Short versus Intermediate Term Bond

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vineviz
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Re: Short versus Intermediate Term Bond

Post by vineviz » Mon Jul 23, 2018 3:21 pm

willthrill81 wrote:
Mon Jul 23, 2018 3:12 pm
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
In the comment to which that reply was directed I pointed out that long term bonds have outperformed short term bonds even during periods of increasing fed funds rates, and the retort was that I should have been looking at real returns and not nominal returns.

If the essence of that retort of is that short term rates correlate more closely with inflation, I'll say "maybe, but so what?"

It seems to me though that the assertion was that short bonds magically produced higher real returns despite having lower nominal returns, to which I say "impossible".

Either way, you still make more money staying in long bonds than by trying to switch to short bonds, since the nominal returns of both short and long term bonds get reduced by the same amount.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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willthrill81
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Re: Short versus Intermediate Term Bond

Post by willthrill81 » Mon Jul 23, 2018 3:46 pm

vineviz wrote:
Mon Jul 23, 2018 3:21 pm
willthrill81 wrote:
Mon Jul 23, 2018 3:12 pm
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
In the comment to which that reply was directed I pointed out that long term bonds have outperformed short term bonds even during periods of increasing fed funds rates, and the retort was that I should have been looking at real returns and not nominal returns.

If the essence of that retort of is that short term rates correlate more closely with inflation, I'll say "maybe, but so what?"

It seems to me though that the assertion was that short bonds magically produced higher real returns despite having lower nominal returns, to which I say "impossible".

Either way, you still make more money staying in long bonds than by trying to switch to short bonds, since the nominal returns of both short and long term bonds get reduced by the same amount.
Historically, there is no "maybe" to it. They clearly have.

This is important to a lot of investors who hold bonds not as an attempt to diversify stock risk but as to add safety and stability relative to stocks. There is far less of a risk of a substantial real loss with short-term bonds than with long-term bonds (at least nominal bonds). Over the long-term, this risk has been rewarded, but investors may need their money today and not ten years from now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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gmaynardkrebs
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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Mon Jul 23, 2018 4:26 pm

vineviz wrote:
Mon Jul 23, 2018 3:21 pm
willthrill81 wrote:
Mon Jul 23, 2018 3:12 pm
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
In the comment to which that reply was directed I pointed out that long term bonds have outperformed short term bonds even during periods of increasing fed funds rates, and the retort was that I should have been looking at real returns and not nominal returns.

If the essence of that retort of is that short term rates correlate more closely with inflation, I'll say "maybe, but so what?"

It seems to me though that the assertion was that short bonds magically produced higher real returns despite having lower nominal returns, to which I say "impossible".

Either way, you still make more money staying in long bonds than by trying to switch to short bonds, since the nominal returns of both short and long term bonds get reduced by the same amount.
If I understand you correctly, you are saying that there is no 30 year period in which the investor who plunked down X dollars in year Y for a 30 year bond, did not come out ahead, in year Y+30, of his identical twin who stayed short through the same 30 year period. Is that correct? My recollection is that investors who bought long bonds in many of the pre-Volker years, got crushed in real terms, compared to the investor who stayed short. Can anyone clarify this?

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vineviz
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Re: Short versus Intermediate Term Bond

Post by vineviz » Mon Jul 23, 2018 4:52 pm

gmaynardkrebs wrote:
Mon Jul 23, 2018 4:26 pm
vineviz wrote:
Mon Jul 23, 2018 3:21 pm
willthrill81 wrote:
Mon Jul 23, 2018 3:12 pm
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
In the comment to which that reply was directed I pointed out that long term bonds have outperformed short term bonds even during periods of increasing fed funds rates, and the retort was that I should have been looking at real returns and not nominal returns.

If the essence of that retort of is that short term rates correlate more closely with inflation, I'll say "maybe, but so what?"

It seems to me though that the assertion was that short bonds magically produced higher real returns despite having lower nominal returns, to which I say "impossible".

Either way, you still make more money staying in long bonds than by trying to switch to short bonds, since the nominal returns of both short and long term bonds get reduced by the same amount.
If I understand you correctly, you are saying that there is no 30 year period in which the investor who plunked down X dollars in year Y for a 30 year bond, did not come out ahead, in year Y+30, of his identical twin who stayed short through the same 30 year period. Is that correct? My recollection is that investors who bought long bonds in many of the pre-Volker years, got crushed in real terms, compared to the investor who stayed short. Can anyone clarify this?
I was looking at the total returns for a long bond index compared to a short bond index, which would be more analogous to holding a bond fund as opposed to holding individual bond to maturity (the OP in this thread was talking about bond funds).

Holding individual bonds to maturity does eliminate interest rate and reinvestment risk (which a bond fund investor is exposed to) but exposes the investor to inflation risk (unless the bonds are TIPs, I guess) which, I guess, is one reason nobody should be 100% in bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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patrick013
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Re: Short versus Intermediate Term Bond

Post by patrick013 » Mon Jul 23, 2018 4:58 pm

gmaynardkrebs wrote:
Mon Jul 23, 2018 4:26 pm
My recollection is that investors who bought long bonds in many of the pre-Volker years, got crushed in real terms, compared to the investor who stayed short. Can anyone clarify this?
Sure they got crushed and were very unhappy. If they watched the
Fed I'm sure there were signals rates would rise to reduce inflation
or whatever. Those who waited were much happier. Those who
watch the Fed do better than those who do not over the decades.

It's supposed to be a dynamic asset allocation as opposed to a tactical
or short term asset allocation strategy.
age in bonds, buy-and-hold, 10 year business cycle

MIretired
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Re: Short versus Intermediate Term Bond

Post by MIretired » Mon Jul 23, 2018 7:11 pm

gmaynardkrebs wrote:
Mon Jul 23, 2018 4:26 pm
vineviz wrote:
Mon Jul 23, 2018 3:21 pm
willthrill81 wrote:
Mon Jul 23, 2018 3:12 pm
That's not what he said. He that short-term bonds have lower nominal rates (which is virtually always true unless the yield curve is very inverted and certainly true over the long-term), and they do indeed more closely track inflation than do long-term bonds.
In the comment to which that reply was directed I pointed out that long term bonds have outperformed short term bonds even during periods of increasing fed funds rates, and the retort was that I should have been looking at real returns and not nominal returns.

If the essence of that retort of is that short term rates correlate more closely with inflation, I'll say "maybe, but so what?"

It seems to me though that the assertion was that short bonds magically produced higher real returns despite having lower nominal returns, to which I say "impossible".

Either way, you still make more money staying in long bonds than by trying to switch to short bonds, since the nominal returns of both short and long term bonds get reduced by the same amount.
If I understand you correctly, you are saying that there is no 30 year period in which the investor who plunked down X dollars in year Y for a 30 year bond, did not come out ahead, in year Y+30, of his identical twin who stayed short through the same 30 year period. Is that correct? My recollection is that investors who bought long bonds in many of the pre-Volker years, got crushed in real terms, compared to the investor who stayed short. Can anyone clarify this?
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VUSTX,VFITX,VFISX (longT,InterT,ShortT) recreated in history. Relative to inflation. Anytime around and including starting dates of 1940-1950.

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Always passive
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Re: Short versus Intermediate Term Bond

Post by Always passive » Mon Jul 23, 2018 11:20 pm

The very interesting thing that I always see in all the analyses presented in this forum is that time span that is being used to prove a point/make a case. No doubt for academic work 30 years is a very adequate time frame to present ideas, but to me 30 years is a life long time frame that I am afraid I do not think that I, or for that matter, most investors commit. I challenge someone that tells me that from the age of 30, or 40, he/she has kept the same bond duration. When I think long term for my money, my mind do not go beyond about 10 years. So 30 year work does not seem relevant for me, I did not when I was younger, and certainly not now at age 70.
Last edited by Always passive on Mon Jul 23, 2018 11:36 pm, edited 1 time in total.

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gmaynardkrebs
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Re: Short versus Intermediate Term Bond

Post by gmaynardkrebs » Mon Jul 23, 2018 11:35 pm

Always passive wrote:
Mon Jul 23, 2018 11:20 pm
The very interesting thing that I always see in all the analyses is that time span that is being used to prove a point/make a case. No doubt for academic work 30 years is a decent time frame to present ideas, but to me 30 years is a life long time frame that I am afraid I do not think that most investors commit. I challenge someone that tells me that from the age of 30, or 40 has kept the same bond duration. At least when I think long term for my money, my mind do not go beyond about 10 years. So 30 year work does not seem relevant for me, not when I was younger, and certainly not now at age 70.
30 years is the number here because it's the duration of the US long bond, aka, The Bond.
I certainly do have 30 year bonds (TIPS) in my portfolio. However, I agree that things are mighty cloudy ten years out, to say nothing of 30.

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