Is Now the Time to Reduce Bond Duration?

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Is Now the Time to Reduce Bond Duration?

Post by goodenyou » Sat Mar 03, 2018 2:48 pm

With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
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Re: Is Now the Time to Reduce Bond Duration?

Post by dbr » Sat Mar 03, 2018 2:57 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
The decision depends on your ability to predict in detail the future evolution of interest rates. Since this is pretty much not doable, your question can't be answered. Considering that rising interest rates eventually deliver higher overall return to long term investors it seems to me that it makes sense to just hold intermediate term bonds and leave it alone.

In the rare case that you have money in bonds but with an objective of recovering an exactly known amount at a particular time you would need a much more specific plan, such as individual bonds dated to that point in time or CDs etc.

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Re: Is Now the Time to Reduce Bond Duration?

Post by goodenyou » Sat Mar 03, 2018 3:04 pm

dbr wrote:
Sat Mar 03, 2018 2:57 pm
goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
The decision depends on your ability to predict in detail the future evolution of interest rates. Since this is pretty much not doable, your question can't be answered. Considering that rising interest rates eventually deliver higher overall return to long term investors it seems to me that it makes sense to just hold intermediate term bonds and leave it alone.

In the rare case that you have money in bonds but with an objective of recovering an exactly known amount at a particular time you would need a much more specific plan, such as individual bonds dated to that point in time or CDs etc.
I was hoping that you could predict the future :D. I assume “staying the course” would be applicable to bonds and their duration as well. Thanks.
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Re: Is Now the Time to Reduce Bond Duration?

Post by tibbitts » Sat Mar 03, 2018 3:15 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
Obviously in retrospect, the time to reduce duration was some time ago. Looking forward is another story. It was obvious that reducing duration would have been a good move every year for a decade or so now, and in most cases that move wouldn't have paid off.

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Re: Is Now the Time to Reduce Bond Duration?

Post by whodidntante » Sat Mar 03, 2018 3:28 pm

You're asking a market timing question. If you're going to time the market, I would suggest you use a timing model that is systematic and quantitative, like trend following with a 200 day moving average. A 200 day SMA would have you out of both short term or intermediate term bond funds right now. "Out" could mean you buy zero duration fixed income like a stable value fund, or it could mean you buy another asset that hasn't triggered a sell signal.

Please note that proper Bogleheads do not time the market, so you won't get much support here.

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Re: Is Now the Time to Reduce Bond Duration?

Post by nisiprius » Sat Mar 03, 2018 3:33 pm

No crystal ball here, either, but I will point out two things:

1) Queries like yours have been made quite regularly in this forum at since 2009, when a poster asked here,
I see the total bond fund and intermediate treasuries recommended a lot on here. I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit.

So isn't it wise to go short in this environment where rates can only go up?
An investor who stayed the course in the Vanguard Total Bond Market Index Fund, VBMFX, starting on the day that question was asked, would have experienced the growth shown by the blue line. One who switched to the Vanguard Short-Term Bond Market Index Fund, VBISX, would have experienced the growth shown by the orange line. (Yes, I can see that the rate of growth in the blue line has been slowing, and I see the ups and downs).

Image

2) In April, 2014, Bloomberg polled 67 economists regarding how they thought the ten-year Treasury yield would move in the next six months. 67 out of 67 economists said it would go up, the main question was how long it would take to get to 4%.

The rate went down.

Do not assume that anybody knows what interest rates will do, even when it seems obvious and "everybody" says so.

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Re: Is Now the Time to Reduce Bond Duration?

Post by whodidntante » Sat Mar 03, 2018 3:36 pm

Also note I am not a trend follower. What I have done is:
Buy an equity market neutral long-short equity fund.
Buy a stable value fund for 50% of my fixed income. This has the effect of reducing my duration.
Buy an intermediate term bond fund for the other 50% of my fixed income.

I will probably dump the equity market neutral fund if bond yields become reasonable again, but continue to split my fixed income.

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sat Mar 03, 2018 3:50 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
I have an allocation to Total US bond index and Short-term corporate bond index. I just look at a chart to decide what to do:

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It really is that easy.
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Re: Is Now the Time to Reduce Bond Duration?

Post by saltycaper » Sat Mar 03, 2018 4:06 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm

Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
A year ago, you were offered about 1.05% more yield to move from a 1-year maturity to a 5-year maturity, and about 0.46% more yield to move from 5 years to 10 years. Today, you are offered about 0.57% to go from 1 year to 5 years and about 0.23% to go from 5 years to 10 years. If you think there was a sweet spot before, and whether you prefer hitting the steepest part of the curve or just demand a certain percentage more yield for taking more term risk, then the sweet spot is probably less than 5 years duration.
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Re: Is Now the Time to Reduce Bond Duration?

Post by Tyler Aspect » Sat Mar 03, 2018 4:30 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
Here is link where you can see the daily Treasury rates along the complete yield curve.

https://www.treasury.gov/resource-cente ... data=yield

If you switch to a short term bond product, then you have to be able to switch back to the intermediate term bond product at the right time, which is not that easy to do, but not impossible. This is a trade-off of how much lost net asset value you avoided, versus how much dividend you went without. If you look back in history, the vision is 100%; however, going toward the future, the intermediate term yield can go up / stay put / go down. Can you determine the peak, or to a point where you can say "this is close enough"?
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Re: Is Now the Time to Reduce Bond Duration?

Post by dkturner » Sat Mar 03, 2018 5:06 pm

Comparing the Vanguard short and intermediate-term investment grade bond funds, you are only getting 38 basis points of additional yield by holding the intermediate-term fund rather than the short-term fund. The intermediate-term fund has an average duration that is 3.1 years longer than the 2.4 year duration of the short-term fund. That works out to a whopping 12 basis points of additional yield for each year of increase in duration one gets by holding the intermediate-term fund. For me that’s insufficient compensation for taking the additional term risk. I’m forgoing that additional 38 basis points of yield and holding the short-term investment grade fund instead.

A case can be made that the bond bull market, that began in 1982, ended in 2012. In the five years since 2012 five and ten year Treasury notes have only provided nominal total returns of about 1% per year. Real total returns for the last 5 years have been negative. No one knows the future but the Federal Reserve is strongly indicating that it will “guide” interest rates higher over the next year or two - or until a recession appears on the horizon and the Fed can start lowering rates again.

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Re: Is Now the Time to Reduce Bond Duration?

Post by patrick013 » Sat Mar 03, 2018 5:07 pm

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I don't know either if there will be 2 or 4 or no rate increases
this year but BLV has a duration of 15 so I don't think long
term bonds is where I will be at least not till rates peak. There's
duration risk unless some short-medium CD's are held to maturity
as sort of a target date approach.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sat Mar 03, 2018 5:16 pm

Tyler Aspect wrote:
Sat Mar 03, 2018 4:30 pm
Can you determine the peak, or to a point where you can say "this is close enough"?
Correct. One has to decide what they want. If one is not greedy, then the "want" could be simple, such as:

"I will buy back Total US Bond Market index fund after it drops a half percent from when I sell it."


But if one wants:

"I will buy back Total US Bond Market index fund after it drops a one-and-a-half percent from when I sell it."

Then that may be more difficult.
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Re: Is Now the Time to Reduce Bond Duration?

Post by abuss368 » Sat Mar 03, 2018 5:25 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease. Does the decision rest on the need for liquidity only? Is the sweet spot still intermediate duration with an average duration of 5 years, or have you moved to a shorter duration?
Hi goodenyou -

No one really knows the future movement of interest rates. In fact, it has been said that predicting interest rates is harder than predicting the stock markets! Investors would be wise to consider a short or intermediate term investment grade bond fund and stay the course.

The beauty of a Boglehead investment portfolio is one can tune out the market noise.
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Re: Is Now the Time to Reduce Bond Duration?

Post by abuss368 » Sat Mar 03, 2018 5:26 pm

nisiprius wrote:
Sat Mar 03, 2018 3:33 pm
No crystal ball here, either, but I will point out two things:

1) Queries like yours have been made quite regularly in this forum at since 2009, when a poster asked here,
I see the total bond fund and intermediate treasuries recommended a lot on here. I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit.

So isn't it wise to go short in this environment where rates can only go up?
An investor who stayed the course in the Vanguard Total Bond Market Index Fund, VBMFX, starting on the day that question was asked, would have experienced the growth shown by the blue line. One who switched to the Vanguard Short-Term Bond Market Index Fund, VBISX, would have experienced the growth shown by the orange line. (Yes, I can see that the rate of growth in the blue line has been slowing, and I see the ups and downs).

Image

2) In April, 2014, Bloomberg polled 67 economists regarding how they thought the ten-year Treasury yield would move in the next six months. 67 out of 67 economists said it would go up, the main question was how long it would take to get to 4%.

The rate went down.

Do not assume that anybody knows what interest rates will do, even when it seems obvious and "everybody" says so.

Image
Isn't the difference in investment results between short and intermediate term bond funds incredible considering the market noise over the last ten years. I recall Rick Ferri talked about this impact moving forward at the time.
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Re: Is Now the Time to Reduce Bond Duration?

Post by grabiner » Sat Mar 03, 2018 8:35 pm

goodenyou wrote:
Sat Mar 03, 2018 2:48 pm
With the expectation of interest rate increases, it it time to reduce duration to preserve NAV of bond funds? I realize the yield will increase with rising interest rates, but the value will decrease.
And bond traders know that as well, so they trade bonds at prices which compensate them for that expectation. Currently, Vanguard Short-Term Bond Index yields 2.46%, and Intermediate-Term Bond Index yields 3.15%; you can collect that higher dividend in return for taking more interest-rate risk.

In addition, there is not just one "interest rate". The rates which the Fed plans to influence are very-short-term rates; the yields on longer-term bonds are based on bond traders' expectations over the whole term of the bond. If the federal funds rate rises by 1%, long-term bond yields are not likely to rise by the same 1%.
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Re: Is Now the Time to Reduce Bond Duration?

Post by aristotelian » Sat Mar 03, 2018 9:33 pm

When NAV drops, yield increases. That is, the return of new bonds is going up. It would be great if you could predict the bottom with certainty but the next best thing is to wait out the duration and benefit from the higher yield.

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Re: Is Now the Time to Reduce Bond Duration?

Post by welderwannabe » Sun Mar 04, 2018 7:29 am

I have made some small changes over the last year. The main changes I made last year was to start to take advantage of the stable value in my megacorp 401k as its yield climbed, and swing some of my CD allocation in my i401k over to individual tbill issues (3-6 month bills). That was done just to chase yield as CDs matured. Even these changes, my 401k bond duration is still around 4.75 years.

In my MegaCorp 401k my fixed income allocation is 44% actively managed high-fee intermediate bond fund and 56% stable value. In my i401k (which is largely made up of rollover IRA dollars) I am 50% intermediate term corporate bond fund, 25% intermediate treasuries, 25% short term treasuries and CDs.

In my taxable account I used to hold short term municipal fund and intermediate term municipal find. I switched all the short term fund money into the vanguard municipal MM as the yield premium to be in the short term fund isn't worth it in my opinion. My duration in taxable is around 4.5 years.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sun Mar 04, 2018 10:28 am

aristotelian wrote:
Sat Mar 03, 2018 9:33 pm
When NAV drops, yield increases. That is, the return of new bonds is going up. It would be great if you could predict the bottom with certainty but the next best thing is to wait out the duration and benefit from the higher yield.
It is a common fallacy that one needs to predict things with certainty and accuracy. There is really no need to "predict the bottom with certainty."

The goal is not to be a perfect market timer. The goal is simply to outperform by even a smidgeon what one was already doing and wants to stop doing. For instance, if one had their fixed income solely invested in the Vanguard Total Bond Market Index fund, then the goal would be to outperform the Total Bond Market Index fund for a little while. Then after that little while, one has to decide what to do next.

The YTD performance of the Vanguard Total Bond Market Index fund is today -2.07%. We don't know what the performance going forward will be and we don't know how long the next round of "performance" will last. We can probably say that switching temporarily (a month? 3 months? 6 months? 12 months?) to something else will probably not have significant consequences: It could be that one outperforms Total Bond Market Index by 1-2% or it could be that one underperforms Total Bond Market Index by 0.5-1.5% or something else. Whatever happens, it should not make or break one's finances.
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Re: Is Now the Time to Reduce Bond Duration?

Post by magneto » Sun Mar 04, 2018 10:55 am

From an earlier post with similar OP concerns.
Some comment around this subject, reminds investors that since 1980 ish Bonds have been in a benign environment with steadily falling yields and rising prices , see chart :-

http://www.multpl.com/10-year-treasury-rate

The two or three fund portfolio might over that period take advantage of ever rising Bond prices as a safe haven and profitable alternative to Stocks.
Those with longer memories are recalling say the 1970s as a period of falling Stock prices, combined with rising Bond yields, hence falling Bond prices (again see chart). The only safe-havens were Cash (not so very safe due to inflation) and Real Estate (esp Housing).

Not having any special insight into the future, this investor is playing it safe by keeping to Short-Duration Bonds à la mode Frank Armstrong (see 'The Informed Investor'), plus more than adequate reserves of Cash.
That -ve correlation on Longer-Duration Bonds may or may not show up.
If there is uncertainty; then why take risk on the supposedly Defensive-Side?
But this is thought fodder, not a recommendation.
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Re: Is Now the Time to Reduce Bond Duration?

Post by patrick013 » Sun Mar 04, 2018 1:49 pm

The Congressional Budget Office is to release a new economic
forecast on April 9 according to law. The forecast was delayed
for some reason as far as I can tell. It usually includes a forecast
for short and long term rates at least the federal ones. Have to
weigh that at least half of any decision I make.
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Re: Is Now the Time to Reduce Bond Duration?

Post by BetaTracker » Sun Mar 04, 2018 1:50 pm

Doesn't this whole discussion raise a more basic issue: Too much worry about risks in bonds? If you're thinking about this so early in an expected cycle of higher rates, why not just keep duration low (short-term bond index fund) on a permanent basis, and instead put more of your risk exposure into stocks by edging up your equity allocations a little more. Comparing returns of Total Bond and Short-Term Bond indexes seems fairly off-kilter. If you're not going to look at risk-adjusted returns and just settle for raw total returns, why not compare short-term bond vs. total stock market?
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Re: Is Now the Time to Reduce Bond Duration?

Post by abuss368 » Sun Mar 04, 2018 2:37 pm

I have always considered bonds for safety and income. We have invested in Total Bond Index for many years with various interest rate cycles and it has performed as expected. It is a fund that allows investors to sleep well at night.
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Re: Is Now the Time to Reduce Bond Duration?

Post by nisiprius » Sun Mar 04, 2018 3:17 pm

dkturner wrote:
Sat Mar 03, 2018 5:06 pm
...A case can be made that the bond bull market, that began in 1982, ended in 2012...
"In general, we have thought that this very long bull market in bonds must be somewhere near the end."--Sir John Templeton, 1993
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Re: Is Now the Time to Reduce Bond Duration?

Post by dbr » Sun Mar 04, 2018 4:07 pm

BetaTracker wrote:
Sun Mar 04, 2018 1:50 pm
Doesn't this whole discussion raise a more basic issue: Too much worry about risks in bonds? If you're thinking about this so early in an expected cycle of higher rates, why not just keep duration low (short-term bond index fund) on a permanent basis, and instead put more of your risk exposure into stocks by edging up your equity allocations a little more. Comparing returns of Total Bond and Short-Term Bond indexes seems fairly off-kilter. If you're not going to look at risk-adjusted returns and just settle for raw total returns, why not compare short-term bond vs. total stock market?
Really, now! That kind of thinking makes too much sense and would allow too many people to stop worrying and go work on something else, or maybe even go have fun.

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Re: Is Now the Time to Reduce Bond Duration?

Post by honduranhurricane » Sun Mar 04, 2018 6:34 pm

If your concerned about rising rate impact on bond prices, look at floating rate funds.

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Re: Is Now the Time to Reduce Bond Duration?

Post by Scott S » Sun Mar 04, 2018 6:54 pm

I plan to be invested in bonds for the next 60 years or so. Duration is not a worry for me.
My Plan: (Age-10)% in bonds until I reach age 60, 50/50 thereafter. Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

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Re: Is Now the Time to Reduce Bond Duration?

Post by CWRadio » Sun Mar 04, 2018 7:25 pm

Trying to understand how to handle intermediate bond funds in retirement to meet RMD requirements while the NAV of the fund goes down and yield increase?
Thanks Paul

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sun Mar 04, 2018 7:28 pm

CWRadio wrote:
Sun Mar 04, 2018 7:25 pm
Trying to understand how to handle intermediate bond funds in retirement to meet RMD requirements while the NAV of the fund goes down and yield increase?
Thanks Paul
I don't understand. At least our RMD's are only dependent on the values on December 31st of previous year, so it doesn't matter what any of the investments including bond funds do starting in the next year as far as one's RMD goes. That is, NAV and yield don't matter when considering RMD.
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Re: Is Now the Time to Reduce Bond Duration?

Post by CWRadio » Sun Mar 04, 2018 7:39 pm

livesoft wrote:
Sun Mar 04, 2018 7:28 pm
CWRadio wrote:
Sun Mar 04, 2018 7:25 pm
Trying to understand how to handle intermediate bond funds in retirement to meet RMD requirements while the NAV of the fund goes down and yield increase?
Thanks Paul
I don't understand. At least our RMD's are only dependent on the values on December 31st of previous year, so it doesn't matter what any of the investments including bond funds do starting in the next year as far as one's RMD goes. That is, NAV and yield don't matter when considering RMD.
To clarify, I need to sell some bond funds to meet the RMD distributions for the current year. Paul

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sun Mar 04, 2018 7:44 pm

CWRadio wrote:
Sun Mar 04, 2018 7:39 pm
To clarify, I need to sell some bond funds to meet the RMD distributions for the current year. Paul
We had to sell shares, too, so we just sold shares of VBMFX and FBIDX which are total US bond index fund shares without a second thought about it.
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Re: Is Now the Time to Reduce Bond Duration?

Post by saltycaper » Sun Mar 04, 2018 8:29 pm

nisiprius wrote:
Sun Mar 04, 2018 3:17 pm
dkturner wrote:
Sat Mar 03, 2018 5:06 pm
...A case can be made that the bond bull market, that began in 1982, ended in 2012...
"In general, we have thought that this very long bull market in bonds must be somewhere near the end."--Sir John Templeton, 1993
One of these statements is primarily a reflection on the past, the other is primarily a prediction about the future. I don't think one has anything to do with the other.
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Re: Is Now the Time to Reduce Bond Duration?

Post by aristotelian » Sun Mar 04, 2018 9:02 pm

livesoft wrote:
Sun Mar 04, 2018 10:28 am
The YTD performance of the Vanguard Total Bond Market Index fund is today -2.07%. We don't know what the performance going forward will be and we don't know how long the next round of "performance" will last. We can probably say that switching temporarily (a month? 3 months? 6 months? 12 months?) to something else will probably not have significant consequences: It could be that one outperforms Total Bond Market Index by 1-2% or it could be that one underperforms Total Bond Market Index by 0.5-1.5% or something else. Whatever happens, it should not make or break one's finances.
Sure. But if you switch to short term bonds in response to fall in bond prices, by the same logic, wouldn't you try to outperform by switching out of stocks when stocks appear to be falling, or increase duration when interest rates are going down, etc? It may work for a time but at the end of the day you are trying to time the market and that generally doesn't work out. How is this different than any number of "should I do X in response to the news about Y" posts?

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sun Mar 04, 2018 9:05 pm

aristotelian wrote:
Sun Mar 04, 2018 9:02 pm
Sure. But if you switch to short term bonds in response to fall in bond prices, by the same logic, wouldn't you try to outperform by switching out of stocks when stocks appear to be falling, or increase duration when interest rates are going down, etc? It may work for a time but at the end of the day you are trying to time the market and that generally doesn't work out. How is this different than any number of "should I do X in response to the news about Y" posts?
No, you would not. It would not be market timing, but would be rebalancing. Some folks even use CDs, but we don't dump on them for market timing.
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aristotelian
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Re: Is Now the Time to Reduce Bond Duration?

Post by aristotelian » Sun Mar 04, 2018 9:18 pm

livesoft wrote:
Sun Mar 04, 2018 9:05 pm
No, you would not. It would not be market timing, but would be rebalancing. Some folks even use CDs, but we don't dump on them for market timing.
I would raise a concern any time someone is deviating from their IPS in reaction to market events.

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Re: Is Now the Time to Reduce Bond Duration?

Post by livesoft » Sun Mar 04, 2018 9:34 pm

And for folks who had something in shorter-duration bonds (following their IPS), it may now be time to rebalance some into intermediate-term bonds.
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Re: Is Now the Time to Reduce Bond Duration?

Post by randomizer » Sun Mar 04, 2018 9:37 pm

Imma stay the course.
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Re: Is Now the Time to Reduce Bond Duration?

Post by dkturner » Mon Mar 05, 2018 3:34 pm

nisiprius wrote:
Sun Mar 04, 2018 3:17 pm
dkturner wrote:
Sat Mar 03, 2018 5:06 pm
...A case can be made that the bond bull market, that began in 1982, ended in 2012...
"In general, we have thought that this very long bull market in bonds must be somewhere near the end."--Sir John Templeton, 1993
Lets test this one out.

Templeton was trying to predict the peak in interest rates in 1993. He was wrong. For the ensuing five years five year treasuries provided annualized nominal total returns of 6.3% (3.9% real). After looking at the landscape over the prior five years I observed that the 1982-? bond bull market looked like it peaked in 2012, and plateaued over the five years from 2013-2017, where five year treasuries provided annualized nominal total returns of 1% (-.4% real). Templeton was predicting the future. I was merely examinations the past and observing that holding intermediate-term Treasuries had failed to earn their coupons for bond investors for the prior five years.

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Re: Is Now the Time to Reduce Bond Duration?

Post by zeugmite » Mon Mar 05, 2018 3:46 pm

dkturner wrote:
Mon Mar 05, 2018 3:34 pm
Templeton was trying to predict the peak in interest rates in 1993. He was wrong. For the ensuing five years five year treasuries provided annualized nominal total returns of 6.3% (3.9% real). After looking at the landscape over the prior five years I observed that the 1982-? bond bull market looked like it peaked in 2012, and plateaued over the five years from 2013-2017, where five year treasuries provided annualized nominal total returns of 1% (-.4% real). Templeton was predicting the future. I was merely examinations the past and observing that holding intermediate-term Treasuries had failed to earn their coupons for bond investors for the prior five years.
Now that "everyone" "knows" that the long end will rise and all the shorts have piled in (I'm not saying it will, just quoting some), it gets less clear what is still mispriced. Possibly it is the EU/JP intervention still going on. Once that's out, even if we're in a bear market or whatever that means, where yields rise on average every year, duration should be priced to compensate so that in the long run you should come out ahead for taking that risk.

If you were to listen to Bloomberg, all the rush out of duration for liquidity has happened already. Now the short end may be overpriced. Lesson is these things happen quickly. By the time you find out, or at most a few days later, the repricing is done.

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Re: Is Now the Time to Reduce Bond Duration?

Post by Stipachio » Wed Mar 07, 2018 8:40 pm

dkturner wrote:
Sat Mar 03, 2018 5:06 pm
Comparing the Vanguard short and intermediate-term investment grade bond funds, you are only getting 38 basis points of additional yield by holding the intermediate-term fund rather than the short-term fund. The intermediate-term fund has an average duration that is 3.1 years longer than the 2.4 year duration of the short-term fund. That works out to a whopping 12 basis points of additional yield for each year of increase in duration one gets by holding the intermediate-term fund.
I agree with many commenting here: second guessing the market is unlikely to be successful. But I think the above misses something interesting. In one way, short-term bonds have more risk than long-term bonds - short-term bonds mature sooner and can only be reinvested at the new rates. This is what lies behind flat and inverted yield curves. If the market expects rates to drop soon and stay low, then a 2-year bond will need to have a higher yield than a 10-year bond to compensate investors, at least somewhat, for its early maturity.

But rates can only go up? Both short and long rates have recently been lower in the US. In Japan, the current yield on a 10 year government bond is 0.06%.

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Re: Is Now the Time to Reduce Bond Duration?

Post by bradshaw1965 » Wed Mar 07, 2018 9:08 pm

nisiprius wrote:
Sun Mar 04, 2018 3:17 pm
dkturner wrote:
Sat Mar 03, 2018 5:06 pm
...A case can be made that the bond bull market, that began in 1982, ended in 2012...
"In general, we have thought that this very long bull market in bonds must be somewhere near the end."--Sir John Templeton, 1993
And he was right for a year, 1994 was a terrible year for bonds, as for the intervening almost 20 years, oops.

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Re: Is Now the Time to Reduce Bond Duration?

Post by BlueEars » Thu Mar 08, 2018 11:25 am

Posted this in another thread but will also mention it here. Comments welcome.

We are done near 1950's rates now. Here is the data from the SImba spreadsheet comparing returns of intermediate versus short term Treasuries. The red oval is that rising rate environment which was as irregular up and we have experienced going down since 1982. Short term bonds did well.

Image
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