Are Bogleheads smarter than the bond market?

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tc101
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Are Bogleheads smarter than the bond market?

Post by tc101 » Fri Jun 15, 2018 12:20 pm

There is a lot of talk recently about shifting to shorter duration bonds because interest rates are going up. Do we know something that is not already known by everyone else buying and selling bonds? Do we have information not already priced into the bonds?

"The market is smarter than you are" was my favorite chapter in "The Four Pillars of Investing". Bernstein convinced me. But maybe I am wrong. Maybe the Bogleheads going to shorter duration bonds are smarter than I am. Maybe you have some information that I don't have.
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Re: Are Bogleheads smarter than the bond market?

Post by Leesbro63 » Fri Jun 15, 2018 12:26 pm

Not just recently. This conversation has been going on for at least 10 years. Maybe 15. Dr. Bernstein is right about the risk of anything but shorter term bonds. But he's been wrong about the market. So far. He says "keep your safe money safe" and "take your risk on the equity side", no on the bond side. Rick Ferri, however, says to buy something like Vanguard Total Market and deal with it. He's been right as far as the market. So far. If interest rates ever return to even half of what they've been during most BabyBoomer's lifetimes, bonds will get clobbered. But for people who ignored Dr. Bernstein 15 years ago and stayed the course, the extra interest received along the way will probably more than make up for any bond losses in the future. But they won't remember that and will feel the sting of falling bonds, perhaps as stocks are falling as well.

Did I answer your question? Probably not. I still struggle with this too.

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Re: Are Bogleheads smarter than the bond market?

Post by GodelianKnot » Fri Jun 15, 2018 12:43 pm

It's not about being "smarter" than the bond market. It's about buying the duration that makes sense for you. For many market participants, owning long term bonds is necessary, regardless of the relative value compared to shorter term bonds.

But for someone using bonds in their AA as a hedge against stocks, it may not make sense to buy long term duration anymore, now that you get very little additional returns from it, and a lot more risk. In my opinion, this is especially true given the current valuation of the stock market, which means that if you do lose a lot on long term duration, you're likely to ALSO lose a lot in the stock market (in order to maintain a positive risk premium).

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Re: Are Bogleheads smarter than the bond market?

Post by greg24 » Fri Jun 15, 2018 12:51 pm

There have been many market timing advocates when it comes to bonds on this board for many years.

Myself, I just keep buying TBM. With TIAA Traditional helping things out.

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Re: Are Bogleheads smarter than the bond market?

Post by alex_686 » Fri Jun 15, 2018 12:52 pm

Maybe we are smarter. The Efficient Market Hypothesis rests on the fact that the market is efficient. What if it is not?

First, I more or less disregard all of the people saying that rates will go up and thus bond prices will go down. That is already priced into the bond market. The market is efficient and we are not smarter here.

However, there is an ongoing debate is the impact of taxes, regulations, and market segmentation. First, the government writes rules and regulations pushing pension funds and insurance companies to buy lots of long term government debt. Then the government issues lots of long-term debt. Is the market giving you a good high quality price discovery? Maybe not. Even Bogle thinks that the TBM has too much government debt.

I will second GodelianKnot position - figure out the bond segment that is right for your goals and risk tolerance.

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Re: Are Bogleheads smarter than the bond market?

Post by patrick013 » Fri Jun 15, 2018 12:53 pm

Bogleheads like to convince themselves that the market
has performed some unique valuation process. But many
times a yield spread analysis needs to be done. Could
you comment/explain the following 2 observations if they
occurred next week ? Assume the FFR is constant.

TRSY 10 = 4%, FFR = 1%

or

TRSY 10 = 4%, FFR = 3%

At either time TRSY 10 may not be at an equilibrium price
but on the way to becoming so. Which observation is a better
buy ? You've answered your own question then.
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Re: Are Bogleheads smarter than the bond market?

Post by livesoft » Fri Jun 15, 2018 1:22 pm

I went to shorter durations earlier this year. I really don't care what bogleheads do. And yes, I do market timing with my bond ETFs.

I also bought a bunch of Total US Bond Index ETF as recently as June 7th. Those shares are UP by 0.38% since then. The shares bought at the May lows are up 0.5% to 0.7%.
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Re: Are Bogleheads smarter than the bond market?

Post by nisiprius » Fri Jun 15, 2018 1:47 pm

(I'm staying the course in Total Bond... and if I were going to shift, I wouldn't shift to shorter-term bond funds, I'd just shrug and put it in a well-chosen bank savings account).

I thought that the oldest post saying "interest rates can only go up" was this one, from 2009
Interest rates can only go up, why go intermediate in bonds?
Post by mathwhiz, Sun Jul 19, 2009 12:36 am
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?
However, I just found one from 2008:
I'm thinking of putting most of this money in the Vanguard limited-term tax-exempt muni fund (VMLTX), with a little in the high-yield muni fund (VWAHX) just for fun. BUT, interest rates can only go up, so maybe this is bad idea?
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Re: Are Bogleheads smarter than the bond market?

Post by JohnDindex » Fri Jun 15, 2018 1:53 pm

Sticking with Total Bond here. If I were to change, or as allocation to Fixed income becomes larger with age, I would consider Cd's for a portion of Fixed income. I think Allan Roth makes a lot of sense on this topic.

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Re: Are Bogleheads smarter than the bond market?

Post by 1210sda » Fri Jun 15, 2018 1:57 pm

Is that what your Investment Policy Statement says, ....switch to shorter maturity/duration bonds when interest rates are going up??

Mine says.....stay the course.

1210

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Re: Are Bogleheads smarter than the bond market?

Post by livesoft » Fri Jun 15, 2018 2:00 pm

I also want to point out that the difference between sticking with total bond market index fund versus CDs or shorter duration bond funds is going to be much smaller than say a 6-month return on any of them.

So that means the consequences of staying the course, not switching, switching, or timing poorly is really no big deal. Thus, if you do something or even if you don't do something, then you will not destroy your life nor your portfolio.
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Re: Are Bogleheads smarter than the bond market?

Post by PFInterest » Fri Jun 15, 2018 2:05 pm

tc101 wrote:
Fri Jun 15, 2018 12:20 pm
There is a lot of talk recently about shifting to shorter duration bonds because interest rates are going up. Do we know something that is not already known by everyone else buying and selling bonds? Do we have information not already priced into the bonds?

"The market is smarter than you are" was my favorite chapter in "The Four Pillars of Investing". Bernstein convinced me. But maybe I am wrong. Maybe the Bogleheads going to shorter duration bonds are smarter than I am. Maybe you have some information that I don't have.
Nope.

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Re: Are Bogleheads smarter than the bond market?

Post by cfs » Fri Jun 15, 2018 2:10 pm

-- The question: Are Bogleheads smarter than the bond market?
-- The answer: YES, the score is not even close.
-- Next question?
Good luck, y gracias por leer ~cfs~
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Re: Are Bogleheads smarter than the bond market?

Post by Earl Lemongrab » Fri Jun 15, 2018 4:18 pm

My fixed-income allocation has been 50/50 bond index and stable-value. I've never been sure of what duration means for the latter, as the principal is insured and the fund should never lose value. Its rate will track changes in interest rates, although typically it will lag.

A core principle of mine is that I have no skill in timing the market. That includes bonds. I don't see any reason to change anything.
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Re: Are Bogleheads smarter than the bond market?

Post by Sandtrap » Fri Jun 15, 2018 4:21 pm

I am not smarter than the bond market.
Thus, for simplicity, Vanguard Total Bond Admiral (VBTLX) is enough for me.
j

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Re: Are Bogleheads smarter than the bond market?

Post by michaeljc70 » Fri Jun 15, 2018 4:33 pm

I'm still in BND and staying the course.

Another thing I didn't see mentioned is short term bond funds or CDs would not have returned 17% in 2000, 10% in 2007 , 20% in 2008, 16% in 2011 or 11% in 2014 but long (10 year treasuries) bonds did.

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Re: Are Bogleheads smarter than the bond market?

Post by grog » Fri Jun 15, 2018 4:51 pm

Leesbro63 wrote:
Fri Jun 15, 2018 12:26 pm
Not just recently. This conversation has been going on for at least 10 years. Maybe 15. Dr. Bernstein is right about the risk of anything but shorter term bonds. But he's been wrong about the market. So far. He says "keep your safe money safe" and "take your risk on the equity side", no on the bond side. Rick Ferri, however, says to buy something like Vanguard Total Market and deal with it. He's been right as far as the market. So far. If interest rates ever return to even half of what they've been during most BabyBoomer's lifetimes, bonds will get clobbered. But for people who ignored Dr. Bernstein 15 years ago and stayed the course, the extra interest received along the way will probably more than make up for any bond losses in the future. But they won't remember that and will feel the sting of falling bonds, perhaps as stocks are falling as well.

Did I answer your question? Probably not. I still struggle with this too.
One theory of the yield curve is that it reflects some degree of liquidity preference. If that is true (makes sense to me) then an argument against going really short is that you are essentially paying for liquidity that you don't particularly need.

Even in cases where the yield curve is fairly flat, short bonds have to rolled over frequently and therefore have reinvestment risk, i.e., you still come out behind if your reinvestment rate doesn't hold up.

Another point is that bond prices react asymmetrically. The price drop from yield increases is partly mitigated by convexity whereas for a yield drop, convexity works in your favor giving you a greater price increase.

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Re: Are Bogleheads smarter than the bond market?

Post by grok87 » Fri Jun 15, 2018 5:00 pm

grog wrote:
Fri Jun 15, 2018 4:51 pm
Leesbro63 wrote:
Fri Jun 15, 2018 12:26 pm
Not just recently. This conversation has been going on for at least 10 years. Maybe 15. Dr. Bernstein is right about the risk of anything but shorter term bonds. But he's been wrong about the market. So far. He says "keep your safe money safe" and "take your risk on the equity side", no on the bond side. Rick Ferri, however, says to buy something like Vanguard Total Market and deal with it. He's been right as far as the market. So far. If interest rates ever return to even half of what they've been during most BabyBoomer's lifetimes, bonds will get clobbered. But for people who ignored Dr. Bernstein 15 years ago and stayed the course, the extra interest received along the way will probably more than make up for any bond losses in the future. But they won't remember that and will feel the sting of falling bonds, perhaps as stocks are falling as well.

Did I answer your question? Probably not. I still struggle with this too.
One theory of the yield curve is that it reflects some degree of liquidity preference. If that is true (makes sense to me) then an argument against going really short is that you are essentially paying for liquidity that you don't particularly need.

Even in cases where the yield curve is fairly flat, short bonds have to rolled over frequently and therefore have reinvestment risk, i.e., you still come out behind if your reinvestment rate doesn't hold up.

Another point is that bond prices react asymmetrically. The price drop from yield increases is partly mitigated by convexity whereas for a yield drop, convexity works in your favor giving you a greater price increase.
Agree on the last point but only if you buy noncallable bonds and avoid mortgage backed securities
Keep calm and Boglehead on. KCBO.

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Re: Are Bogleheads smarter than the bond market?

Post by Nate79 » Fri Jun 15, 2018 5:05 pm

tc101 wrote:
Fri Jun 15, 2018 12:20 pm
There is a lot of talk recently about shifting to shorter duration bonds because interest rates are going up. Do we know something that is not already known by everyone else buying and selling bonds? Do we have information not already priced into the bonds?

"The market is smarter than you are" was my favorite chapter in "The Four Pillars of Investing". Bernstein convinced me. But maybe I am wrong. Maybe the Bogleheads going to shorter duration bonds are smarter than I am. Maybe you have some information that I don't have.
What does this even mean? Smarter than the bond market about what? Priced into which bonds?

Do you even know why you hold bonds in the first place? I know why I hold bonds. My specific bond selection is based on my reason and adjusted for risk/reward based on my goal. Not trying to outsmart anyone else.

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Re: Are Bogleheads smarter than the bond market?

Post by patrick013 » Fri Jun 15, 2018 5:09 pm

BND for 10 years returned 3.7% compounded while BND the
last 3 years returned 1.6% compounded while a CD ladder
would return 2-3% compounded and would be reinvested
at par at whatever rate shows up in the next few years.

If I had any money I think I'd consider these. Get the exact
target date and very good SEC yield.
https://www.ishares.com/us/products/etf ... &fst=50587
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Re: Are Bogleheads smarter than the bond market?

Post by Earl Lemongrab » Fri Jun 15, 2018 5:29 pm

^^^ That's pretty similar to my results. The Bond Index Fund has a 3-year annualized return of 1.61%. The stable-value has 2.28%. The advantage of the latter over CDs is that it's easier (for me at least) to hold large amounts in tax-advantaged.
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Re: Are Bogleheads smarter than the bond market?

Post by Dandy » Fri Jun 15, 2018 6:13 pm

i don't know about smarter but it is somewhat elementary that longer duration bonds do better when interest rates are declining and shorter duration bonds do better when rates are rising. The Fed has been pretty clear for awhile that they are bent on raising rates gradually for the next 12 - 18 months. Also, keep in mind fixed income vs only bonds/bond funds.

The rising rate environment head wind on longer duration bonds won't last forever and bond funds will be replacing older bonds with lower rates with newer bonds with higher rates so, eventually, they will recover.

Another factor is how people react. Stay the course whatever happens group will -- stay the course and ride out the temporary drag on the Total Bond Fund. Much of the investing public either is often clueless about how rates affect their bond funds -- especially if they are in balanced/TD type funds. Or they will panic a bit and get enticed by the rising FDIC and money market products. That could affect bond fund assets flows.

I am 70 with a large fixed income allocation that is roughly 1/3 Principal "safe" assets e.g. FDIC products, 1/3 short term bond funds and 1/3 intermediate bond funds. Since asset preservation is my goal and fixed income allocation is so large this allocation suits my needs since rising, lower or static interest rates won't overly affect my fixed income assets.

In a rising rate environment I let the 1/3 "safe" allocation creep up a bit and am glad it helps offset the modest declines in the other fixed income allocations. So, it helps with the asset preservation goal. If in the future the Fed announced it was gradually going to lower interest rates for a year or two I would probably let the intermediate bond fund assets grow a bit more than the "safer" fixed income assets. Some may call this market timing (I don't really care) but the Fed is basically telling what the interest rate market is most likely going to be. It isn't some analyst on CNBC it is the Fed. :oops: :happy

Anyhow, that is how I am dealing with fixed income and interest rate changes in mid retirement. People in the accumulation phase and/or if growth is your goal staying the course is a good option.

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Re: Are Bogleheads smarter than the bond market?

Post by michaeljc70 » Fri Jun 15, 2018 6:22 pm

Since there are so many threads bashing them, I'll add that having international bonds has cushioned the drop in NAV of BND. I was thinking about dropping them, but now think they are not a bad addition (though I wouldn't call them necessary).

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Re: Are Bogleheads smarter than the bond market?

Post by Leesbro63 » Fri Jun 15, 2018 6:41 pm

Dandy wrote:
Fri Jun 15, 2018 6:13 pm

I am 70 with a large fixed income allocation that is roughly 1/3 Principal "safe" assets e.g. FDIC products, 1/3 short term bond funds and 1/3 intermediate bond funds. Since asset preservation is my goal and fixed income allocation is so large this allocation suits my needs since rising, lower or static interest rates won't overly affect my fixed income assets.
So don't the shorter term "safe" FDIC products and the 1/3 Intermediate funds average each other out to be like a short term bond fund? Effectively you are 100% short term bond funds, but with extra hassling and mental accounting. :shock:

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Re: Are Bogleheads smarter than the bond market?

Post by jalbert » Fri Jun 15, 2018 6:57 pm

Dr. Bernstein is right about the risk of anything but shorter term bonds. But he's been wrong about the market. So far. He says "keep your safe money safe" and "take your risk on the equity side", no on the bond side. Rick Ferri, however, says to buy something like Vanguard Total Market and deal with it. He's been right as far as the market.
If taking risk on the equity side means increasing the equity exposure a little to use the “risk headroom” freed up by taking less risk on the bond side, then the conclusion might be different.
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Re: Are Bogleheads smarter than the bond market?

Post by stlutz » Fri Jun 15, 2018 7:00 pm

There is an approach that the best predictor of the future shape of the yield curve is today's yield curve. Not that it's a good prediction, but it's better one than looking at what the market itself is forecasting. This theory concludes that the market is pretty dumb about the future direction of interest rates. If you were following this approach, today you would lean toward shorter term bonds because the yield curve is pretty flat.

On the other hand, if you believe that the market opinion is smarter than any "rules of thumb" then you might want to opt for longer-term bonds today. The current shape of the yield curve indicates a market opinion that shorter-term rates won't stay up very long. We're 9 years into an economic expansion, so a recession is coming sooner rather than later. In that case, you'd want to lock in longer term yields now because they will be going down whenever that recession hits (which always seems to be unexpected).

I lean more toward the later view, so I haven't changed my average bond duration recently.

That said, I do attempt to outsmart the market when choosing between nominal bonds and TIPS. :happy

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Re: Are Bogleheads smarter than the bond market?

Post by michaeljc70 » Fri Jun 15, 2018 7:05 pm

As I mentioned above (I am not going to quote myself :oops: ), the risk is not just to the downside. It seems that it is often ignored in a lot of these threads. No one expects stocks to go up every year yet they enjoy double digit gains some years, but those double digit gains in longer term bonds/bond funds seems to be ignored. If you owned a CD in 2014 and earned 1.3% and also owned a 10 year Treasury that earned 16%, you noticed a difference.

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Re: Are Bogleheads smarter than the bond market?

Post by Call_Me_Op » Sat Jun 16, 2018 10:51 am

tc101 wrote:
Fri Jun 15, 2018 12:20 pm
There is a lot of talk recently about shifting to shorter duration bonds because interest rates are going up. Do we know something that is not already known by everyone else buying and selling bonds? Do we have information not already priced into the bonds?

"The market is smarter than you are" was my favorite chapter in "The Four Pillars of Investing". Bernstein convinced me. But maybe I am wrong. Maybe the Bogleheads going to shorter duration bonds are smarter than I am. Maybe you have some information that I don't have.
There is another way to look at it. By holding shorter bonds, you may not beat those holding longer bonds, but you are avoiding the possibility of a catastrophic outcome. This is an example of Pascal's Wager.
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Re: Are Bogleheads smarter than the bond market?

Post by tc101 » Sat Jun 16, 2018 1:41 pm

The Fed has been pretty clear for awhile that they are bent on raising rates gradually for the next 12 - 18 months.
the Fed is basically telling what the interest rate market is most likely going to be. It isn't some analyst on CNBC it is the Fed.
Isn't this something that everyone knows and is already figured into what people are willing to pay for bonds, so it already shows up in the price? That is the basic thing I am confused about. Again and again here on bogleheads I hear people ask each other "Do you know something the market doesn't already know?". Is this different with bonds?
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Re: Are Bogleheads smarter than the bond market?

Post by patrick013 » Sat Jun 16, 2018 1:55 pm

If rates are to normalize then the base FFR rate needs to hold
steady for many years. Expecting rates to go down if stocks
decline, inversions to occur otherwise, or rate increases to halt
runaway production, all the things Keynes likes to do to try
to effect the market slightly, would have to cease and the FFR
would just be a boring static number whether it be 1% or 5%.
Sales of govt. bonds at par could be made anytime, and taxes
adjusted to help corp profits would be adjustable economic items.

So the doubters in the market expecting a big rate decrease
if stocks decline, etc. keeping yields low would be an event that
just doesn't happen.

So the longer the FFR holds at 3 or 4% the better term premiums
for LT will be IMO. But right now the doubters in the market are
happily keeping prices high for LT flattening the curve as expected
and anticipating lower rate increases if any.

Most analysts think 38% foreign TRSY ownership and well over $500B
average daily trading volume overall is keeping spreads less than they
might be. Just have to see what happens, if normalizing rates is more
important than reacting to business activity changes or not. Long story
short.

Here's the Congressional Budget Office forecast for what it is worth.
Image
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Re: Are Bogleheads smarter than the bond market?

Post by PFInterest » Sat Jun 16, 2018 10:14 pm

cfs wrote:
Fri Jun 15, 2018 2:10 pm
-- The question: Are Bogleheads smarter than the bond market?
-- The answer: YES, the score is not even close.
-- Next question?
Good luck, y gracias por leer ~cfs~
How do you plan to prove this?

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Re: Are Bogleheads smarter than the bond market?

Post by thx1138 » Sun Jun 17, 2018 12:52 am

Market timing duration has of course not worked well the past many years of “bond yields can only go up” but that still doesn’t mean BND is necessarily the right answer or that doing something other than BND is trying to be “smarter” than the market.

An individual investor’s needs in fixed income are quite different than the markets needs and so buying something different than the market is often sound. Some obvious examples:

- Institutional investors often are legally required to buy certain bonds to meet particular obligations. Your needs often very different from theirs (few of us have 30 year *nominal* obligations while many institutional investors do). Following the “market” buying BND means buying a fixed income portfolio full of things that meet an entirely different financial goal than yours.

- Institutions don’t have access to FDIC insured CDs. Recently the yield difference between CDs available to individual investors have at times been significantly higher than those available in the bond market. Silly to purchase lower yielding equivalent assets, but that’s what a BND buyer was doing in the past few years.

- A bit of a trivial example, but buying a tax deferred bond if you don’t pay taxes would be ridiculous. Again, your specific needs not the same as the market at large - don’t assume the market average is what you need since the market is in a different situation than you.

- Lots of bonds bought by sovereign wealth funds. Are your fixed income needs the same as theirs? Likely not...

Of course if you have a significant equity allocation that has way more uncertainty in it than the delta between BND and a more thoughtful FI choice and so in the interests of simplicity many would just use BND and call it a day. But someone using CDs, SVF, TIPS or various ladders aren’t trying to outsmart the market rather they are purchasing the correct securities for their needs. Which is different than shortening duration because you don’t think the yield curve is a good estimate!

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Re: Are Bogleheads smarter than the bond market?

Post by Theoretical » Sun Jun 17, 2018 1:09 am

Retail investors have access to 100% FDIC insured savings accounts (duration of 0) with interest rates that on the highest end rival 3 month t-bills. The CD liquidity premium is also very well known and while not as strong as it was last year or even before, they still gives a premium over treasuries for durations past a year or two. Again, FDIC insurance (as well as the unique features of bank CDs) provides a bond market advantage that institutions don't have.

It's actually pretty easy to match BND's yield with less duration via these methods. In addition, you can use it to make up for the lost yield in a barbell strategy. If you play around with the duration and yield numbers, you will still notice that the bond market is incredibly efficient, but your upside will be FDIC protections and minimal to nonexistent credit risks while gaining the investment grade spread from your illiquid CDs.

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Re: Are Bogleheads smarter than the bond market?

Post by UpperNwGuy » Sun Jun 17, 2018 5:36 am

I'm sticking with my current mix of Total Bond and Intermediate-Term Tax-Exempt.

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Re: Are Bogleheads smarter than the bond market?

Post by michaeljc70 » Sun Jun 17, 2018 7:54 am

Theoretical wrote:
Sun Jun 17, 2018 1:09 am
Retail investors have access to 100% FDIC insured savings accounts (duration of 0) with interest rates that on the highest end rival 3 month t-bills. The CD liquidity premium is also very well known and while not as strong as it was last year or even before, they still gives a premium over treasuries for durations past a year or two. Again, FDIC insurance (as well as the unique features of bank CDs) provides a bond market advantage that institutions don't have.

It's actually pretty easy to match BND's yield with less duration via these methods. In addition, you can use it to make up for the lost yield in a barbell strategy. If you play around with the duration and yield numbers, you will still notice that the bond market is incredibly efficient, but your upside will be FDIC protections and minimal to nonexistent credit risks while gaining the investment grade spread from your illiquid CDs.
The 3 month treasury is yielding 1.86 after a recent uptick. That is below inflation. I just don't see how that is helping anyway by losing money to inflation. I suppose some will argue that you are losing less than if you put it in your mattress.... I get that if you need the money in 3 months, it is safe and that is fine for smaller amounts needed immediately. I just don't see that as a good medium to long term strategy.

And I'll add, Bogleheads tend to look down at market timing for equities, but in my view, this is no different other than it is with fixed income. It is trying to predict the timing and direction of interest rates. Don't think that if another recession hits rates will necessarily keep climbing.

BogleTails
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Re: Are Bogleheads smarter than the bond market?

Post by BogleTails » Sun Jun 17, 2018 10:38 am

UpperNwGuy wrote:
Sun Jun 17, 2018 5:36 am
I'm sticking with my current mix of Total Bond and Intermediate-Term Tax-Exempt.
just curious, what's your mix? I'm mostly Intermediate-Term Tax-Exempt but was considering adding Total Bond in my taxable for diversification as my tax bracket dropped to 24%.

Thanks!

UpperNwGuy
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Re: Are Bogleheads smarter than the bond market?

Post by UpperNwGuy » Sun Jun 17, 2018 10:45 am

BogleTails wrote:
Sun Jun 17, 2018 10:38 am
UpperNwGuy wrote:
Sun Jun 17, 2018 5:36 am
I'm sticking with my current mix of Total Bond and Intermediate-Term Tax-Exempt.
just curious, what's your mix? I'm mostly Intermediate-Term Tax-Exempt but was considering adding Total Bond in my taxable for diversification as my tax bracket dropped to 24%.

Thanks!
I'm at a 50/50 mix. I'm in the 24% Federal tax bracket.

Theoretical
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Re: Are Bogleheads smarter than the bond market?

Post by Theoretical » Wed Jun 20, 2018 6:16 am

michaeljc70 wrote:
Sun Jun 17, 2018 7:54 am
Theoretical wrote:
Sun Jun 17, 2018 1:09 am
Retail investors have access to 100% FDIC insured savings accounts (duration of 0) with interest rates that on the highest end rival 3 month t-bills. The CD liquidity premium is also very well known and while not as strong as it was last year or even before, they still gives a premium over treasuries for durations past a year or two. Again, FDIC insurance (as well as the unique features of bank CDs) provides a bond market advantage that institutions don't have.

It's actually pretty easy to match BND's yield with less duration via these methods. In addition, you can use it to make up for the lost yield in a barbell strategy. If you play around with the duration and yield numbers, you will still notice that the bond market is incredibly efficient, but your upside will be FDIC protections and minimal to nonexistent credit risks while gaining the investment grade spread from your illiquid CDs.
The 3 month treasury is yielding 1.86 after a recent uptick. That is below inflation. I just don't see how that is helping anyway by losing money to inflation. I suppose some will argue that you are losing less than if you put it in your mattress.... I get that if you need the money in 3 months, it is safe and that is fine for smaller amounts needed immediately. I just don't see that as a good medium to long term strategy.

And I'll add, Bogleheads tend to look down at market timing for equities, but in my view, this is no different other than it is with fixed income. It is trying to predict the timing and direction of interest rates. Don't think that if another recession hits rates will necessarily keep climbing.
True, the t bill/savings account alone is still below inflation, but if you combine T Bills/savings and 4-6 year CDs (esp secondary market ones), it’s pretty easy to match BND’s yield with at least 1 less year of duration and no credit, call, or negative convexity risk. You also gain two asset classes as well, since t-bills and intermediate bonds are not well correlated to each other in addition to the well known equity diversification benefits.

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Re: Are Bogleheads smarter than the bond market?

Post by z3r0c00l » Wed Jun 20, 2018 6:21 am

Total bond now paying 3.12%, perfectly happy with that. Anyone pretending to know future rate changes is delusional. 5 year CDs are a valid alternative but hardly a free lunch and rather illiquid.

protagonist
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Re: Are Bogleheads smarter than the bond market?

Post by protagonist » Wed Jun 20, 2018 3:30 pm

tc101 wrote:
Fri Jun 15, 2018 12:20 pm
There is a lot of talk recently about shifting to shorter duration bonds because interest rates are going up. Do we know something that is not already known by everyone else buying and selling bonds? Do we have information not already priced into the bonds?

"The market is smarter than you are" was my favorite chapter in "The Four Pillars of Investing". Bernstein convinced me. But maybe I am wrong. Maybe the Bogleheads going to shorter duration bonds are smarter than I am. Maybe you have some information that I don't have.
We know the following:
1. When interest rates rise bonds lose value.
2. Longer duration bonds lose more than shorter duration bonds in response to interest rate increases.
3. The Fed has stated that they plan to raise interest rates several times in the next couple of years. Yes, they might change their minds, but they control the Fed rate, and though corporate bonds do not move directly with the Fed rate, they do positively correlate for explainable reasons.
4. Interest rates are still near historic lows and had been dropping for 30-40 years. That is long for a bond cycle, and they hit historic lows. The trend may have reversed in 2016...or maybe what we are experiencing is just noise....but there is at least some indication that they are due to rise.
5. I believe that , to some extent, you can time the bond market based on factors such as the above, and you stand a better than 50% chance of being right. Others here will disagree. Not so with the stock market. The bond market is not nearly as complex as the stock market and it is indirectly manipulated by human beings who control the money supply.

Based on this information, some of us make our decisions. I, for one, am "bond-shy", and have been for some time. I use CDs with generous EWPs and hope I can keep up with inflation. Others invest in less risky short duration bonds. Still others believe this is all unpredictable and stick to their allocations.

I am not an expert like Dr. Bernstein, who dedicates much of his life to studying this. But nobody, including Dr. Bernstein (whose opinions I respect even on occasions when we disagree), knows much more than this about the future of bonds. We just each have our own ways of interpreting it.

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patrick013
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Re: Are Bogleheads smarter than the bond market?

Post by patrick013 » Wed Jun 20, 2018 7:38 pm

protagonist wrote:
Wed Jun 20, 2018 3:30 pm
Based on this information, some of us make our decisions.
When I based out a strategy I hypothesized I would buy a
10 year or slightly longer bond at 4% YTM. I bought one at
a premium and one at a similar discount. I also planned on
selling the bond in 3 years at 3% YTM estimated. So I calc'd
what might happen.

Due to characteristic higher duration of a discount bond the sales
price was 8.9% gain over the purchase price compared to 4% gain
for the premium bond. But, overall the premium bond provided
12.8% more cash return over the 3 years in aggregate even after
taxes.

So duration is telling me the discount bond will generate a larger
NAV gain but aggregate cash is telling me to buy and sell the premium
bond according to the assumptions. Looking deeper in light of the
expected higher duration of the discount bond it does have a higher
holding period return over the premium bond and becomes the
smart choice.

Funds with short to medium durations are going to get their SEC yields
in due time and new bonds as bonds turnover but long term and long
durations still look like thin ice.
age in bonds, buy-and-hold, 10 year business cycle

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