er) term.

(And I have been buying into the "selloffs"; we'll see how that goes. I started off buying shorter-duration, but gradually moved up to the 7-10 year range (IEF) with treasuries. I clearly was early, but even my IEF purchases this year have MUCH smaller losses than any bond funds I bought into from 2014-2017]).
Last edited by BuyAndHoldOn on Wed Feb 21, 2018 5:39 pm, edited 4 times in total.

JustinR
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Re: Why investors shouldn’t panic over falling bond prices

Post by JustinR » Wed Feb 21, 2018 5:28 pm

Scooter57 wrote:
Wed Feb 21, 2018 10:47 am
JustinR wrote:
Wed Feb 21, 2018 6:20 am

So the 2.90% SEC yield on VBTLX isn't that bad, right? Better than CDs right now. Thanks for all your help understanding this!
Absolutely not. Go have a look at Vanguard's summary of the funds performance which you'll find here:

https://investor.vanguard.com/mutual-fu ... nd-returns

As you can see, while the interest payment of the Total Bond Market Index Fund is 2.90%, the YTD loss is -2.15%. So your real gain had you bought that CD Jan 2 would be .75%. With a duration of 6.1, the fund isn't going to be recovering fast unless there is a shock drop in the economy that stops the Fed from raising rates. Not likely to happen for another year or two. The inflation measures the Fed tracks have risen dramatically. Employment is more than full. There are more than whispers that the Fed may raise rates 4 or even 5 times this year if inflation continues, which given the rise in oil prices is likely to happen. Three .25% rises are already expected. This suggests that the NAV of the Total Bond Market Index could drop a bunch more. WIth a 6.1 duration, a one point rise in interest rates is predicted to result in a 6% drop in NAV.

The worst you experience with a bank or credit uniton CD would be to withdraw it early, in which case you'd pay an early withdrawal penalty of no more than 1 year's interest (if it is a long CD) or 6 months interest if short. Your principle remains intact.

Brokered CDs aren't really CDs. They are bonds and you don't have the early withdrawal option which is what makes CDs such a good investment when increasing inflation is a possibility.
So how do you know when it's OK to buy vbtlx again, if SEC yield isn't sufficient?

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Re: Why investors shouldn’t panic over falling bond prices

Post by jdb » Wed Feb 21, 2018 6:19 pm

Toons wrote:
Wed Feb 21, 2018 10:50 am
Panic Over Money?
Take Charge Of The Mind.
It is "Money".
Not life.






:idea: :idea:
Again I agree with Toons. So much angst over market fluctuations. Another post mentioned that equity fluctuations were the market breathing. Same with interest rate fluctuations and changes in yield. Suggest picking an allocation you are comfortable with and worry about more important things in life. Right now I need to replenish the hummingbird feeder. Good luck.

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Blues
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Re: Why investors shouldn’t panic over falling bond prices

Post by Blues » Wed Feb 21, 2018 6:40 pm

jdb wrote:
Wed Feb 21, 2018 6:19 pm
Toons wrote:
Wed Feb 21, 2018 10:50 am
Panic Over Money?
Take Charge Of The Mind.
It is "Money".
Not life.
:idea: :idea:
Again I agree with Toons. So much angst over market fluctuations. Another post mentioned that equity fluctuations were the market breathing. Same with interest rate fluctuations and changes in yield. Suggest picking an allocation you are comfortable with and worry about more important things in life. Right now I need to replenish the hummingbird feeder. Good luck.
Well, that's all well and good...

...but not everyone here has the roughinest,toughinest,rootinest, tootinest bobtailed wildcat north, south east or west of the Pecos guarding their bullion. I'm just sayin'.

So, sure, Toons can afford to relax and read the Acme Mail Order Catalog at his leisure trying to find ways of dealing with that pesky roadrunner.

But some of us have to worry about keeping Elmer Fudd from setting up the next bond ladder.

:mrgreen:
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

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Index Fan
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Re: Why investors shouldn’t panic over falling bond prices

Post by Index Fan » Wed Feb 21, 2018 6:43 pm

Everybody thinks they can time the bond market. Everyone knew that there was no place to go but down many years ago.

Nobody knows nothing.
"Optimum est pati quod emendare non possis." | -Seneca

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triceratop
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Re: Why investors shouldn’t panic over falling bond prices

Post by triceratop » Wed Feb 21, 2018 6:47 pm

Scooter57 wrote:
Mon Feb 19, 2018 3:25 pm
dkturner wrote:
Mon Feb 19, 2018 10:00 am

Just a wild guess, but it may have something to do with the financial incentives management have. If your compensation is tied to the rate of growth in assets under management (or even worse, growth of new money coming into the firm) It may explain all the Vanguard ads touting low expenses.
That sound about right. They show me ads everywhere I go online so they must have a significant ad budget. The infrastructure cost associated with their huge expansion over the past couple years must outweigh any cost savings to individual investors in the form of lower fund expenses.

I liked them a lot better when they were small, cute, and cuddly. I've been with them since the 1980s.
This does not necessarily follow. And it's easy to see it's false, because Vanguard has repeatedly cut expense ratios over the past few years (or rather, they don't "cut" expense ratios, they report backward-looking realized expenses which declined year-over-year).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Why investors shouldn’t panic over falling bond prices

Post by pop77 » Wed Feb 21, 2018 7:03 pm

Just for a different POV (not sure I agree)

https://wealthtrack.com/financial-marke ... more-18269

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Re: Why investors shouldn’t panic over falling bond prices

Post by Toons » Wed Feb 21, 2018 8:07 pm

jdb wrote:
Wed Feb 21, 2018 6:19 pm
Toons wrote:
Wed Feb 21, 2018 10:50 am
Panic Over Money?
Take Charge Of The Mind.
It is "Money".
Not life.






:idea: :idea:
Again I agree with Toons. So much angst over market fluctuations. Another post mentioned that equity fluctuations were the market breathing. Same with interest rate fluctuations and changes in yield. Suggest picking an allocation you are comfortable with and worry about more important things in life. Right now I need to replenish the hummingbird feeder. Good luck.
:sharebeer
In bold above,,,,Your priorities are aligned with the Stars..... :happy
"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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Toons
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Re: Why investors shouldn’t panic over falling bond prices

Post by Toons » Wed Feb 21, 2018 8:08 pm

Blues wrote:
Wed Feb 21, 2018 6:40 pm
jdb wrote:
Wed Feb 21, 2018 6:19 pm
Toons wrote:
Wed Feb 21, 2018 10:50 am
Panic Over Money?
Take Charge Of The Mind.
It is "Money".
Not life.
:idea: :idea:
Again I agree with Toons. So much angst over market fluctuations. Another post mentioned that equity fluctuations were the market breathing. Same with interest rate fluctuations and changes in yield. Suggest picking an allocation you are comfortable with and worry about more important things in life. Right now I need to replenish the hummingbird feeder. Good luck.
Well, that's all well and good...

...but not everyone here has the roughinest,toughinest,rootinest, tootinest bobtailed wildcat north, south east or west of the Pecos guarding their bullion. I'm just sayin'.

So, sure, Toons can afford to relax and read the Acme Mail Order Catalog at his leisure trying to find ways of dealing with that pesky roadrunner.

But some of us have to worry about keeping Elmer Fudd from setting up the next bond ladder.

:mrgreen:
Hahahah...Excellent,,,,, :mrgreen: :mrgreen: :sharebeer
"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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Blues
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Re: Why investors shouldn’t panic over falling bond prices

Post by Blues » Wed Feb 21, 2018 8:12 pm

:sharebeer
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

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Re: Why investors shouldn’t panic over falling bond prices

Post by Noobvestor » Thu Feb 22, 2018 12:28 am

ogd wrote:
Wed Feb 21, 2018 12:31 am
JustinR wrote:
Wed Feb 21, 2018 12:14 am
Should I be comparing the APR of a CD to the equivalent average annual returns on the bonds (in this case 2.02% for 1yr)?
Use SEC yield for funds. The other numbers are backward looking, like it would be to say "last year I made 2.5% in a 1 year CD at X Bank" -- well, that was then and I need to look at the APR of the CD I'm buying now. The SEC yield is the rough equivalent of that APR.
There's an important caveat here: some of us hold bond funds in part because of potential correlation benefits. For instance, when the stock market crashed in 08/09, Treasuries ultimately went in the other direction, offsetting some of the losses. CD returns, of course, were flat - you bought at a certain rate, and that's what you got. Bond rates could rise, but in a crisis, they could also fall again. My crystal ball remains cloudy.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why investors shouldn’t panic over falling bond prices

Post by pascalwager » Thu Feb 22, 2018 5:19 pm

pascalwager wrote:
Sun Feb 18, 2018 10:34 pm
livesoft wrote:
Sun Feb 18, 2018 5:06 pm
Doesn't this suggest that investors should get out of Total US Bond index funds, then buy back in after it drops another 2% whether that takes 1 month or 1 year? Doing that would not be panicking, but would be a rational decision to get off a dead horse.

The one year return of Total US Bond Index fund, short-term corporate bond index fund, and Vanguard Prime MM fund are all about 1% right now. :twisted:
I would wait for advice from Vanguard, Allan Roth, and Taylor Larimore.
Back in 2009, W. Bernstein advised staying in cash until T-Notes rose above 3 or 4 percent (his timing wasn't advantageous). So yes, it might be wise now to cash out on TBM and wait for 3 or 4 percent. But I wouldn't buy only TBM then, but would combine it with short term bond index for a shorter duration figure.

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