Total Bond Market Fund - interest rates rising!

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 10:11 am

So I've seen plenty of people here and in the media warn about bond funds "crashing" when interest rates rise.

Just because I was curious, I checked Total Bond Market Index Fund since 12/14/2016 to today.

Why did I pick 12/14/2016?

Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day. Up a total 1.75%.

Over that same period Total Bond Market lost sorry, gained 1.5% (including reinvested dividends of course). Not much of a gain, to be sure. But a gain.

In a rising interest rate environment.

Bonds are self-correcting.

When interest rates go up, bond fund values go down, but they start increasing their dividends.
When interest rates go down, dividends decrease, but the bond fund values go up.

Inflation is a real bond killer, not slowly rising interest rates.
The J stands for Jay

User avatar
randomizer
Posts: 1540
Joined: Sun Jul 06, 2014 3:46 pm

Re: Total Bond Market Fund - interest rates rising!

Post by randomizer » Fri Oct 19, 2018 10:14 am

Inflation sure is.
87.5:12.5, EM tilt — HODL the course!

Elysium
Posts: 1407
Joined: Mon Apr 02, 2007 6:22 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Elysium » Fri Oct 19, 2018 10:25 am

Inflation is staying low, there is no indication of inflation picking up. In fact rising rates helps keep inflation under control by not letting economy overheat. If it picks up unexpectedly, you can always buy TIPS then, no need to buy now.

McGilicutty
Posts: 159
Joined: Tue Dec 13, 2016 5:24 pm

Re: Total Bond Market Fund - interest rates rising!

Post by McGilicutty » Fri Oct 19, 2018 11:05 am

With those kind of piddly gains, wouldn't it be better to put the bonds/fixed-income portion of your portfolio in a short-term FDIC-insured CD? For example, bankrate.com shows a 15-month CD at 2.75% APY. It seems like that would be the better route rather than speculating on a bond fund at this time.

User avatar
Raybo
Posts: 1690
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

Re: Total Bond Market Fund - interest rates rising!

Post by Raybo » Fri Oct 19, 2018 11:36 am

“Better” is a hard term to define, at times

A CD in taxable versus Total Bond in deferred might well be worse in the end. While CDs are guaranteed by the FDIC, they often come with a surrender charge if you need the money before the term is up. Bond funds can be sold quickly.

A CD at a bank requires a credit check. My credit is locked. To open a bank CD, I have to unlock it, which also costs a few bucks.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

User avatar
willthrill81
Posts: 6553
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Total Bond Market Fund - interest rates rising!

Post by willthrill81 » Fri Oct 19, 2018 11:36 am

HomerJ wrote:
Fri Oct 19, 2018 10:11 am
Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day.
I agree that it hasn't been the bond slaughter many insinuated that it would be.

However, not to pick nits, but the Fed doesn't "raise interest rates." They only raise the overnight lending rate. They do not determine bond yields, for instance. You know this quite well, but some readers might not.
“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

User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 11:37 am

McGilicutty wrote:
Fri Oct 19, 2018 11:05 am
With those kind of piddly gains, wouldn't it be better to put the bonds/fixed-income portion of your portfolio in a short-term FDIC-insured CD? For example, bankrate.com shows a 15-month CD at 2.75% APY. It seems like that would be the better route rather than speculating on a bond fund at this time.
Well those returns are in the past. CD rates were lower in the past too.

Yes, right now you can get CDs paying 2.75% or 3%. Right now, Total Bond is paying 3.33%.

But CDs are certainly a good choice. My point was that Total Bond certainly was NOT destroyed by 2 years of rising interest rates.
The J stands for Jay

User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 11:37 am

willthrill81 wrote:
Fri Oct 19, 2018 11:36 am
HomerJ wrote:
Fri Oct 19, 2018 10:11 am
Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day.
I agree that it hasn't been the bond slaughter many insinuated that it would be.

However, not to pick nits, but the Fed doesn't "raise interest rates." They only raise the overnight lending rate. They do not determine bond yields, for instance. You know this quite well, but some readers might not.
Yes, that's correct. :)

Too many people say "Well, we KNOW the Fed is going to raise rates. They've said so! Therefore, bond funds are going to crash."

But like you said, the Fed doesn't wholly control interest rates. There are many more variables in that market. But interest rates have gone up a bit. CDs do indeed pay more nowadays, and mortgages cost a bit more.

But Total Bond is still UP over the past 2 years.
Last edited by HomerJ on Fri Oct 19, 2018 11:41 am, edited 2 times in total.
The J stands for Jay

RickBoglehead
Posts: 1261
Joined: Wed Feb 14, 2018 9:10 am

Re: Total Bond Market Fund - interest rates rising!

Post by RickBoglehead » Fri Oct 19, 2018 11:40 am

Raybo wrote:
Fri Oct 19, 2018 11:36 am
“Better” is a hard term to define, at times

A CD in taxable versus Total Bond in deferred might well be worse in the end. While CDs are guaranteed by the FDIC, they often come with a surrender charge if you need the money before the term is up. Bond funds can be sold quickly.
Simply setup multiple CDs, in a ladder, or setup a No Penalty CD.
Raybo wrote:
Fri Oct 19, 2018 11:36 am
A CD at a bank requires a credit check. My credit is locked. To open a bank CD, I have to unlock it, which also costs a few bucks.
Several points.

1) There is no longer a fee to unlock your credit.
2) Some banks will not do a credit check.
3) If your credit is locked, and you're a current customer, some banks will simply call you and go through a set of questions.
4) Brokered CDs can be bought at Fidelity or Vanguard.


I had a nice sum in bond funds in taxable (also have them in retirement accounts. I just sold my taxable bonds to harvest the loss, plan on putting some in Ally for the 1% bonus, and then buying some CDs.

Still evaluating whether I take action on my retirement bond funds, I already have sizeable amount in CDs there.

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Admiral » Fri Oct 19, 2018 11:44 am

McGilicutty wrote:
Fri Oct 19, 2018 11:05 am
With those kind of piddly gains, wouldn't it be better to put the bonds/fixed-income portion of your portfolio in a short-term FDIC-insured CD? For example, bankrate.com shows a 15-month CD at 2.75% APY. It seems like that would be the better route rather than speculating on a bond fund at this time.
Many company-sponsored retirement plans do now allow direct purchase of CDs. Many here hold Total Bond in such accounts. Total Bond is liquid, CDs are not (or at least are not without penalty). I would not hold Total Bond in a taxable account, but I don't hold CDs, either, I use a Money Market account.

MnD
Posts: 3807
Joined: Mon Jan 14, 2008 12:41 pm

Re: Total Bond Market Fund - interest rates rising!

Post by MnD » Fri Oct 19, 2018 11:51 am

TBM price doesn't move with short-term rates.
Intermediate terms rates bottomed around July 1 , 2016 at under 1.5%.
TBM performance July 1, 2016 to date is negative.
Bonds are not self-correcting from (in retrospect) poor investing decisions such as lending out your money for 1.5% at an average maturity of almost 10 years.
Last edited by MnD on Fri Oct 19, 2018 11:57 am, edited 1 time in total.

Austintatious
Posts: 802
Joined: Thu Sep 13, 2012 7:01 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Austintatious » Fri Oct 19, 2018 11:52 am

McGilicutty wrote:
Fri Oct 19, 2018 11:05 am
With those kind of piddly gains, wouldn't it be better to put the bonds/fixed-income portion of your portfolio in a short-term FDIC-insured CD? For example, bankrate.com shows a 15-month CD at 2.75% APY. It seems like that would be the better route rather than speculating on a bond fund at this time.
The question you ask is one that's been on my mind, of late. I believe the current political and resulting economic conditions in the U.S. are largely responsible for 1) a profound volatility in the stock market likely to continue for at least several years to come and (2) that bond returns will probably be depressed for a similar time. If that's likely, and I realize there's no way to know for sure, it occurs to me that one's fixed income investments might better be in instruments like CDs where one can expect a predictable and constant return on one's investment. If fixed income is where one looks to for safety, for stability relative to a predictably volatile stock market, why would CDs not be the better choice?

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Admiral » Fri Oct 19, 2018 11:58 am

Austintatious wrote:
Fri Oct 19, 2018 11:52 am
that bond returns will probably be depressed for a similar time.
Define "depressed"? Total Bond yield is now 2.73%, higher than it's been in ten years. Yes, it's not 4 or 5%. But it's not .5% either. Perhaps lower expectations are in order. Stocks are for risk and return, better to chase performance there.

User avatar
Munir
Posts: 2480
Joined: Mon Feb 26, 2007 4:39 pm
Location: Oregon

Re: Total Bond Market Fund - interest rates rising!

Post by Munir » Fri Oct 19, 2018 12:03 pm

HomerJ wrote:
Fri Oct 19, 2018 10:11 am
So I've seen plenty of people here and in the media warn about bond funds "crashing" when interest rates rise.

Just because I was curious, I checked Total Bond Market Index Fund since 12/14/2016 to today.

Why did I pick 12/14/2016?

Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day. Up a total 1.75%.

Over that same period Total Bond Market lost sorry, gained 1.5% (including reinvested dividends of course). Not much of a gain, to be sure. But a gain.

In a rising interest rate environment.

Bonds are self-correcting.

When interest rates go up, bond fund values go down, but they start increasing their dividends.
When interest rates go down, dividends decrease, but the bond fund values go up.

Inflation is a real bond killer, not slowly rising interest rates.
I wouldn't be happy with a 1.5% return over 2 years- i.e. 0.75%/year.. It does not even beat inflation, does it?

Austintatious
Posts: 802
Joined: Thu Sep 13, 2012 7:01 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Austintatious » Fri Oct 19, 2018 12:51 pm

Admiral wrote:
Fri Oct 19, 2018 11:58 am
Austintatious wrote:
Fri Oct 19, 2018 11:52 am
that bond returns will probably be depressed for a similar time.
Define "depressed"? Total Bond yield is now 2.73%, higher than it's been in ten years. Yes, it's not 4 or 5%. But it's not .5% either. Perhaps lower expectations are in order. Stocks are for risk and return, better to chase performance there.
Looking just now at Vanguard's TBM performance page, it's showing SEC yield for 10/17 at 3.22%. But it's also showing the before tax returns at a negative 1.32% for 1 year, at 1.18% for 3 years, and at 1.99% for 5 years. Compare that, for example, to a continued 3% for a 5 year CD at PenFed. Match those numbers to a big chunk of money invested in each and the differences are significant.

What I'm really thinking about, though, is the relative stability of the two types of investments. Since we know that CDs, unlike bonds, will always be maintaining principal and providing positive returns, whether interest rates are rising or stocks are taking a dive, I continue to wonder why they're not the clearly better choice if one wants safety and relative stability for one's portfolio and especially so, when their returns are competitive with or better than bonds.

z3r0c00l
Posts: 1243
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Total Bond Market Fund - interest rates rising!

Post by z3r0c00l » Fri Oct 19, 2018 1:05 pm

Long CDs won out over this small time period, however that says nothing about what will happen over the next few years. Total bond now paying %3.something and could easily have a few percent cap gains if interest rates go back down in a recession. It is still a question of liquidity and flexibility for some of us, to stay with a mutual fund of bonds rather than bother with a CD ladder.

User avatar
vineviz
Posts: 2333
Joined: Tue May 15, 2018 1:55 pm

Re: Total Bond Market Fund - interest rates rising!

Post by vineviz » Fri Oct 19, 2018 1:12 pm

z3r0c00l wrote:
Fri Oct 19, 2018 1:05 pm
Long CDs won out over this small time period, however that says nothing about what will happen over the next few years. Total bond now paying %3.something and could easily have a few percent cap gains if interest rates go back down in a recession. It is still a question of liquidity and flexibility for some of us, to stay with a mutual fund of bonds rather than bother with a CD ladder.
What has happened recently has also GENERALLY been the case: even in periods that include episodes of rising Fed Reserve rates it has been true that intermediate and long-term bonds have typically outperformed short term bonds or savings vehicles like CDs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Earl Lemongrab
Posts: 5866
Joined: Tue Jun 10, 2014 1:14 am

Re: Total Bond Market Fund - interest rates rising!

Post by Earl Lemongrab » Fri Oct 19, 2018 1:12 pm

You can buy CDs in IRAs, but it's not always easy especially if you need to move around to chase the best interest rates. In my case, I have about 800k in fixed income, currently all in the 401(k) split between bond index and stable value. The latter is paying around 2.65% annualized. YTD, they've just about canceled each other.

I could roll some of that out to an IRA and get CDs, but that starts to be a lot of work. If I did anything in that area, it would probably be TIPS funds.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 3:57 pm

MnD wrote:
Fri Oct 19, 2018 11:51 am
TBM price doesn't move with short-term rates.
Intermediate terms rates bottomed around July 1 , 2016 at under 1.5%.
TBM performance July 1, 2016 to date is negative.
Bonds are not self-correcting from (in retrospect) poor investing decisions such as lending out your money for 1.5% at an average maturity of almost 10 years.
TBM has an average maturity of 6 years I thought.

And it's already paying 3.33% today. It turns over bonds fast enough that you're not stuck with 1.5% interest for 10 years.
Last edited by HomerJ on Fri Oct 19, 2018 4:05 pm, edited 1 time in total.
The J stands for Jay

User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 4:00 pm

Munir wrote:
Fri Oct 19, 2018 12:03 pm
I wouldn't be happy with a 1.5% return over 2 years- i.e. 0.75%/year.. It does not even beat inflation, does it?
Sure, but can one really call a POSITIVE 1.5% return a CRASH?

Pundits and experts have been warning of a bond CRASH for years. "Because any day now, the Fed is going to start raising rates!"

Well, the Fed raised them 7 times in less than 2 years, and I'm not seeing a CRASH.
The J stands for Jay

User avatar
HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HomerJ » Fri Oct 19, 2018 4:04 pm

Austintatious wrote:
Fri Oct 19, 2018 12:51 pm
Admiral wrote:
Fri Oct 19, 2018 11:58 am
Austintatious wrote:
Fri Oct 19, 2018 11:52 am
that bond returns will probably be depressed for a similar time.
Define "depressed"? Total Bond yield is now 2.73%, higher than it's been in ten years. Yes, it's not 4 or 5%. But it's not .5% either. Perhaps lower expectations are in order. Stocks are for risk and return, better to chase performance there.
Looking just now at Vanguard's TBM performance page, it's showing SEC yield for 10/17 at 3.22%. But it's also showing the before tax returns at a negative 1.32% for 1 year, at 1.18% for 3 years, and at 1.99% for 5 years. Compare that, for example, to a continued 3% for a 5 year CD at PenFed. Match those numbers to a big chunk of money invested in each and the differences are significant.
You didn't get 3% CDs 5 years ago. You can get 3% today, but TBM is also yielding 3% today.

Look, I'm not arguing that TBM is some great investment fund that people should pour money into. I have CDs as well.

I'm pointing out that predictions of some huge bond apocalypse seem to have been exaggerated.
What I'm really thinking about, though, is the relative stability of the two types of investments. Since we know that CDs, unlike bonds, will always be maintaining principal and providing positive returns, whether interest rates are rising or stocks are taking a dive, I continue to wonder why they're not the clearly better choice if one wants safety and relative stability for one's portfolio and especially so, when their returns are competitive with or better than bonds.
I agree. I like CDs a lot too.
The J stands for Jay

barnaclebob
Posts: 3072
Joined: Thu Aug 09, 2012 10:54 am

Re: Total Bond Market Fund - interest rates rising!

Post by barnaclebob » Fri Oct 19, 2018 4:04 pm

I always laugh when people talk about a bond "crash". What you mean having them going down 5% in a year?

Austintatious
Posts: 802
Joined: Thu Sep 13, 2012 7:01 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Austintatious » Fri Oct 19, 2018 4:22 pm

HomerJ wrote:
Fri Oct 19, 2018 4:04 pm
Austintatious wrote:
Fri Oct 19, 2018 12:51 pm
Admiral wrote:
Fri Oct 19, 2018 11:58 am
Austintatious wrote:
Fri Oct 19, 2018 11:52 am
that bond returns will probably be depressed for a similar time.
Define "depressed"? Total Bond yield is now 2.73%, higher than it's been in ten years. Yes, it's not 4 or 5%. But it's not .5% either. Perhaps lower expectations are in order. Stocks are for risk and return, better to chase performance there.
Looking just now at Vanguard's TBM performance page, it's showing SEC yield for 10/17 at 3.22%. But it's also showing the before tax returns at a negative 1.32% for 1 year, at 1.18% for 3 years, and at 1.99% for 5 years. Compare that, for example, to a continued 3% for a 5 year CD at PenFed. Match those numbers to a big chunk of money invested in each and the differences are significant.
You didn't get 3% CDs 5 years ago. You can get 3% today, but TBM is also yielding 3% today.

Look, I'm not arguing that TBM is some great investment fund that people should pour money into. I have CDs as well.

I'm pointing out that predictions of some huge bond apocalypse seem to have been exaggerated.
What I'm really thinking about, though, is the relative stability of the two types of investments. Since we know that CDs, unlike bonds, will always be maintaining principal and providing positive returns, whether interest rates are rising or stocks are taking a dive, I continue to wonder why they're not the clearly better choice if one wants safety and relative stability for one's portfolio and especially so, when their returns are competitive with or better than bonds.
I agree. I like CDs a lot too.
And by no means am I knocking TBM. I like it a lot, as well. It's remains part of our FI and it's what I've recommended for the portfolios of those younger folks I care about and who at least profess to care a bit about what I recommend. I just wondered if others see CDs as a steadier and safer form of FI as I do, at least for now. BTW, while 3% for CDs was indeed something of a rarity then, a whole bunch of Bogleheads including me signed up for 3% CDs at PenFed 5 years ago and have been getting 3% each year since. Cheers.

User avatar
patrick013
Posts: 2430
Joined: Mon Jul 13, 2015 7:49 pm

Re: Total Bond Market Fund - interest rates rising!

Post by patrick013 » Fri Oct 19, 2018 4:40 pm

barnaclebob wrote:
Fri Oct 19, 2018 4:04 pm
I always laugh when people talk about a bond "crash". What you mean having them going down 5% in a year?
Three year history is a little better. There's some 2 year history.

Image
age in bonds, buy-and-hold, 10 year business cycle

User avatar
Earl Lemongrab
Posts: 5866
Joined: Tue Jun 10, 2014 1:14 am

Re: Total Bond Market Fund - interest rates rising!

Post by Earl Lemongrab » Fri Oct 19, 2018 5:12 pm

If you're putting money in now, the bond index is the best value it's been in a while. Yields are up and share price is down.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
Socrates28
Posts: 146
Joined: Sun May 13, 2018 10:27 pm

@ Earl Lemongrab

Post by Socrates28 » Fri Oct 19, 2018 6:51 pm

Thank you....Im rolling over $25,000 to Vanguard and looking to buy a bond fund.

I just cant figure out Total Bond Index or Intermediate Index.

Mr. Jelly
Posts: 30
Joined: Fri Sep 21, 2018 5:12 pm

Re: Total Bond Market Fund - interest rates rising!

Post by Mr. Jelly » Fri Oct 19, 2018 6:55 pm

I appreciate what the OP pointed out. Thanks for sharing.

User avatar
willthrill81
Posts: 6553
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Total Bond Market Fund - interest rates rising!

Post by willthrill81 » Fri Oct 19, 2018 7:08 pm

Munir wrote:
Fri Oct 19, 2018 12:03 pm
I wouldn't be happy with a 1.5% return over 2 years- i.e. 0.75%/year.. It does not even beat inflation, does it?
No, it doesn't. From Jan., 2016, through Sep., 2018, TBM had a real annualized return of -.85%.

If you want to beat inflation guaranteed, then buy TIPS when the real yield is above 0%, which is not always the case as many believe it is. Sometimes, TIPS have had a real negative yield at the time of purchase.
“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

venkman
Posts: 751
Joined: Tue Mar 14, 2017 10:33 pm

Re: Total Bond Market Fund - interest rates rising!

Post by venkman » Fri Oct 19, 2018 8:28 pm

Austintatious wrote:
Fri Oct 19, 2018 4:22 pm
And by no means am I knocking TBM. I like it a lot, as well. It's remains part of our FI and it's what I've recommended for the portfolios of those younger folks I care about and who at least profess to care a bit about what I recommend. I just wondered if others see CDs as a steadier and safer form of FI as I do, at least for now.
CD's are safer than a bond fund if you plan to use the money when the CD matures. A perpetual CD ladder that reinvests maturing CD's is not safer than a bond fund of similar duration/credit quality. When interest rates rise, existing bonds and CD's both become less attractive, compared to newer issues. The difference is that it's much easier to ignore decreased market value for CD's than it is for a bond fund that's required to report its NAV every day.

User avatar
nisiprius
Advisory Board
Posts: 37090
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Total Bond Market Fund - interest rates rising!

Post by nisiprius » Fri Oct 19, 2018 8:48 pm

I don't want to harp on this too much but there is a legitimate question how liquid CDs might be, if interest rates rise so much that large numbers of people want to break their CDs before maturity... particularly if it happens at a time when banks are stressed.

People assume that money in CDs is available on demand, as long as they don't mind paying the penalty, and in practice this has been almost always true--but many CDs have terms and conditions that say that early withdrawal is "at the bank's discretion" or "with the bank's permission."

One probably should not buy a bank CD unless one is completely able to wait until maturity, should banks start to play hardball with their terms and conditions... which, I say again, hasn't happened.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
arcticpineapplecorp.
Posts: 3503
Joined: Tue Mar 06, 2012 9:22 pm

Re: Total Bond Market Fund - interest rates rising!

Post by arcticpineapplecorp. » Fri Oct 19, 2018 8:55 pm

nisiprius wrote:
Fri Oct 19, 2018 8:48 pm
I don't want to harp on this too much but there is a legitimate question how liquid CDs might be, if interest rates rise so much that large numbers of people want to break their CDs before maturity... particularly if it happens at a time when banks are stressed.

People assume that money in CDs is available on demand, as long as they don't mind paying the penalty, and in practice this has been almost always true--but many CDs have terms and conditions that say that early withdrawal is "at the bank's discretion" or "with the bank's permission."

One probably should not buy a bank CD unless one is completely able to wait until maturity, should banks start to play hardball with their terms and conditions... which, I say again, hasn't happened.
if they broke their cds isn't it likely they'd be "reinvesting" the proceeds (minus early withdrawal penalty) in a new CD paying a higher rate? If so, then there's not really a liquidity problem for the banks, they are still holding the money, but they have to pay more interest over the newer term...and get to collect a nice fee from everyone who terminated early. Not sure why this would be so troublesome for banks. Can you explain further why this might cause a problem for banks? If they were cashing out to put the money somewhere else (bonds instead of cds for instance) I could see that would be a problem for the banks. They'd be losing too much money too quickly. But breaking a cd to buy a new one paying a higher rate doesn't seem like it would break the bank. What am I missing?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

dknightd
Posts: 1038
Joined: Wed Mar 07, 2018 11:57 am

Re: Total Bond Market Fund - interest rates rising!

Post by dknightd » Fri Oct 19, 2018 9:09 pm

Just for fun I put some money in short term bonds, some in MM. Returns on both are dismal. So far MM is slightly ahead. This is for my next few years of expenses. I'm pretty sure neither will go down in nominal dollars. Only time will tell which is better, which is why I did 50/50

rkhusky
Posts: 5917
Joined: Thu Aug 18, 2011 8:09 pm

Re: Total Bond Market Fund - interest rates rising!

Post by rkhusky » Fri Oct 19, 2018 9:40 pm

If you need the money in the next couple of years, buy a CD. If you won't need the money for 5+ years, Total Bond is likely to provide a higher return.

HEDGEFUNDIE
Posts: 1245
Joined: Sun Oct 22, 2017 2:06 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HEDGEFUNDIE » Fri Oct 19, 2018 9:42 pm

And EDV, a bond fund with a 25 year duration, has gained 4% over this same period of rising rates.

So much for long bonds being a portfolio killer.

J295
Posts: 1760
Joined: Sun Jan 01, 2012 11:40 pm

Re: Total Bond Market Fund - interest rates rising!

Post by J295 » Fri Oct 19, 2018 9:47 pm

A lot of dualistic thinking when it comes to bonds and CDs. That’s not how we approach the non-equity side of our equation. For years our non-equity “fixed” portion has included BND, tips, I bonds, CDs, floating rate fund. Our non-equity side also includes cash and alternatives.

nyclon
Posts: 310
Joined: Fri Oct 02, 2015 5:30 pm

Re: Total Bond Market Fund - interest rates rising!

Post by nyclon » Fri Oct 19, 2018 10:32 pm

HEDGEFUNDIE wrote:
Fri Oct 19, 2018 9:42 pm
And EDV, a bond fund with a 25 year duration, has gained 4% over this same period of rising rates.

So much for long bonds being a portfolio killer.
Incorrect. EDV is down 13.5% during the same period of time. Per your comment about its extended duration, indeed, it was impacted much more than any of the other funds listed here.

At the beginning of the chart above during October 2016 EDV incurred a drawdown of roughly 17%, almost double that of BDV.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

HEDGEFUNDIE
Posts: 1245
Joined: Sun Oct 22, 2017 2:06 pm

Re: Total Bond Market Fund - interest rates rising!

Post by HEDGEFUNDIE » Fri Oct 19, 2018 10:48 pm

nyclon wrote:
Fri Oct 19, 2018 10:32 pm
HEDGEFUNDIE wrote:
Fri Oct 19, 2018 9:42 pm
And EDV, a bond fund with a 25 year duration, has gained 4% over this same period of rising rates.

So much for long bonds being a portfolio killer.
Incorrect. EDV is down 13.5% during the same period of time. Per your comment about its extended duration, indeed, it was impacted much more than any of the other funds listed here.

At the beginning of the chart above during October 2016 EDV incurred a drawdown of roughly 17%, almost double that of BDV.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Huh?

The OP started his backtest in December 2016.

https://www.portfoliovisualizer.com/fun ... F19%2F2018

nyclon
Posts: 310
Joined: Fri Oct 02, 2015 5:30 pm

Re: Total Bond Market Fund - interest rates rising!

Post by nyclon » Fri Oct 19, 2018 11:05 pm

HEDGEFUNDIE wrote:
Fri Oct 19, 2018 10:48 pm
nyclon wrote:
Fri Oct 19, 2018 10:32 pm
HEDGEFUNDIE wrote:
Fri Oct 19, 2018 9:42 pm
And EDV, a bond fund with a 25 year duration, has gained 4% over this same period of rising rates.

So much for long bonds being a portfolio killer.
Incorrect. EDV is down 13.5% during the same period of time. Per your comment about its extended duration, indeed, it was impacted much more than any of the other funds listed here.

At the beginning of the chart above during October 2016 EDV incurred a drawdown of roughly 17%, almost double that of BDV.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Huh?

The OP started his backtest in December 2016.

https://www.portfoliovisualizer.com/fun ... F19%2F2018
I stand corrected on timeframe - OPs pick of December 2016 seems to be quite the price dip for long duration bonds.

My backtest was adding EDV to patrick013's chart starting in October - buying long duration on the dip's bottom in the chart (OPs timeframe of December vs October) indeed was a good bet in hindsight but came with a 10% standard deviation. 17% SD starting in October and terrible performance.
Last edited by nyclon on Sat Oct 20, 2018 6:29 pm, edited 1 time in total.

restingonmylaurels
Posts: 227
Joined: Tue Apr 14, 2015 11:02 am

Re: Total Bond Market Fund - interest rates rising!

Post by restingonmylaurels » Sat Oct 20, 2018 9:42 am

HomerJ wrote:
Fri Oct 19, 2018 10:11 am
So I've seen plenty of people here and in the media warn about bond funds "crashing" when interest rates rise.

Just because I was curious, I checked Total Bond Market Index Fund since 12/14/2016 to today.

Why did I pick 12/14/2016? Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day. Up a total 1.75%.

Over that same period Total Bond Market lost sorry, gained 1.5% (including reinvested dividends of course). Not much of a gain, to be sure. But a gain. In a rising interest rate environment. Bonds are self-correcting.

When interest rates go up, bond fund values go down, but they start increasing their dividends.
When interest rates go down, dividends decrease, but the bond fund values go up.

Inflation is a real bond killer, not slowly rising interest rates.
Let me provide a personal and different perspective to this discussion.

After listening to the discussion on the board here for some time, I went with an allocation to TBM in the spring of 2016, two and half years ago.

My average buy-in price was 10.86.

The current TBM price is 10.26.

That is a NAV loss of 5.5% in 2.5 years, for a supposedly safe investment.

To make matters worse, that loss is a long-term capital loss but the higher income from rising yields that will supposedly make up for this loss is taxed at ordinary rates.

This has been my worst investment decision in some time. Fortunately, I only allocated a small part of my FI to TBM and made smarter choices like USB with larger allocations.

I will be TLHing this fund shortly. My only question is, when the wash sale period is over, should I move the funds back in or give up on TBM in favor of short term funds or direct T-bill or CD purchases.

sport
Posts: 7517
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Total Bond Market Fund - interest rates rising!

Post by sport » Sat Oct 20, 2018 10:03 am

Earl Lemongrab wrote:
Fri Oct 19, 2018 1:12 pm
You can buy CDs in IRAs, but it's not always easy especially if you need to move around to chase the best interest rates. In my case, I have about 800k in fixed income, currently all in the 401(k) split between bond index and stable value. The latter is paying around 2.65% annualized. YTD, they've just about canceled each other.

I could roll some of that out to an IRA and get CDs, but that starts to be a lot of work. If I did anything in that area, it would probably be TIPS funds.
You don't need to move around to chase CD interest rates. You can buy brokered CDs in your IRA. It is quick and easy, and the rates are competitive with the best direct CDs. Brokered CDs also have the advantage that they do not auto-reinvest at some low rate if you aren't paying close enough attention to them.

User avatar
vineviz
Posts: 2333
Joined: Tue May 15, 2018 1:55 pm

Re: Total Bond Market Fund - interest rates rising!

Post by vineviz » Sat Oct 20, 2018 10:17 am

restingonmylaurels wrote:
Sat Oct 20, 2018 9:42 am
That is a NAV loss of 5.5% in 2.5 years, for a supposedly safe investment.

To make matters worse, that loss is a long-term capital loss but the higher income from rising yields that will supposedly make up for this loss is taxed at ordinary rates.
Evaluating any investment SOLELY on NAV is unfair and misleading: Vanguard Total Bond Market has been paying higher distributions the entire time you've owned it and (depending on you exact purchase date) is likely to have had a HIGHER total return than a short-term bond fund.

For example, starting at January 4th, 2016 (since I don't know precisely when you bought TBM) the total CAGR of total bond market has been 1.2% versus only 0.8% for Vanguard Short-Term Bond fund.

Owning bonds during a bull market for stocks is never going to feel great, but we know that investing based on EMOTIONAL reactions is often counterproductive. Holding an intermediate or long-term bond fund is usually going to end up giving you more wealth and lower volatility over a six year holding period or more.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

onourway
Posts: 1390
Joined: Thu Dec 08, 2016 3:39 pm

Re: Total Bond Market Fund - interest rates rising!

Post by onourway » Sat Oct 20, 2018 10:23 am

restingonmylaurels wrote:
Sat Oct 20, 2018 9:42 am

Let me provide a personal and different perspective to this discussion.

After listening to the discussion on the board here for some time, I went with an allocation to TBM in the spring of 2016, two and half years ago.

My average buy-in price was 10.86.

The current TBM price is 10.26.

That is a NAV loss of 5.5% in 2.5 years, for a supposedly safe investment.

To make matters worse, that loss is a long-term capital loss but the higher income from rising yields that will supposedly make up for this loss is taxed at ordinary rates.

This has been my worst investment decision in some time. Fortunately, I only allocated a small part of my FI to TBM and made smarter choices like USB with larger allocations.

I will be TLHing this fund shortly. My only question is, when the wash sale period is over, should I move the funds back in or give up on TBM in favor of short term funds or direct T-bill or CD purchases.
$10,000 invested in Total Bond Market in March of 2016 is worth $10,237 today, for a CAGR of 0.91%. If this is your worst investment, you've done very very well. And as HomerJ notes with the creation of this thread, a FAR cry from the slaughter that pundits have been calling for in bonds for years - and you're now earning well over 3% in that fund.

User avatar
willthrill81
Posts: 6553
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Total Bond Market Fund - interest rates rising!

Post by willthrill81 » Sat Oct 20, 2018 10:25 am

onourway wrote:
Sat Oct 20, 2018 10:23 am
$10,000 invested in Total Bond Market in March of 2016 is worth $10,237 today, for a CAGR of 0.91%. If this is your worst investment, you've done very very well. And as HomerJ notes with the creation of this thread, a FAR cry from the slaughter that pundits have been calling for in bonds for years.
In real dollars, that's a loss, albeit a small one.
“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

User avatar
aspirit
Posts: 225
Joined: Wed Jan 03, 2018 12:52 am
Location: Bos/Mia-south

Re: Total Bond Market Fund - interest rates rising!

Post by aspirit » Sat Oct 20, 2018 10:30 am

restingonmylaurels wrote:
Sat Oct 20, 2018 9:42 am
HomerJ wrote:
Fri Oct 19, 2018 10:11 am
So I've seen plenty of people here and in the media warn about bond funds "crashing" when interest rates rise.

Just because I was curious, I checked Total Bond Market Index Fund since 12/14/2016 to today.

Why did I pick 12/14/2016? Because the Fed raised interest rates 0.25% on that day. In fact, including that day, the Fed has raised interest rates 0.25% SEVEN times in less than 2 years since that day. Up a total 1.75%.

Over that same period Total Bond Market lost sorry, gained 1.5% (including reinvested dividends of course). Not much of a gain, to be sure. But a gain. In a rising interest rate environment. Bonds are self-correcting.

When interest rates go up, bond fund values go down, but they start increasing their dividends.
When interest rates go down, dividends decrease, but the bond fund values go up.

Inflation is a real bond killer, not slowly rising interest rates.
Let me provide a personal and different perspective to this discussion.

After listening to the discussion on the board here for some time, I went with an allocation to TBM in the spring of 2016, two and half years ago.

My average buy-in price was 10.86.

The current TBM price is 10.26.

That is a NAV loss of 5.5% in 2.5 years, for a supposedly safe investment.

To make matters worse, that loss is a long-term capital loss but the higher income from rising yields that will supposedly make up for this loss is taxed at ordinary rates.

This has been my worst investment decision in some time. Fortunately, I only allocated a small part of my FI to TBM and made smarter choices like USB with larger allocations.

I will be TLHing this fund shortly. My only question is, when the wash sale period is over, should I move the funds back in or give up on TBM in favor of short term funds or direct T-bill or CD purchases.
U.S Bank-corp? A bank? Good luck!
Time & tides wait for no one. A man has to know his limitations.

User avatar
vineviz
Posts: 2333
Joined: Tue May 15, 2018 1:55 pm

Re: Total Bond Market Fund - interest rates rising!

Post by vineviz » Sat Oct 20, 2018 10:31 am

willthrill81 wrote:
Sat Oct 20, 2018 10:25 am
onourway wrote:
Sat Oct 20, 2018 10:23 am
$10,000 invested in Total Bond Market in March of 2016 is worth $10,237 today, for a CAGR of 0.91%. If this is your worst investment, you've done very very well. And as HomerJ notes with the creation of this thread, a FAR cry from the slaughter that pundits have been calling for in bonds for years.
In real dollars, that's a loss, albeit a small one.
True, but it's a smaller loss than you'd have suffered by being in short-term bonds over the same period.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Kenkat
Posts: 4454
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Total Bond Market Fund - interest rates rising!

Post by Kenkat » Sat Oct 20, 2018 10:33 am

Rates have been purported to rise for the last 7 years. Now that it has finally happened, after 5 years of it not happening, it becomes news. And still not a major calamity; returns are still positive but just not as high as we’d like. It’s easy to forget that bonds earned interest at a higher rate than CDs for those 5 years we were all waiting for rates to rise.

User avatar
willthrill81
Posts: 6553
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Total Bond Market Fund - interest rates rising!

Post by willthrill81 » Sat Oct 20, 2018 10:34 am

vineviz wrote:
Sat Oct 20, 2018 10:31 am
willthrill81 wrote:
Sat Oct 20, 2018 10:25 am
onourway wrote:
Sat Oct 20, 2018 10:23 am
$10,000 invested in Total Bond Market in March of 2016 is worth $10,237 today, for a CAGR of 0.91%. If this is your worst investment, you've done very very well. And as HomerJ notes with the creation of this thread, a FAR cry from the slaughter that pundits have been calling for in bonds for years.
In real dollars, that's a loss, albeit a small one.
True, but it's a smaller loss than you'd have suffered by being in short-term bonds over the same period.
Indeed. TBM has had about a 1% higher annual return than short-term Treasuries over the last two years.
“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

onourway
Posts: 1390
Joined: Thu Dec 08, 2016 3:39 pm

Re: Total Bond Market Fund - interest rates rising!

Post by onourway » Sat Oct 20, 2018 10:37 am

willthrill81 wrote:
Sat Oct 20, 2018 10:25 am
In real dollars, that's a loss, albeit a small one.
In March of 2016 Prime Money Market was paying 0.4%. If they'd put their money there instead they'd be at approximately the same net position, but probably not be feeling bad about it.

If you can't tolerate any fluctuation in your account value, you shouldn't be in stocks OR bonds!

User avatar
willthrill81
Posts: 6553
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Total Bond Market Fund - interest rates rising!

Post by willthrill81 » Sat Oct 20, 2018 10:42 am

onourway wrote:
Sat Oct 20, 2018 10:37 am
willthrill81 wrote:
Sat Oct 20, 2018 10:25 am
In real dollars, that's a loss, albeit a small one.
In March of 2016 Prime Money Market was paying 0.4%. If they'd put their money there instead they'd be at approximately the same net position, but probably not be feeling bad about it.
I was just pointing out that these numbers getting tossed around are nominal figures, but it's the real ones that count, even in the short-term.
onourway wrote:
Sat Oct 20, 2018 10:37 am
If you can't tolerate any fluctuation in your account value, you shouldn't be in stocks OR bonds!
Yep. Stable value funds or CDs would be options if that was the case.
“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

User avatar
unclescrooge
Posts: 2698
Joined: Thu Jun 07, 2012 7:00 pm

Re: Total Bond Market Fund - interest rates rising!

Post by unclescrooge » Sat Oct 20, 2018 10:49 am

barnaclebob wrote:
Fri Oct 19, 2018 4:04 pm
I always laugh when people talk about a bond "crash". What you mean having them going down 5% in a year?
Long term bonds (as tracked by TLT) are down 9% this year.

We can laugh, but a lot of conservative investors in bond-heavy portfolios are confused by this turn of events.

Post Reply