Help me understand "inflation risk" for bond funds

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Topic Author
rbaldini
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Help me understand "inflation risk" for bond funds

If I understand correctly, it is commonly said that bonds suffer from "inflation risk". In short, since an interest rate on a bond is fixed for the duration, if inflation rises, you are effectively making less. Fine.

But in a sense, this is still true of stocks, no? At the end of, say, the year, the stock will have returned some percentage. Your true return - i.e. your additional purchasing power as a result of that gain - is that amount minus inflation. In other words, when it comes to total return, inflation reduces every dollar to the same degree, regardless of how you made it, because it shows up on the spending side.

I figure I must be missing something, so I thought I'd look at this in a more quantitative way. Consider an investor who puts proportion p of his assets in a stock index fund, and the rest (1-p) in a bond index fund. The real return on the year, R, is

R = p*R_s + (1-p)*R_b - I

Where R_s is the nominal return to stocks, R_b is the nominal return to bonds, and I is inflation. These are all random variables: we don't know what they are going to be, and they vary every year. If one uses variance to measure volatility and risk (reader can insert the usual caveats here about equating risk with variance), then we get the following equation for variance in return, V(R):

V(R) = p^2*V(R_s) + (1-p)^2*V(R_b) + V(I) + 2p*(1-p)*C(R_s,R_b) - 2p*C(R_s,I) - 2(1-p)*C(R_b,I)

In this formula V() is a variance and C() is a covariance. (Follows from formula for variance of linear function of random variables.)
This is a little hard to read, but you can basically think of each term as follows (respectively): The total variance in real return is the sum of parts that are due to...
1. variance in stocks
2. variance in bonds
3. variance in inflation
4. covariance between stocks and bonds
5. negative covariance between inflation and stock return
6. negative covariance between inflation and bond return

The last term seems to be relevant to the topic at hand: it specifies how much of the volatility in your annual returns is due to the interaction of bonds and inflation. In short, if there is a positive correlation between annual bond returns and inflation, this reduces overall volatility: they tend to cancel each other out. If there is a negative correlation, it increases volatility: you tend to get a bad return precisely when your money loses most value. So, if investing in bonds increases inflation risk, perhaps I should expect the correlation between bonds and inflation to be negative.

Is that so? Well, using the annual inflation numbers from here:
https://www.usinflationcalculator.com/i ... 3-to-2008/
And the annual total bond returns to VBMFX from yahoo, I found that the correlation appears to be weakly positive. Stocks even less so. I didn't bother to check if it's significant, because, in any case, the evidence does not suggest the negative correlation I expected.

Thoughts? Am I overthinking this? I guess what ultimately matters is this: what actionable advice is implied by the statement that bonds are subject to inflation risk? How does that affect how we invest?

dbr
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Re: Help me understand "inflation risk" for bond funds

I think the point is that bonds appear to be "safe" in the sense that debt investments promise to repay the debt. But this "safety" is illusory in the sense that what is repaid may not have fixed purchasing power because inflation has eroded the value of the fixed dollars. Stocks are also subject to inflation but the risk does not appear the same for two contradictory reasons. The first first is that stocks don't offer a promise of safety of principal that we can then argue is illusory due to inflation. The second and contradictory reason is that the return offered by stocks is on average enough to "outrun" inflation and leave us "whole" so to speak.

I would say that inflation is inflation and the rest of probably a lot of confounding of how words are used.

In short, I agree you are overthinking this although people should always be aware that a promise or an expectation made in nominal dollars may not be the same promise or expectation regarding future purchasing power.

alex_686
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Re: Help me understand "inflation risk" for bond funds

First, on bonds. Not sure what time period you are running your tests, but inflation has been pretty tame for the past 30 years for the US. Low and predictable. Inflation risks tend to be more obvious when you run it for longer time periods and different countries.

Second, stocks tend to be a good hedge against inflation. Equities's value are based on real economic value, not its nominal cash flows. Underlying assets tend to adjust for inflation, companies tend to raise prices for inflation, etc.

Lastly, you are misspecifying your model. It is the old correlation does not equal causation. There are more fundamental factors that drive both investment returns and bonds. For example we had high inflation and low real returns during the 70s due to the oil shock. We had high inflation and high returns during the 90s because high productivity growth sucked up all of the slack in the economy.

There are some pretty good cross country studies out there where they compared different companies in the same sector but were in different countries with different inflation rates. The impact on inflation on real returns were pretty low between countries.

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

pdavi21 wrote:
Tue Jun 11, 2019 2:12 pm
I didn't read your whole comment, but if it continues to make the above assumption, that would be a problem. I believe the inflation rate does have some impact on the return of stocks and even bonds (unless they have zero default risk).
There appears to be a weak positive correlation between inflation and stock/bond returns for index funds - although I'm not sure that it's statistically meaningful. In other words, when inflation is higher that usual, it may be that bonds and stocks return more than usual, too. That correlation is relevant to the math section. But anyway, *given that some amount of inflation has occurred* - say, 2% - then it has the same effect on every dollar you made, no? If you made \$100, it's really like you only made \$98, regardless of how you made it.

pdavi21
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Re: Help me understand "inflation risk" for bond funds

"Bonds are subject to inflation risk" is just a questionable way of stating that they have lower expected returns. At first I didn't read your whole comment, but then after reading it, I would say you are probably spot on. Whichever goes up more when inflation goes up has less inflation risk. The correct way to calculate co-variance is unknown. Time interval matters immensely. However, because stocks tend to return more than bonds over long term intervals, the difference of total return minus inflation has been much higher for stocks than bonds, on average.

What does this mean? A smaller percentage of the stock market's nominal gain has been wiped out from inflation than for the bond market.

Really, I think if one uses only inflation adjusted returns, then the question of whether bonds have inflation risk or not becomes a moot point.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

alex_686 wrote:
Tue Jun 11, 2019 2:16 pm
First, on bonds. Not sure what time period you are running your tests, but inflation has been pretty tame for the past 30 years for the US. Low and predictable. Inflation risks tend to be more obvious when you run it for longer time periods and different countries.
Fair point: I only looked back to the 80s or so. Not much data to make a good conclusion. I may look at indexes that provide more data.
alex_686 wrote:
Tue Jun 11, 2019 2:16 pm
Second, stocks tend to be a good hedge against inflation. Equities's value are based on real economic value, not its nominal cash flows. Underlying assets tend to adjust for inflation, companies tend to raise prices for inflation, etc.
What does this mean, though? At the end of the year, your bond investment returns x%, and your stock investment returns y%. The real return to both is just those variables minus the inflation. They are subject to it to the same degree. If the claim is that "stocks return more when inflation is higher" - well, there doesn't seem to be much evidence of that in the data I saw. There was a weak positive correlation - but it was less than for bonds (though I doubt it is statistically significant difference). Are you suggesting that this positive association would be stronger if I looked at a longer timescale?
alex_686 wrote:
Tue Jun 11, 2019 2:16 pm
Lastly, you are misspecifying your model. It is the old correlation does not equal causation. There are more fundamental factors that drive both investment returns and bonds.
To be clear, I'm not looking to understand what "drives" returns per se. Rather, to understand what it means for bonds to be more subject to inflation risk. It's still not clear to me, though dbr seems to suggest that it amounts to little more than saying "but remember that inflation happens."
Last edited by rbaldini on Tue Jun 11, 2019 2:28 pm, edited 2 times in total.

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

pdavi21 wrote:
Tue Jun 11, 2019 2:22 pm
"Bonds are subject to inflation risk" is just a questionable way of stating that they have lower expected returns.
Sounds like you are dbr are saying about the same thing. If I'm understanding right, "inflation risk" just a way of saing "inflation happens". Inflation doesn't "eat more" from bonds than from stocks - it eats the same amount, regardless. But bonds have lower expected nominal return, so the amount leftover for you is less. But that's solely a function of the difference in expected return.

pdavi21
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 2:26 pm
pdavi21 wrote:
Tue Jun 11, 2019 2:22 pm
"Bonds are subject to inflation risk" is just a questionable way of stating that they have lower expected returns.
Sounds like you are dbr are saying about the same thing. If I'm understanding right, "inflation risk" just a way of saing "inflation happens". Inflation doesn't "eat more" from bonds than from stocks - it eats the same amount, regardless. But bonds have lower expected nominal return, so the amount leftover for you is less. But that's solely a function of the difference in expected return.
Yes. It is a grammatically incorrect and illogical way of stating that bonds return less over the long term.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

dbr
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Re: Help me understand "inflation risk" for bond funds

pdavi21 wrote:
Tue Jun 11, 2019 2:28 pm
rbaldini wrote:
Tue Jun 11, 2019 2:26 pm
pdavi21 wrote:
Tue Jun 11, 2019 2:22 pm
"Bonds are subject to inflation risk" is just a questionable way of stating that they have lower expected returns.
Sounds like you are dbr are saying about the same thing. If I'm understanding right, "inflation risk" just a way of saing "inflation happens". Inflation doesn't "eat more" from bonds than from stocks - it eats the same amount, regardless. But bonds have lower expected nominal return, so the amount leftover for you is less. But that's solely a function of the difference in expected return.
Yes. It is a grammatically incorrect and illogical way of stating that bonds return less over the long term.
I agree with the above statement but have also added that there is a difference in the expectations that one has for bonds and equities that cause people to think differently about what the risk is. The specific issue for bonds is that one expects certainty of results and inflation can disturb that certainty.

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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 1:39 pm
I guess what ultimately matters is this: what actionable advice is implied by the statement that bonds are subject to inflation risk? How does that affect how we invest?
Since about 1990, U.S. investors have gotten used to low inflation that is relatively predictable. However, there have been periods in U.S. history when inflation was high and much more unpredictable — and real bond values suffered accordingly (chart below). These include the decade of 1915-1925 (World War I inflation shock), the 1940s (when inflation was high and interest rates were capped), and the 1970s (multiple oil supply shocks).
A few lessons for bond investors:
• 1. Allocating even a small portion of one's overall assets to stocks (say 20%-30%) is likely to help preserve real portfolio values over long holding periods, especially with periodic withdrawals.

2. A healthy allocation to TIPS would add further inflation protection, especially for investors with bond-heavy portfolios.

MotoTrojan
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 2:26 pm
pdavi21 wrote:
Tue Jun 11, 2019 2:22 pm
"Bonds are subject to inflation risk" is just a questionable way of stating that they have lower expected returns.
Sounds like you are dbr are saying about the same thing. If I'm understanding right, "inflation risk" just a way of saing "inflation happens". Inflation doesn't "eat more" from bonds than from stocks - it eats the same amount, regardless. But bonds have lower expected nominal return, so the amount leftover for you is less. But that's solely a function of the difference in expected return.
Bond yields are priced for expected inflation. If unexpected inflation occurs, both bonds and equities will be hurt, but those original bonds will not have any fundamental reason to adjust for the inflation while those original equity shares will as the price of products sold by the companies increases. Bonds will bounce back eventually as yields increase and bonds roll off, but the bonds themselves (individual holdings, just like your individual equities) will not.

I do not think it is as simple as saying stocks simply return more on average and thus make up for it. There are fundamental economic reasons that equities will be driven up to eventually offset unexpected inflation.

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

Tue Jun 11, 2019 2:31 pm
However, there have been periods in U.S. history when inflation was high and much more unpredictable — and real bond values suffered accordingly (chart below). These include the decade of 1915-1925 (World War I inflation shock), the 1940s (when inflation was high and interest rates were capped), and the 1970s (multiple oil supply shocks).
But inflation ate away from realized stock returns by the same percentage in those time periods. So with previous commenters' posts in mind, does this just boil down to saying that "bonds return less than stocks, so it is more likely in high-inflation periods that your real return will be flat or negative"?

Or are you asserting something more complicated, e.g. that the *nominal* returns of bonds might actually be negatively correlated with inflation, such that they do even worse than usual in high-inflation periods?

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

MotoTrojan wrote:
Tue Jun 11, 2019 2:34 pm
Bond yields are priced for expected inflation. If unexpected inflation occurs, both bonds and equities will be hurt, but those original bonds will not have any fundamental reason to adjust for the inflation while those original equity shares will as the price of products sold by the companies increases. Bonds will bounce back eventually as yields increase and bonds roll off, but the bonds themselves (individual holdings, just like your individual equities) will not.
To me, this would suggest that historical nominal returns of stocks ought be positively correlated with inflation (because they tend to adjust), whereas bonds should not be (because they do not tend do adjust). Do you think that is a fair assessment, that would allow empirical testing? In the small data sample I looked at, I did not see this (bond correlation was higher than stock's), but perhaps I need more data.

UPDATE: I looked at nominal S&P 500 returns from 1928 to 2019, and measured correlation with inflation from link I provided before. The correlation is a whopping 0.02. Nothing there.
Last edited by rbaldini on Tue Jun 11, 2019 2:46 pm, edited 1 time in total.

alex_686
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 2:23 pm
To be clear, I'm not looking to understand what "drives" returns per se. Rather, to understand what it means for bonds to be more subject to inflation risk. It's still not clear to me, though dbr seems to suggest that it amounts to little more than saying "but remember that inflation happens."

Lets say bonds are expected to return 2% real and equities 7% real. Country A has expected inflation of 2%, Country B has expected inflation of 4%. So Country A's bonds price at 4%, stocks for 9%. Country B bonds price at 6%, stocks at 11%. All is find and dandy. Expected inflation is priced in.

Next, let us say that inflation unexpectedly jumps up by 3% in both countries. What then? The unexpected bit is the critical bit. Bonds get crushed in real terms, equities tend to adjust.

You are not going to see this looking backwards in a single country where inflation has been tame - where it has been low and had few surprises. Statistically strength is going to be low, swamped by other factors, and - as I suggest - will be a statistical artifact.

Want to want to do is search for period with unexpected changes in inflation.

willthrill81
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 2:23 pm
alex_686 wrote:
Tue Jun 11, 2019 2:16 pm
Second, stocks tend to be a good hedge against inflation. Equities's value are based on real economic value, not its nominal cash flows. Underlying assets tend to adjust for inflation, companies tend to raise prices for inflation, etc.
What does this mean, though? At the end of the year, your bond investment returns x%, and your stock investment returns y%. The real return to both is just those variables minus the inflation. They are subject to it to the same degree. If the claim is that "stocks return more when inflation is higher" - well, there doesn't seem to be much evidence of that in the data I saw. There was a weak positive correlation - but it was less than for bonds (though I doubt it is statistically significant difference). Are you suggesting that this positive association would be stronger if I looked at a longer timescale?
If inflation occurs, then companies' revenue, assets, profits, etc. will inflate over time and benefit shareholders. Apart from I-bonds and TIPS, this is not true of bonds, whose payouts are in nominal dollars.
“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

pdavi21
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Re: Help me understand "inflation risk" for bond funds

MotoTrojan wrote:
Tue Jun 11, 2019 2:34 pm
I do not think it is as simple as saying stocks simply return more on average and thus make up for it. There are fundamental economic reasons that equities will be driven up to eventually offset unexpected inflation.
That's still too simple because some portions of the stock market favor inflation, while others favor deflation. Also, we'd need to introduce foreign inflation/deflation which can drive stock performance significantly, while mostly local inflation erodes future returns and spending power.
"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: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 2:37 pm
But inflation ate away from realized stock returns by the same percentage in those time periods. So with previous commenters' posts in mind, does this just boil down to saying that "bonds return less than stocks, so it is more likely in high-inflation periods that your real return will be flat or negative"?
Yes, inflation detracted from real stock returns during those high-inflation periods when bonds suffered negative real returns — but the overall real returns of stocks were positive in all periods — and substantially positive in several of them (chart below).
This thread has more detail on how various stock/bond mixes performed during periods of high inflation historically.
Last edited by SimpleGift on Tue Jun 11, 2019 2:56 pm, edited 1 time in total.

Topic Author
rbaldini
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Re: Help me understand "inflation risk" for bond funds

alex_686 wrote:
Tue Jun 11, 2019 2:45 pm
Lets say bonds are expected to return 2% real and equities 7% real. Country A has expected inflation of 2%, Country B has expected inflation of 4%. So Country A's bonds price at 4%, stocks for 9%. Country B bonds price at 6%, stocks at 11%. All is find and dandy. Expected inflation is priced in.

Next, let us say that inflation unexpectedly jumps up by 3% in both countries. What then? The unexpected bit is the critical bit. Bonds get crushed in real terms, equities tend to adjust.
Were bonds crushed any more than stocks?
Real bond return: nominal bond return - inflation
Real stock return: nominal stock return - inflation
Real stock return - real bond return = (nominal stock return - inflation) - (nominal bond return - inflation) = nominal stock return - nominal bond return.
Inflation has not changed the difference in returns. What you are seeing is that one has a higher nominal return, which is what dbr and others mentioned.
alex_686 wrote:
Tue Jun 11, 2019 2:45 pm
The unexpected bit is the critical bit. Bonds get crushed in real terms, equities tend to adjust.
Again, I would think this would mea that "the correlation between inflation and stocks ought to be higher than for inflation and bonds", because one adjusts with inflation, but the other doesn't. I haven't seen any data suggesting that.
Consider the data here, going back to 1928: http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html
Correlating with inflation values I linked before, I see...
Correlation of inflation with S&P500: 0.02
Correlation of inflation with 10-year T-Bond: -0.07
So perhaps there is a slight increase, but it seems so small as to be meaningless.

pdavi21
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Re: Help me understand "inflation risk" for bond funds

Bonds eventually have a higher nominal return in response to inflation too, assuming you kept on rolling into new bonds (with the higher nominal rates investors demanded).

The OP's co-variance is referencing a shorter term interval while others are suggesting a longer term interval. However, I would suggest that since inflation has been falling for centuries and stocks and bonds have had real positive returns over those same centuries, the long term [interval] co-variance is negative for both and more negative for stocks.
"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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rbaldini
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Re: Help me understand "inflation risk" for bond funds

willthrill81 wrote:
Tue Jun 11, 2019 2:47 pm
If inflation occurs, then companies' revenue, assets, profits, etc. will inflate over time and benefit shareholders. Apart from I-bonds and TIPS, this is not true of bonds, whose payouts are in nominal dollars.
I'm understanding this as saying that "nominal returns to stocks are positively correlated with inflation; bonds aren't".

Consider an investment that returns a fixed % every year, nominal. Then the volatility of real return is entirely due to volatility in inflation; there is no "adjustment" to inflation at all. People seem to be saying that bonds are like this (except that investing in bond funds, which is what I do, do have nominal variability).

Now consider an investment that has higher nominal return when there is higher inflation, and lower nominal return with less inflation. People seem to be saying that stocks are like this - i.e., they adjust somewhat to offset the effect of inflation.

If this is all right, then correlation between nominal stock index returns and inflation ought to be positive. And the correlation with bond funds ought to be 0. The data I've seen suggests it's about 0, on the annual timescale since 1928, for both. So what am I missing? Should I look at longer periods than one year?

willthrill81
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 3:10 pm
willthrill81 wrote:
Tue Jun 11, 2019 2:47 pm
If inflation occurs, then companies' revenue, assets, profits, etc. will inflate over time and benefit shareholders. Apart from I-bonds and TIPS, this is not true of bonds, whose payouts are in nominal dollars.
I'm understanding this as saying that "nominal returns to stocks are positively correlated with inflation; bonds aren't".

Consider an investment that returns a fixed % every year, nominal. Then the volatility of real return is entirely due to volatility in inflation; there is no "adjustment" to inflation at all. People seem to be saying that bonds are like this (except that investing in bond funds, which is what I do, do have nominal variability).

Now consider an investment that has higher nominal return when there is higher inflation, and lower nominal return with less inflation. People seem to be saying that stocks are like this - i.e., they adjust somewhat to offset the effect of inflation.

If this is all right, then correlation between nominal stock index returns and inflation ought to be positive. And the correlation with bond funds ought to be 0. The data I've seen suggests it's about 0, on the annual timescale since 1928, for both. So what am I missing? Should I look at longer periods than one year?
Yes, you should definitely look at longer periods. Remember that a year in the stock market is just noise.

You might find it interesting to take a look at Jeremy Siegel's book "Stocks for the Long Run." He found that over multiple long-term periods, with substantial variance in inflation, stocks returned about 7% inflation-adjusted. That could be taken to mean that inflation, over the long-term, does not impact stocks' real returns, although it would certainly impact their nominal returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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rbaldini
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Re: Help me understand "inflation risk" for bond funds

willthrill81 wrote:
Tue Jun 11, 2019 3:17 pm
Yes, you should definitely look at longer periods. Remember that a year in the stock market is just noise.

You might find it interesting to take a look at Jeremy Siegel's book "Stocks for the Long Run." He found that over multiple long-term periods, with substantial variance in inflation, stocks returned about 7% inflation-adjusted. That could be taken to mean that inflation, over the long-term, does not impact stocks' real returns, although it would certainly impact their nominal returns.
I'll take a look at different return periods - 5 years, 10 years, etc.

Not sure I follow the second point. Average nominal returns over a long period are close to 10%, right? I mean, I'm sure it depends on the period, but seems like 7% after inflation implies average inflation effect on stocks of about 3%?

willthrill81
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Re: Help me understand "inflation risk" for bond funds

rbaldini wrote:
Tue Jun 11, 2019 3:25 pm
Not sure I follow the second point. Average nominal returns over a long period are close to 10%, right? I mean, I'm sure it depends on the period, but seems like 7% after inflation implies average inflation effect on stocks of about 3%?
The 7% inflation-adjusted number Siegel found was remarkably consistent over the long-term, despite inflation varying significantly over the periods investigated. This implies that over the long-term, inflation has no impact on stocks' real returns, which is entirely logical.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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rbaldini
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Re: Help me understand "inflation risk" for bond funds

willthrill81 wrote:
Tue Jun 11, 2019 3:27 pm
The 7% inflation-adjusted number Siegel found was remarkably consistent over the long-term, despite inflation varying significantly over the periods investigated. This implies that over the long-term, inflation has no impact on stocks' real returns, which is entirely logical.
Thanks.

Looked at stock and bond nominal returns for 5-year and 10-year aggregates, using data I linked before. So far no statistically significant correlation with inflation when you account properly for the fact that they are now non-independent observations. Doesn't get closer either. No obvious evidence from my amateur analysis that "stocks adjust and bonds don't". Looks like noise all the way through.

Not sure how to square this with what you are saying. Perhaps it's just that, over long periods, the expectations of each settle down on their overall expectation, yielding 7% real return. This would be the case even if there were no correlation over all. More likely Siegel is doing something smarter than I am. I suppose looking before 1928 would be good.

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Re: Help me understand "inflation risk" for bond funds

Inflation increases costs for companies and increases pricing power which increases revenue. Some stocks will benefit from inflation, others will get hurt, and for some it will be a wash. For a broad market index fund these effects are averaged out to lead to some real return that probably will fall short of where they would have been without the higher inflation.

From 1967 to 1981, the S&P500 had a real return of zero. It kept pace with inflation but did not deliver any excess real return. It also was underwater in real terms during significant periods in the era. During the same period, a portfolio of long-term treasuries got hammered, with a loss of 25-40% in real terms depending on duration.

In those years, fixed-rate mortgages were assumable— so extension risk was significantly greater then compared to today. Once the principal was eroded in real terms, and with prevailing interest rates much higher due to inflation, they never got paid off faster than their schedule (typically 20 years in the US then) but were just assumed by buyers from sellers who sold their home. They also got hammered in real terms.