time to move from short term bonds to longer term?

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lomarica01
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time to move from short term bonds to longer term?

Post by lomarica01 » Tue Mar 26, 2019 12:13 pm

I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks

HEDGEFUNDIE
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Re: time to move from short term bonds to longer term?

Post by HEDGEFUNDIE » Tue Mar 26, 2019 12:17 pm

You should have been in long bonds the whole time.

onourway
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Re: time to move from short term bonds to longer term?

Post by onourway » Tue Mar 26, 2019 12:17 pm

The time was about 4 months ago. Right now you will be buying high as the NAV of intermediate and long-term bonds has rebounded.

However, if your time horizon approximately matches the duration of the fund, now is always the right time to make the move.

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vineviz
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Re: time to move from short term bonds to longer term?

Post by vineviz » Tue Mar 26, 2019 12:44 pm

lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market
At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.

Also the risk of downside in stocks is EXACTLY what provides the upside in stocks. If these are retirement funds or some other "funds ... not needed any time soon", don't be trying to switch between stocks and bonds based on what you think the Fed might do. Pick your allocation based on your investment goals, not on reading of tea leaves or CNBC.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

garlandwhizzer
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Re: time to move from short term bonds to longer term?

Post by garlandwhizzer » Tue Mar 26, 2019 1:16 pm

The optimal time for that switch has already passed but it's still probably a rational move to increase short duration to intermediate duration or, if you prefer, a barbell approach with short term on one end and long term on the other. The short term outperformance train is no longer running IMO. TBM looks attractive to me now, and in fact is essentially always a solid bond market choice.

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UpperNwGuy
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Re: time to move from short term bonds to longer term?

Post by UpperNwGuy » Tue Mar 26, 2019 1:18 pm

Why were you in short term bonds? Were you trying to time the bond market? I've been in intermediate term bonds all along and have no plans to change.

What is this "higher downside risk of the equity market" of which you speak?

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DanMahowny
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Re: time to move from short term bonds to longer term?

Post by DanMahowny » Tue Mar 26, 2019 1:23 pm

I'm happy to keep my portfolio short-term treasuries and TIPS.
Funding secured

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baconavocado
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Re: time to move from short term bonds to longer term?

Post by baconavocado » Tue Mar 26, 2019 7:28 pm

If you're asking whether the "time" is right to do something, there's something wrong in your investing approach.

Bogleheads don't recommend market timing. I'd suggest studying the wiki.

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Phineas J. Whoopee
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Re: time to move from short term bonds to longer term?

Post by Phineas J. Whoopee » Tue Mar 26, 2019 7:52 pm

The Fed does not set bond yields.
PJW

pward
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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 7:57 pm

vineviz wrote:
Tue Mar 26, 2019 12:44 pm

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.

Also the risk of downside in stocks is EXACTLY what provides the upside in stocks. If these are retirement funds or some other "funds ... not needed any time soon", don't be trying to switch between stocks and bonds based on what you think the Fed might do. Pick your allocation based on your investment goals, not on reading of tea leaves or CNBC.
Not true. Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation. There's nothing wrong with mixing the two in order to help hedge the weaknesses in the other. Yes, that would mean investing "funds... not needed anytime soon" in short term bonds can be a legit strategy. I do agree he shouldn't be trying to time the curve, and should set an allocation and stick to it. But there definitely is a logical place in a portfolio for short term bonds, and in general it would be foolish to exclude an entire asset class just because. While matching maturity to consumption sounds great, the real practical effects on implementation are much more nuanced than that. Broad generalizations about what asset classes are good or bad should be avoided; asset classes can only be good or bad within the context of a unique investor, their unique goals, and their unique portfolio.
Last edited by pward on Tue Mar 26, 2019 8:07 pm, edited 1 time in total.

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vineviz
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Re: time to move from short term bonds to longer term?

Post by vineviz » Tue Mar 26, 2019 8:07 pm

pward wrote:
Tue Mar 26, 2019 7:57 pm
vineviz wrote:
Tue Mar 26, 2019 12:44 pm

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.
Not true. Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation.
This is an urban legend that just won't die. I don't even know how the myth got started.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

pward
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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 8:10 pm

vineviz wrote:
Tue Mar 26, 2019 8:07 pm
pward wrote:
Tue Mar 26, 2019 7:57 pm
vineviz wrote:
Tue Mar 26, 2019 12:44 pm

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.
Not true. Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation.
This is an urban legend that just won't die. I don't even know how the myth got started.
It's not a myth, it's a fact. Show me some data that proves it false. All you have to do is go look at inflation adjusted returns through the 70's. Long term and intermediate bonds got massacred, short term bonds basically kept up with inflation. Long term, intermediate, and short term bonds are all good asset classes and they all can have their place in a portfolio.

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vineviz
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Re: time to move from short term bonds to longer term?

Post by vineviz » Tue Mar 26, 2019 8:28 pm

pward wrote:
Tue Mar 26, 2019 8:10 pm
vineviz wrote:
Tue Mar 26, 2019 8:07 pm
pward wrote:
Tue Mar 26, 2019 7:57 pm
Not true. Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation.
This is an urban legend that just won't die. I don't even know how the myth got started.
It's not a myth, it's a fact. Show me some data that proves it false.
That data has been shared dozens of times, maybe hundreds, before. It's tiresome.
pward wrote:
Tue Mar 26, 2019 8:10 pm
All you have to do is go look at inflation adjusted returns through the 70's.
Maybe that's the source of the myth: people taking a quick look at one set of returns and extrapolating universalities from it without doing any serious analysis.

Looking at a few charts is NOT all you have to do to substantiate a claim like the one you made: carefully controlling for all the variables is the bare minimum. I don't know if I can count the number of Bogleheads who went to "look at inflation adjusted returns through the 70's" and reached the same wrong conclusion.
pward wrote:
Tue Mar 26, 2019 8:10 pm
Long term, intermediate, and short term bonds are all good asset classes and they all can have their place in a portfolio.
Sure that can. In fact,I think I said that already: short-term bonds are a GREAT asset class for investors with short-term investment horizons. That's their place in the portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 8:33 pm

vineviz wrote:
Tue Mar 26, 2019 8:28 pm
pward wrote:
Tue Mar 26, 2019 8:10 pm
vineviz wrote:
Tue Mar 26, 2019 8:07 pm
pward wrote:
Tue Mar 26, 2019 7:57 pm
Not true. Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation.
This is an urban legend that just won't die. I don't even know how the myth got started.
It's not a myth, it's a fact. Show me some data that proves it false.
That data has been shared dozens of times, maybe hundreds, before. It's tiresome.
pward wrote:
Tue Mar 26, 2019 8:10 pm
All you have to do is go look at inflation adjusted returns through the 70's.
Maybe that's the source of the myth: people taking a quick look at one set of returns and extrapolating universalities from it without doing any serious analysis.

Looking at a few charts is NOT all you have to do to substantiate a claim like the one you made: carefully controlling for all the variables is the bare minimum. I don't know if I can count the number of Bogleheads who went to "look at inflation adjusted returns through the 70's" and reached the same wrong conclusion.
pward wrote:
Tue Mar 26, 2019 8:10 pm
Long term, intermediate, and short term bonds are all good asset classes and they all can have their place in a portfolio.
Sure that can. In fact,I think I said that already: short-term bonds are a GREAT asset class for investors with short-term investment horizons. That's their place in the portfolio.
All I hear is opinion and a cop out to not back it up with actual data. I don't care about your opinion. Opinion means nothing. Bring me some data, if you're so sure of your opinion then it shouldn't be hard, and the data should be good enough in and of itself for me to come to the same conclusion. I've always got an open mind to new ideas, provided the data backs it up.

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Re: time to move from short term bonds to longer term?

Post by vineviz » Tue Mar 26, 2019 8:35 pm

pward wrote:
Tue Mar 26, 2019 8:33 pm
All I hear is opinion and a cop out to not back it up with actual data. I don't care about your opinion. Opinion means nothing. Bring me some data, if your so sure of your opinion then it shouldn't be hard, and the data should be good enough in and of itself for me to come to the same conclusion.
Data like this? "Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation."

[OT comment removed by admin LadyGeek]
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 8:37 pm

vineviz wrote:
Tue Mar 26, 2019 8:35 pm
pward wrote:
Tue Mar 26, 2019 8:33 pm
All I hear is opinion and a cop out to not back it up with actual data. I don't care about your opinion. Opinion means nothing. Bring me some data, if your so sure of your opinion then it shouldn't be hard, and the data should be good enough in and of itself for me to come to the same conclusion.
Data like this? "Intermediate and long term bonds are strong in a deflation, but weak in an inflation. Short term bonds are weak in an deflation, and strong in an inflation."

[OT comment removed by admin LadyGeek]
You made a very strong blanket generalization saying that short term bonds are bad for all investors without a short time horizon. Then you are failing to bring any data to the table to support your claim. [OT comment removed by admin LadyGeek] I really want to see the proof behind this.

DonIce
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Re: time to move from short term bonds to longer term?

Post by DonIce » Tue Mar 26, 2019 8:41 pm

Sorry to interrupt but could someone explain to me why different durations of bonds should respond differently to inflation from a theoretical/intuitive standpoint? Naively it seems to me that inflation should correspond to rising interest rates as the fed attempts to get inflation under control, and rising interest rates should reduce the value of all bonds? Long duration bonds should be more strongly affected since the longer the duration, the more sensitive they are to interest rate increases, but short term bonds should still also be adversely affected, right?

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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 8:46 pm

DonIce wrote:
Tue Mar 26, 2019 8:41 pm
Sorry to interrupt but could someone explain to me why different durations of bonds should respond differently to inflation from a theoretical/intuitive standpoint? Naively it seems to me that inflation should correspond to rising interest rates as the fed attempts to get inflation under control, and rising interest rates should reduce the value of all bonds? Long duration bonds should be more strongly affected since the longer the duration, the more sensitive they are to interest rate increases, but short term bonds should still also be adversely affected, right?
Short term bonds aren't really effected by inflation because they expire much sooner and they can get rolled into higher interest rate bills which will represent the new inflation levels. Rising interest rates are good for T-Bills, I mean just look back at 2018, T-Bills were the best returning asset class for the year.

In a deflation, the long term bonds value goes up, but treasury bills wind up getting rolled over into lower interest rate bills that pay less.
Last edited by pward on Tue Mar 26, 2019 8:48 pm, edited 1 time in total.

pdavi21
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Re: time to move from short term bonds to longer term?

Post by pdavi21 » Tue Mar 26, 2019 8:47 pm

Not really. They have been far cheaper recently, but I don't think it's a bad time either.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: time to move from short term bonds to longer term?

Post by DonIce » Tue Mar 26, 2019 8:52 pm

pward wrote:
Tue Mar 26, 2019 8:46 pm
Short term bonds aren't really effected by inflation because they expire much sooner and they can get rolled into higher interest rate bills which will represent the new inflation levels. Rising interest rates are good for T-Bills, I mean just look back at 2018, T-Bills were the best returning asset class for the year.
Ah I see, that makes sense. So basically the duration is short enough that essentially the bonds are maturing all the time anyway so you recoup their face value and their coupon, and then reinvest them into new bonds with a higher coupon.

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Re: time to move from short term bonds to longer term?

Post by pward » Tue Mar 26, 2019 9:25 pm

DonIce wrote:
Tue Mar 26, 2019 8:52 pm
pward wrote:
Tue Mar 26, 2019 8:46 pm
Short term bonds aren't really effected by inflation because they expire much sooner and they can get rolled into higher interest rate bills which will represent the new inflation levels. Rising interest rates are good for T-Bills, I mean just look back at 2018, T-Bills were the best returning asset class for the year.
Ah I see, that makes sense. So basically the duration is short enough that essentially the bonds are maturing all the time anyway so you recoup their face value and their coupon, and then reinvest them into new bonds with a higher coupon.
Exactly. If it's a fresh 1 year bill and interest rates get hiked, it will see a slight decline in value, but very small. A bill that is within 3 months of maturing won't really see any appreciable difference in value. And if you're laddering T-Bills so you have some expiring and automatically rolling over every month (like a money market fund) then the slight decline in value of the older bills is way less than the increase in interest rate in the new bills coming into the fold, so the portfolio as a whole benefits gradually with each rollover. This is what happened last year.

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Re: time to move from short term bonds to longer term?

Post by balbrec2 » Tue Mar 26, 2019 9:30 pm

lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks
I just stick with intermediate term all the time. Guessing which end to be on is
market timing. I won't do it.

pascalwager
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Re: time to move from short term bonds to longer term?

Post by pascalwager » Wed Mar 27, 2019 1:54 am

balbrec2 wrote:
Tue Mar 26, 2019 9:30 pm
lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks
I just stick with intermediate term all the time. Guessing which end to be on is
market timing. I won't do it.
I've been in either cash or ultra short-term bond funds (1 to 2 years duration) since 1954. Made a few short experiments with intermediate, but always ran for the exits. My former advisor believed in ultra-short and so does IFA today. The 2.5 year duration IFA bond portfolio consists of four DFA funds and is used for virtually all of their clients. Right now, I'm 100% money market for fixed income.

Yes, I've seen the PV curves for cash, STT, ITT, and LTT. Yes, it hurts. Maybe I need formal term risk desensitization training.

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Re: time to move from short term bonds to longer term?

Post by mrspock » Wed Mar 27, 2019 2:08 am

Let me ask a slightly different question: if my bonds are part of my core portfolio, I.e. the bonds I will hold probably forever as my “bond” allocation in my AA, should they be long term bonds? By the “how long will I hold them” criteria the answer is yes?

Question 2: If they end up dropping due to interest rate fluctuation, I rebalance to get back to my AA just as I would with stocks? If the answer is yes, then why wouldn’t everyone go long on bonds if they are the core part of the portfolio? (By definition a long term horizon)

Backtest: https://www.portfoliovisualizer.com/bac ... tion3_2=30

Test shows for 70/30 or 60/40 long term bonds do better. What am I missing here? Is everyone saving for a house with the intermediate term bonds? Some form of market timing with bonds?

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Re: time to move from short term bonds to longer term?

Post by pascalwager » Wed Mar 27, 2019 2:52 am

mrspock wrote:
Wed Mar 27, 2019 2:08 am
Let me ask a slightly different question: if my bonds are part of my core portfolio, I.e. the bonds I will hold probably forever as my “bond” allocation in my AA, should they be long term bonds? By the “how long will I hold them” criteria the answer is yes?

Question 2: If they end up dropping due to interest rate fluctuation, I rebalance to get back to my AA just as I would with stocks? If the answer is yes, then why wouldn’t everyone go long on bonds if they are the core part of the portfolio? (By definition a long term horizon)

Backtest: https://www.portfoliovisualizer.com/bac ... tion3_2=30

Test shows for 70/30 or 60/40 long term bonds do better. What am I missing here? Is everyone saving for a house with the intermediate term bonds? Some form of market timing with bonds?
The CA LT fund is only 7.0 years duration--not very long.

State munis can be part of your taxable AA, but it's wise to include Treasuries and, maybe, CDs along with the single-state risk.

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Re: time to move from short term bonds to longer term?

Post by pward » Wed Mar 27, 2019 9:24 am

mrspock wrote:
Wed Mar 27, 2019 2:08 am
Let me ask a slightly different question: if my bonds are part of my core portfolio, I.e. the bonds I will hold probably forever as my “bond” allocation in my AA, should they be long term bonds? By the “how long will I hold them” criteria the answer is yes?

Question 2: If they end up dropping due to interest rate fluctuation, I rebalance to get back to my AA just as I would with stocks? If the answer is yes, then why wouldn’t everyone go long on bonds if they are the core part of the portfolio? (By definition a long term horizon)

Backtest: https://www.portfoliovisualizer.com/bac ... tion3_2=30

Test shows for 70/30 or 60/40 long term bonds do better. What am I missing here? Is everyone saving for a house with the intermediate term bonds? Some form of market timing with bonds?
It's much more nuanced than that. I wish these things were as simple as just asking how long you're going to hold the bonds. The one thing you have to realize is that you are looking at a time frame from 1985 to today that was entirely a bull run for bonds. Bonds, just like every other asset, do have decade+ bear markets. Unfortunately, PV only goes back to 1978 for long bonds for whatever reason. This is already starting 8 years into the bond bear market, so you can get the idea, but it would have looked much, much worse if you were able to start at 1970. See the difference here between long term treasuries, T-Bills, and my personal favorite a 50/50 mix of both. Ignore the numbers since they are not inflation adjusted, and make sure you click the inflation adjusted button on the chart so you can see the real difference: https://www.portfoliovisualizer.com/bac ... easury3=50

You can see that the long bonds took quite a beating, losing at one point a hair under 50% of their real value, and this is less than half of the bear market! Imagine how bad that would have been if the first 8 years of the bear market were also represented! People don't realize that long and intermediate bonds can lose just as much of their value as stocks can, and both stocks and bonds can lose over half their value or more at the same time! The short term treasuries basically kept up with inflation, and a mix of both long and short was a happy medium. You were still taking some risk, still protected from a deflation, still able to participate in the strong recovery and bond bull market that followed this, but you weren't decimated during the bond bear market either. During this time both stocks and bonds were in a bear market for the entire decade. A portfolio of just stocks and LTT's got ruined, especially in real inflation adjusted returns. Some STT's would have really helped to dull the pain, and help an investor stick to it (hard assets would have helped a ton as well). Now let's look at the opposite, a deflationary period: https://www.portfoliovisualizer.com/bac ... easury3=50

Here you see the opposite. LTT's rocketed up. In a year where stocks were down over 30%, having an asset go up by 22% could have saved your bacon. STT's of course, didn't really do much here. Yields actually went down as interest rates dropped, but since this is one year you don't fully see the results of that, as there is a lag as new bills rollover. Either way, you can get the point. There are merits to both, and they can be used in conjunction a'la MPT to help hedge each others weaknesses. Matching maturity to consumption sounds great and all, but things are never that cut and dry. There is no good or bad in building a portfolio, for every change you make there are tradeoffs. It's a matter of balancing those tradeoffs into a fully baked strategy in a way that will meet your goals. Now, that strategy might be maturity matching, but it also might not. These things are nuanced, and there is more than one right way to build a portfolio. The important thing is that you understand the tradeoffs and unique strengths and weaknesses of each asset class, so that you can create the proper strategy for you. Both long term and short term treasuries are fine assets, and they both can have a place in a portfolio, regardless of how far someone is from using them.

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Re: time to move from short term bonds to longer term?

Post by LadyGeek » Wed Mar 27, 2019 3:23 pm

I removed some off-topic comments. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
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Re: time to move from short term bonds to longer term?

Post by FelixTheCat » Wed Mar 27, 2019 3:30 pm

DanMahowny wrote:
Tue Mar 26, 2019 1:23 pm
I'm happy to keep my portfolio short-term treasuries and TIPS.
May I ask why? I view short-term bond funds as a little better than a money market account.
Felix is a wonderful, wonderful cat.

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Re: time to move from short term bonds to longer term?

Post by columbia » Wed Mar 27, 2019 3:39 pm

FelixTheCat wrote:
Wed Mar 27, 2019 3:30 pm
DanMahowny wrote:
Tue Mar 26, 2019 1:23 pm
I'm happy to keep my portfolio short-term treasuries and TIPS.
May I ask why? I view short-term bond funds as a little better than a money market account.
My answer:

See long term difference in total return and relative performance during periods of steep equity decline. I want to be short treasuries over cash in 2008 style year.)

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Re: time to move from short term bonds to longer term?

Post by FelixTheCat » Wed Mar 27, 2019 4:55 pm

columbia wrote:
Wed Mar 27, 2019 3:39 pm
FelixTheCat wrote:
Wed Mar 27, 2019 3:30 pm
DanMahowny wrote:
Tue Mar 26, 2019 1:23 pm
I'm happy to keep my portfolio short-term treasuries and TIPS.
May I ask why? I view short-term bond funds as a little better than a money market account.
My answer:

See long term difference in total return and relative performance during periods of steep equity decline. I want to be short treasuries over cash in 2008 style year.)
I understand. Thanks for responding.
Felix is a wonderful, wonderful cat.

columbia
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Re: time to move from short term bonds to longer term?

Post by columbia » Wed Mar 27, 2019 4:58 pm

FelixTheCat wrote:
Wed Mar 27, 2019 4:55 pm
columbia wrote:
Wed Mar 27, 2019 3:39 pm
FelixTheCat wrote:
Wed Mar 27, 2019 3:30 pm
DanMahowny wrote:
Tue Mar 26, 2019 1:23 pm
I'm happy to keep my portfolio short-term treasuries and TIPS.
May I ask why? I view short-term bond funds as a little better than a money market account.
My answer:

See long term difference in total return and relative performance during periods of steep equity decline. I want to be short treasuries over cash in 2008 style year.)
I understand. Thanks for responding.
There’s no “right” choice, of course. Whatever works for each individual.

ericcohen
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Re: time to move from short term bonds to longer term?

Post by ericcohen » Wed Mar 27, 2019 7:21 pm

Anyone have any thoughts on LTPZ -PIMCO 15+ Year US TIPS- for investing new money lump sum?

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Re: time to move from short term bonds to longer term?

Post by vineviz » Wed Mar 27, 2019 7:48 pm

ericcohen wrote:
Wed Mar 27, 2019 7:21 pm
Anyone have any thoughts on LTPZ -PIMCO 15+ Year US TIPS- for investing new money lump sum?
If unexpected inflation is a source of risk for you then LTPZ can be a great tool to use. It’s hard to say more without all the requisite details.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

UpperNwGuy
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Re: time to move from short term bonds to longer term?

Post by UpperNwGuy » Wed Mar 27, 2019 7:58 pm

columbia wrote:
Wed Mar 27, 2019 3:39 pm
FelixTheCat wrote:
Wed Mar 27, 2019 3:30 pm
DanMahowny wrote:
Tue Mar 26, 2019 1:23 pm
I'm happy to keep my portfolio short-term treasuries and TIPS.
May I ask why? I view short-term bond funds as a little better than a money market account.
My answer:

See long term difference in total return and relative performance during periods of steep equity decline. I want to be short treasuries over cash in 2008 style year.)
But if you look at the years following 2008, the intermediate term bonds and long term bonds rebounded within a year or two and outperformed short term bonds. My time horizon is fairly long, so I plan to keep my intermediate term bond fund and total bond fund even if we are entering a 2008 style year.

ericcohen
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Re: time to move from short term bonds to longer term?

Post by ericcohen » Wed Mar 27, 2019 8:04 pm

vineviz wrote:
Wed Mar 27, 2019 7:48 pm
ericcohen wrote:
Wed Mar 27, 2019 7:21 pm
Anyone have any thoughts on LTPZ -PIMCO 15+ Year US TIPS- for investing new money lump sum?
If unexpected inflation is a source of risk for you then LTPZ can be a great tool to use. It’s hard to say more without all the requisite details.
Isn't unexpected inflation a risk for everyone?

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vineviz
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Re: time to move from short term bonds to longer term?

Post by vineviz » Wed Mar 27, 2019 8:12 pm

ericcohen wrote:
Wed Mar 27, 2019 8:04 pm
vineviz wrote:
Wed Mar 27, 2019 7:48 pm
ericcohen wrote:
Wed Mar 27, 2019 7:21 pm
Anyone have any thoughts on LTPZ -PIMCO 15+ Year US TIPS- for investing new money lump sum?
If unexpected inflation is a source of risk for you then LTPZ can be a great tool to use. It’s hard to say more without all the requisite details.
Isn't unexpected inflation a risk for everyone?
Not necessarily.

For a young investor the majority of their investable asserts should be in stocks, which offer protection from unexpected inflation. And the vast majority of their capital is human capital (ie the present value future wages) which also tracks inflation pretty well.

Another case would be a retiree whose expenses are covered completely or mostly by Social Security and/or a CPI-linked pension.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ericcohen
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Re: time to move from short term bonds to longer term?

Post by ericcohen » Wed Mar 27, 2019 8:18 pm

vineviz wrote:
Wed Mar 27, 2019 8:12 pm
ericcohen wrote:
Wed Mar 27, 2019 8:04 pm
vineviz wrote:
Wed Mar 27, 2019 7:48 pm
ericcohen wrote:
Wed Mar 27, 2019 7:21 pm
Anyone have any thoughts on LTPZ -PIMCO 15+ Year US TIPS- for investing new money lump sum?
If unexpected inflation is a source of risk for you then LTPZ can be a great tool to use. It’s hard to say more without all the requisite details.
Isn't unexpected inflation a risk for everyone?
Not necessarily.

For a young investor the majority of their investable asserts should be in stocks, which offer protection from unexpected inflation. And the vast majority of their capital is human capital (ie the present value future wages) which also tracks inflation pretty well.

Another case would be a retiree whose expenses are covered completely or mostly by Social Security and/or a CPI-linked pension.
That makes sense, thanks.

jrbdmb
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Re: time to move from short term bonds to longer term?

Post by jrbdmb » Thu Mar 28, 2019 1:33 am

lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks
I actually have the exact opposite question. With the yield curve currently inverted, does it now make sense to move from the intermediate term bonds I now have (Vanguard Intermediate-Term Treasury Index Fund Admiral Shares - VSIGX) to a short term fund (Vanguard Short-Term Treasury Index Fund Admiral Shares - VSBSX)? Why take additional interest rate risk for a lower current SEC interest rate?

(Note that when the yield curve recovers to a positive slope I would move back to intermediate term.)

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vineviz
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Re: time to move from short term bonds to longer term?

Post by vineviz » Thu Mar 28, 2019 8:34 am

jrbdmb wrote:
Thu Mar 28, 2019 1:33 am
lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks
I actually have the exact opposite question. With the yield curve currently inverted, does it now make sense to move from the intermediate term bonds I now have (Vanguard Intermediate-Term Treasury Index Fund Admiral Shares - VSIGX) to a short term fund (Vanguard Short-Term Treasury Index Fund Admiral Shares - VSBSX)? Why take additional interest rate risk for a lower current SEC interest rate?

(Note that when the yield curve recovers to a positive slope I would move back to intermediate term.)
The answer to your question is "no". It does not make sense.

The premise is that you are able to outsmart a world full of fixed income investors based on something you read in the WSJ or saw on CNBC. Does that sound right to you? It doesn't to me. Timing the market is a loser's game: the only way to win is to not play.

Another source of confusion I see with investors is that they misunderstand the nature of what you referred to as "interest rate risk". The actual risk is not defined by the characteristics of your bond or bond fund, but rather on the degree of mismatch between your investment time horizon and the duration of the bond/bond fund.

If your investment goal is long-term (e.g. retirement in 12 years) then a short-term bond has MORE interest rate risk FOR YOU than a long-term bond.

Conversely if your investment goal is short-term (e.g. a tuition payment due in August, 2019) then a short-term bond has LESS interest rate risk FOR YOU than a long-term bond.

Finally, if you are investing for a savings goal on a particular day (e.g.a tax bill due on April 1, 2020) then a bond that matures on that day1 has NO interest rate risk for you.

1Actually a couple days before to allow for settlement, but you get the point I hope.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by garlandwhizzer » Thu Mar 28, 2019 2:05 pm

vineviz wrote;

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.
I believe that this overstates the case against short longer duration. Bill Bernstein, a brilliant, highly accomplished and very knowledgeable investor/market historian, advocates short duration as the consistent core bond holding. Personally, I actually made money shortening duration when the Fed started aggressively raising rates then moving back to intermediate duration just as they hit the brakes. Perhaps that was luck but it was quite clear to me then that in a rising rate, rising inflationary environment longer duration both reduces returns and increases risk relative to shorter duration. Long duration bonds got massacred during the inflationary environment of the 1970s and early 1980s as pward has pointed out. I remember those days but few investors now do, recency bias. Such a simple inflexible formula as the quote above advocates for what everyone should always do with their bond holdings regardless of market conditions would have been disastrous during this period. I don't advocate that everyone do it as I did which involved market timing. It's fine with me if others choose different approaches which may be better aligned with their specific situations. Personally I think TBM which includes all durations is a great bond fund. Pontificating what everyone should always do in bond investing regardless of market conditions oversteps the limits of market predictability IMO.

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Re: time to move from short term bonds to longer term?

Post by vineviz » Thu Mar 28, 2019 2:20 pm

garlandwhizzer wrote:
Thu Mar 28, 2019 2:05 pm
vineviz wrote;

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.
I believe that this overstates the case against short longer duration. Bill Bernstein, a brilliant, highly accomplished and very knowledgeable investor/market historian, advocates short duration as the consistent core bond holding.
Maybe Bill Bernstein is a nice guy, and maybe he's even smart. He's certainly entitled to an opinion.

But if he really says that short duration bonds should be everyone's "core bond holding" then he's clearly capable of saying stuff that is irrational and misguided.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by JBTX » Thu Mar 28, 2019 9:42 pm

vineviz wrote:
Thu Mar 28, 2019 2:20 pm
garlandwhizzer wrote:
Thu Mar 28, 2019 2:05 pm
vineviz wrote;

At the risk of piling on, I agree with the others that "funds ... not needed any time soon" should never be invested in money markets or short-term bonds to begin with.
I believe that this overstates the case against short longer duration. Bill Bernstein, a brilliant, highly accomplished and very knowledgeable investor/market historian, advocates short duration as the consistent core bond holding.
Maybe Bill Bernstein is a nice guy, and maybe he's even smart. He's certainly entitled to an opinion.

But if he really says that short duration bonds should be everyone's "core bond holding" then he's clearly capable of saying stuff that is irrational and misguided.
What you are saying would generally be true if both were driven primarily by market forces, but short term rates are primarily driven by the fed. So theoretically short term rates could be in effect subsidized, or the reverse, correct?

Also, in a portfolio, it might be more optimal to hold slightly less short term bonds and more stocks. If your POV is correct, an investor with a 30 year time horizon should hold their bond holdings as long term zero coupon bonds.

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Re: time to move from short term bonds to longer term?

Post by stlutz » Thu Mar 28, 2019 10:17 pm

jrbdmb wrote:
Thu Mar 28, 2019 1:33 am
lomarica01 wrote:
Tue Mar 26, 2019 12:13 pm
I know no one can predict which way interest rates will move, but since the Fed appears to have stopped/slowed down raising rates this year and maybe next year, is it time to move a percentage of money market and some short term bonds to intermediate or even longer term bonds in anticipation of getting a higher return?

these are in tax exempt accounts and the funds are not needed any time soon. the goal is to get a higher return without the higher downside risk of the equity market

thanks
I actually have the exact opposite question. With the yield curve currently inverted, does it now make sense to move from the intermediate term bonds I now have (Vanguard Intermediate-Term Treasury Index Fund Admiral Shares - VSIGX) to a short term fund (Vanguard Short-Term Treasury Index Fund Admiral Shares - VSBSX)? Why take additional interest rate risk for a lower current SEC interest rate?

(Note that when the yield curve recovers to a positive slope I would move back to intermediate term.)
There is currently something of a debate as to why longer term rates have gone down so far so fast. Is the market giving an indication of an imminent recession? Or are there temporary technical factors at work and soon fundamentals will reassert themselves and rates will go back up to 3%. If you want to make a market-timing call, you need to be able to answer that question in an intelligent way.

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Re: time to move from short term bonds to longer term?

Post by stlutz » Thu Mar 28, 2019 10:22 pm

pward wrote:
Tue Mar 26, 2019 8:10 pm
It's not a myth, it's a fact. Show me some data that proves it false. All you have to do is go look at inflation adjusted returns through the 70's. Long term and intermediate bonds got massacred, short term bonds basically kept up with inflation. Long term, intermediate, and short term bonds are all good asset classes and they all can have their place in a portfolio.
To look at some actual data, the person who bought the 30 year bond in 1977 earned about 7.75%/yr. The person who continually rolled over 2 year bonds over that 30 year period earned about a half-a-percent less per year.

In that case, buying longer term bonds in the midst of a bad period for inflation was a good call.

Roll back the clock to 1957, the winner gets reversed.

stlutz
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Re: time to move from short term bonds to longer term?

Post by stlutz » Thu Mar 28, 2019 10:30 pm

The strategic answer to this question (short vs. long) always seems to depend a lot on which period of investing one considers "normal". For those who were scarred by high inflation in the 70s, a repeat of the scenario is always just around the corner. On the other hand, the person who has only been investing for the past 20 years thinks it's pretty much a rule that bonds go up when stocks go down. My own bet is that the next couple of decades probably won't resemble either period.

For the person who argues that bond duration should match the investment horizon, then the correlation question should be considered not meaningful. And for the individual investor, TIPS would be preferred over nominal treasuries as well, since inflation-adjusted dollars is what matters to an individual.

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Re: time to move from short term bonds to longer term?

Post by typical.investor » Fri Mar 29, 2019 12:59 am

stlutz wrote:
Thu Mar 28, 2019 10:22 pm
pward wrote:
Tue Mar 26, 2019 8:10 pm
It's not a myth, it's a fact. Show me some data that proves it false. All you have to do is go look at inflation adjusted returns through the 70's. Long term and intermediate bonds got massacred, short term bonds basically kept up with inflation. Long term, intermediate, and short term bonds are all good asset classes and they all can have their place in a portfolio.
To look at some actual data, the person who bought the 30 year bond in 1977 earned about 7.75%/yr. The person who continually rolled over 2 year bonds over that 30 year period earned about a half-a-percent less per year.

In that case, buying longer term bonds in the midst of a bad period for inflation was a good call.

Roll back the clock to 1957, the winner gets reversed.
The inflection point is actually 1968. Real returns for 30 year bonds at any time after that were better than 2 years (a). Obviously that reflects changes in how the Fed set rates. I expect long will have higher returns going forward.

(a) data from links below

Image

You can see it Siamond's gem (think diamond i.e. 'Siamond's Diamond') of a worksheet here (more commonly referred to as simba I think) :
https://www.bogleheads.org/wiki/Simba%2 ... preadsheet
viewtopic.php?f=10&t=2520&p=4379369#p4379369

Two points though:

1) long bonds are much more volatile. Have fun selling them to fund expenses after rate hikes. And who knows when you might lose your job.
2) funds maintain a constant duration. So 10 year duration when you have a 20 year horizon, really only works for the first 10 years. Of course you won't need it all at once but it takes a bit of calculation

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Re: time to move from short term bonds to longer term?

Post by vineviz » Fri Mar 29, 2019 7:15 am

JBTX wrote:
Thu Mar 28, 2019 9:42 pm
What you are saying would generally be true if both were driven primarily by market forces, but short term rates are primarily driven by the fed. So theoretically short term rates could be in effect subsidized, or the reverse, correct?
I think it'd be more accurate to say that the federal funds rate is driven by market forces than to say the FOMC is driving the market. Both Treasury rates and the federal funds rate are reacting to economic changes much more than they are causing them.

The 3-Year Treasury is a better predictor of the federal funds rate than the converse, for instance, and the spread between the two frequently grows quite wide (and sometimes even negative). Those are indicators that market forces are quite robustly at work.
JBTX wrote:
Thu Mar 28, 2019 9:42 pm
Also, in a portfolio, it might be more optimal to hold slightly less short term bonds and more stocks.
The optimal mix of assets is always going to be context dependent, obviously, but generally speaking it is almost never optimal to hold short-term bonds in equity-heavy portfolios. You can almost always achieve lower expected volatility with the same expected return, or higher expected returns with the same expected volatility, using intermediate- or long-term bonds.
JBTX wrote:
Thu Mar 28, 2019 9:42 pm
If your POV is correct, an investor with a 30 year time horizon should hold their bond holdings as long term zero coupon bonds.
Bingo.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by vineviz » Fri Mar 29, 2019 7:20 am

typical.investor wrote:
Fri Mar 29, 2019 12:59 am
The inflection point is actually 1968. Real returns for 30 year bonds at any time after that were better than 2 years (a). Obviously that reflects changes in how the Fed set rates. I expect long will have higher returns going forward.
Also, people forget that Treasury bonds used to be callable and no longer are. That creates a serious incongruity in the data for any period that includes long-term Treasuries issued before 1985.

Unless and until the Treasury resumes issuing callable bonds, the relative returns of long versus intermediate bonds from the 1950s to 1980s offer very little predictive power.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: time to move from short term bonds to longer term?

Post by pward » Fri Mar 29, 2019 11:44 am

vineviz wrote:
Fri Mar 29, 2019 7:15 am
The optimal mix of assets is always going to be context dependent, obviously, but generally speaking it is almost never optimal to hold short-term bonds in equity-heavy portfolios. You can almost always achieve lower expected volatility with the same expected return, or higher expected returns with the same expected volatility, using intermediate- or long-term bonds.
I do agree with this, that generally speaking, within the context of someone with a high equity allocation, they are not very diversified and would generally be better served by exclusively using long term treasuries than someone with a smaller equity allocation. The volatility of long term treasuries make them a much better diversifier than short, or even intermediate term treasuries.

Things get a little more grey though when you get into a more diversified MPT style portfolio, where there can be some benefits of mixing and matching different maturities depending on the exact mix of assets chosen. Assets can only be judged to be "good", "bad", "better", or "worse" within the context of the portfolio as a whole, that is mainly the point that I was alluding to earlier.

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Re: time to move from short term bonds to longer term?

Post by vineviz » Fri Mar 29, 2019 12:33 pm

pward wrote:
Fri Mar 29, 2019 11:44 am
Things get a little more grey though when you get into a more diversified MPT style portfolio, where there can be some benefits of mixing and matching different maturities depending on the exact mix of assets chosen. Assets can only be judged to be "good", "bad", "better", or "worse" within the context of the portfolio as a whole, that is mainly the point that I was alluding to earlier.
You may find this thread interesting: Fixed Income Volatility Should Vary Based on % Equity Allocation

Nothing revolutionary is revealed, but I graphically show an example of an optimally diversified bond allocation for various levels of equity exposure.

I tend to generalize that investors with long time horizons should have relatively high equity exposures (again, no shock) and that such investors ALSO should have most of their fixed income in long-term bonds (again, no shock).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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