Hottest Bond Market in History Is Starting to Make Some Nervous

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Frank2012
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Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Frank2012 » Tue Mar 03, 2020 7:15 am

Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)

Ferdinand2014
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Ferdinand2014 » Tue Mar 03, 2020 7:54 am

I only own treasury bills of 1 month duration. I have no worries regarding interest rates, credit risk or inflation. I do not have an asset allocation, so do not rebalance. I simply keep enough to sleep well and call it good. So I do number 1.) Nothing
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Watty
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Watty » Tue Mar 03, 2020 10:08 am

I am not a bond guru by any stretch of imagination and at least for me the more you dig into the details the more complex they become for something that seems like it should be straightforward.

That said it is important to understand how bond duration works. Here is one explanation;
How Duration Works
Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows. At the same time, duration is a measure of sensitivity of a bond's or fixed income portfolio's price to changes in interest rates. In general, the higher the duration, the more a bond's price will drop as interest rates rise (and the greater the interest rate risk). As a general rule, for every 1% change in interest rates (increase or decrease), a bond’s price will change approximately 1% in the opposite direction, for every year of duration. If a bond has a duration of five years and interest rates increase 1%, the bond’s price will drop by approximately 5% (1% X 5 years). Likewise, if interest rates fall by 1%, the same bond’s price will increase by about 5% (1% X 5 years).
https://www.investopedia.com/terms/d/du ... tion-works

Here is Vanguards explanation of duration.

https://investor.vanguard.com/insights/ ... s-duration

I invest in Vanguard target date funds which own the Vanguard Total Bond fund which has a duration of 6.2 years. The way I understand it is that bond rates go up by 1% then that fund would be expected to go down by 6.2%.

The good news is that the bond fund would now be yielding 1% more so that I would basically breakeven in about 6 years and after that I would actually be doing better because of the 1% rate increase.

If rates go up by 5% that would result in about a 31% (5x6.2=31) drop in the bond fund - ouch. The bond fund would then be earning about 5% more so the breakeven would also be in about 6 years.

That is a bit oversimplified though since that does not take inflation into account. If the rate increased because of inflation then you would not get as much advantage because of the future interest rates. This is where my understanding breaks down and I don't really have a good intuitive feel about how bonds work in this situation.

It is not worth much but my gut feel is that with bond mutual funds moderately rising real interest rate might not be fun but they are not all that bad. The big risk is inflation or sharply raising interest rate.
Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
I am also a bit nervous about it but I have not done anything yet.

Last week when the stock market was dropping my bonds did well and more or less offset the stock market drop in my 2015 target date fund. They basically did their job.

If things start looking a lot better in the near future that might hurt my bonds but my stocks should do well to hopefully balance that out.

So far it does not feel like my overall risk is too bad but I am still watching how things develop.

Not that it means much but I am seeing more talk about possible fed rate cuts and negative interest rates so the trend still seems to be downward.

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watchnerd
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 10:24 am

I picked my Long Treasuries because they're volatile. The short TIPS / cash end of my barbell (see sig) is my stability zone.

They've gone up incredibly YTD.

I expect them to decline rapidly at some point.

Plan:

Do nothing until rebalance band is hit, per IPS.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by firebirdparts » Tue Mar 03, 2020 10:27 am

I agree. They rocketed up. To me the optimistic scenario now is that they stay flat.

If you sell and go to cash, you haven't lost anything, but , if I look at when I hold cash and when I hold bonds, I always seem to be holding the wrong one at the wrong time. I'm not a fan of my predictive power in that area.

I do try to not be over-exposed to any one risk these days. I have not done anything in response, but I did it before this.
A fool and your money are soon partners

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Watty
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Watty » Tue Mar 03, 2020 10:34 am

Watty wrote:
Tue Mar 03, 2020 10:08 am
Not that it means much but I am seeing more talk about possible fed rate cuts and negative interest rates so the trend still seems to be downward.
:oops:

The fed cut their rates by 50 basis points while I was making that that post.

barberakb
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by barberakb » Tue Mar 03, 2020 11:52 am

Doesn't that cut mean your bond funds just rose in value??

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TomatoTomahto
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by TomatoTomahto » Tue Mar 03, 2020 12:07 pm

barberakb wrote:
Tue Mar 03, 2020 11:52 am
Doesn't that cut mean your bond funds just rose in value??
Yeah, but it’s never that much.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Watty
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Watty » Tue Mar 03, 2020 12:20 pm

barberakb wrote:
Tue Mar 03, 2020 11:52 am
Doesn't that cut mean your bond funds just rose in value??
It gets complicated.

If the Fed sets the federal funds rate too low that can cause people to worry about inflation which could actually make other longer term rates go up.

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nisiprius
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by nisiprius » Tue Mar 03, 2020 12:29 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
No, I'm not. It's the usual garbage that considers direction and not magnitude. Let's unpack this a little bit.

"That means every percentage point increase in average yields would spark a price decline of about 8.6%."

Yes, but that's only temporary. That price decline immediately creates an upward pull on price, because the price has to equal the face value at maturity. If a bond's market value is $8,000 today, and it is going to pay out $10,000 when it matures, it can't stay down at $8,000 indefinitely. As it approaches maturity, the price will approach $10,000. That isn't any vague "reversion to the mean," it's bond math and it's fundamental.

Second, a price decline does not change the number of dollars the bond is going to pay out in coupon payments. This isn't a case where a business that's having a bad year decides whether or not to cut or skip a dividend, it's a debt that the bond issuer has contracted to pay. On a total return growth chart, those up and down market movements are waves on top of a rising tide. Normally, the waves are relatively slow compared to the tidal rise.

Third, "huge losses." How much is that in dollars? Run your eyeball along a chart of the price of the Vanguard Total Bond Market fund. Please notice how magnified the vertical axis is. Let's say there's an irrational elevation. By how much?

Image

Let's say the rise is froth It's not like it was irrationally worth triple what it had been, like the NASDAQ was in 2000. It's just up, let's take the whole chart and say 20%. Let's say the bubble pops and collapses. How much does it lose? That 20%.

Here's the growth chart, the total return, not just prices. In a stock fund, dividends are just "important;" in a bond fund, they're almost everything.

Image

During that time period, mostly through steady accumulation of coupon interest, Total Bond would have turned a $10,000 into $68,696. 6.9X what you started with. (A gain of 590%). So if it suddenly and precipitously drops 20% all at once, you'd knock 20% off that You'd have "only" 5.5X what you started with.

And that "20%" is insanely pessimistic, because if you look at the growth chart, see 1993? That was called a "bond bubble." 1994 was called "the bond massacre." That's probably the worst thing that's happened to Total Bond, and it was only about 4% loss.

You can run the numbers all kinds of ways, and sure, there are scenarios when other things might not do as well as bonds. But "huge losses" without numbers on it is just scare talk.

Yes, if you are making huge bets on the short-term direction of bond movements, or if you are used bonds with leverage as part of a complicated piece of financial engineering that relies on predictable behavior, you could have "huge" losses. I don't see how this is at all likely for someone who's just holding Total Bond as part of a retirement portfolio.
Last edited by nisiprius on Tue Mar 03, 2020 3:21 pm, edited 4 times in total.
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ugaDAWGS09
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by ugaDAWGS09 » Tue Mar 03, 2020 12:33 pm

Yeah I have a large part of my 401k in Vanguard Intermediate Bond fund but I'm not sure what this rate cut will do to my bond fund ?

nullisland
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by nullisland » Tue Mar 03, 2020 12:48 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.
This is one reason even the most conservative asset allocation should include some stock. 90% bonds/10% stock historically has had both lower volatility and higher returns than 100% bonds.

barberakb
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by barberakb » Tue Mar 03, 2020 12:48 pm

most likely, not much

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by barberakb » Tue Mar 03, 2020 12:49 pm

ugaDAWGS09 wrote:
Tue Mar 03, 2020 12:33 pm
Yeah I have a large part of my 401k in Vanguard Intermediate Bond fund but I'm not sure what this rate cut will do to my bond fund ?
most likely, not much

surfstar
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by surfstar » Tue Mar 03, 2020 12:56 pm

4. n/a

Our FI is in a "general" account with a previous employer's 457. It pays 4% this year (as it has done for a couple decades now) but will be reduced to 3.5% next year and then further. So in 2022 we'll need to reallocate to bonds.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by garlandwhizzer » Tue Mar 03, 2020 12:58 pm

watchnerd wrote:

I picked my Long Treasuries because they're volatile. The short TIPS / cash end of my barbell (see sig) is my stability zone.
1+

IMO this is a good strategy, all bases covered. Mine is very similar: TBM, ST TIPS, MMF for cash. It may not outperform other bond strategies but it prepares you for whatever happens, inflation (ST TIPS, MMF), deflation (IT/LT nominals), bear markets (IT/LT nominals) or bull markets with moderate underlying inflation (ST/IT nominals plus STB TIPS). In short I take an agnostic approach about what's going to happen in the future rather than an ongoing replay of the great bond bull market of the last 38 years. As long as inflation and rates keep declining and economic growth remains tepid, LTT will outperform and offer better diversification to equity. They have been a winner and a lot of investors are on board that train. That's the upside. Downside of 100% bonds in LTT is increased volatility of principal and the nasty thing that happens to them if rates and inflation rise. Currently no one expects significant inflation and/or rates to rise. Most expect the exact opposite which is why LTT yields are the lowest in history even including the depths of the Great Depression. 30 year Treasuries are yielding less now (1.7%) than the current CPI inflation rate over the last 12 months (2.3%) The market is at present totally neglecting any risk whatsoever of rising inflation and rising rates and they may turn out to be right, very likely in the short term, somewhat less likely in the intermediate term, and totally unpredictable over the next 30 years. If you think there is no risk in locking up all your bond money for decades at a fixed rate that is less than the current inflation rate in a very low inflation era, I strongly disagree. As usual investors are well prepared now for what has happened in the past which may or may not replay in the future.

Garland Whizzer

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by stocknoob4111 » Tue Mar 03, 2020 1:03 pm

I would've sold some bonds but my bonds are in taxable and I will have an astronomical capital gains hit (I live in California that taxes capital gains as income)... Bonds have skyrocketed but equities are not coming down yet, they are still at close to all time highs reached only a few months ago so if one sells Bonds there is nothing else to buy at the moment and I don't want to sit in cash.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by ballons » Tue Mar 03, 2020 1:28 pm

You should be more nervous about the corporate debt bubble.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by MotoTrojan » Tue Mar 03, 2020 1:30 pm

barberakb wrote:
Tue Mar 03, 2020 11:52 am
Doesn't that cut mean your bond funds just rose in value??
They likely had it priced in and had already gone up in value. If you buy the fund the moment before the rate change goes public, you are unlikely to net much of the benefit. The fed doesn't directly control the interest rate of bond funds, the market does.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by tombonneau » Tue Mar 03, 2020 2:01 pm

ballons wrote:
Tue Mar 03, 2020 1:28 pm
You should be more nervous about the corporate debt bubble.
This is my concern. I won't pretend to have any keen insight into how the intricacies of corporate debt, buybacks, etc. work, but I just know I have the same feeling I had working at an internet start-up in 99-00 and when I was at Countrywide in 2006-2007. Something just doesn't add up.

Anyway, I've read a lot of Swensen and Swedroe recently and am convinced enough to decouple myself from my Intermediate Bond fund (VBILX) which is 50/50 treasury/corporate and go straight ITT. (Not sure I have the stomach for LTT ....)

Figure may as well ask here as I've got the eyeballs of what I consider the two most intelligent bond board posters in @garland and @watchnerd:

When I make the exchange over from VBILX to ITTs is there anything I should be aware of for timing-wise so I don't shoot myself in the foot? I'm not referring to trying to time rates or the market or anything but anything with the mechanics of the bond fund itself? It's only 10% of port so not terribly significant, just don't want to be dumb. :)

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by ballons » Tue Mar 03, 2020 2:37 pm

tombonneau wrote:
Tue Mar 03, 2020 2:01 pm
ballons wrote:
Tue Mar 03, 2020 1:28 pm
You should be more nervous about the corporate debt bubble.
This is my concern. I won't pretend to have any keen insight into how the intricacies of corporate debt, buybacks, etc. work, but I just know I have the same feeling I had working at an internet start-up in 99-00 and when I was at Countrywide in 2006-2007. Something just doesn't add up.

Anyway, I've read a lot of Swensen and Swedroe recently and am convinced enough to decouple myself from my Intermediate Bond fund (VBILX) which is 50/50 treasury/corporate and go straight ITT. (Not sure I have the stomach for LTT ....)

Figure may as well ask here as I've got the eyeballs of what I consider the two most intelligent bond board posters in @garland and @watchnerd:

When I make the exchange over from VBILX to ITTs is there anything I should be aware of for timing-wise so I don't shoot myself in the foot? I'm not referring to trying to time rates or the market or anything but anything with the mechanics of the bond fund itself? It's only 10% of port so not terribly significant, just don't want to be dumb. :)
Rate cuts just kicked the can down the road, but eventually it has to give. I personally wouldn't make knee jerk reactions today; but just start planning for it.
Inter-Term Bond Index Adm
U.S. Government 53.6%
Aaa 2.1%
Aa 2.9%
A 16.2%
Baa 25.2%
You aren't in junk bonds, so you really shouldn't be worrying that much.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Pikel » Tue Mar 03, 2020 2:41 pm

If you aren't maxxing out EE and I Bonds you should have a really good reason. They are the best deal out there.

Everyone's tax situation will be a little different, but as an example:

If your current top federal rate is 24%, state is 6.5% and in 20 years you will be retired paying a 12% federal rate, a risk-free CD rate of 4.6% would be required to match an EE Bond. The caveat is that EE bonds are illiquid.
Last edited by Pikel on Tue Mar 03, 2020 2:44 pm, edited 1 time in total.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by DB2 » Tue Mar 03, 2020 2:42 pm

What is Swedroe's reasoning for Intermediate Treasuries over Total Bond? Lack of default odds?

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Pikel » Tue Mar 03, 2020 2:48 pm

DB2 wrote:
Tue Mar 03, 2020 2:42 pm
What is Swedroe's reasoning for Intermediate Treasuries over Total Bond? Lack of default odds?
https://www.etf.com/sections/index-inve ... corp-bonds

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by flaccidsteele » Tue Mar 03, 2020 3:01 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
I started investing in the 90s. I've never had bonds. Not worried
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by nisiprius » Tue Mar 03, 2020 3:22 pm

DB2 wrote:
Tue Mar 03, 2020 2:42 pm
What is Swedroe's reasoning for Intermediate Treasuries over Total Bond? Lack of default odds?
One reason is that he doesn't like mortgage-based securities of any kind, not even the government-guaranteed ones in Total Bond, I think because of prepayment risk.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 4:29 pm

tombonneau wrote:
Tue Mar 03, 2020 2:01 pm


Figure may as well ask here as I've got the eyeballs of what I consider the two most intelligent bond board posters in @garland and @watchnerd:

When I make the exchange over from VBILX to ITTs is there anything I should be aware of for timing-wise so I don't shoot myself in the foot? I'm not referring to trying to time rates or the market or anything but anything with the mechanics of the bond fund itself? It's only 10% of port so not terribly significant, just don't want to be dumb. :)
I can't think of anything major, timing-wise, on the logistics of the exchange.

In addition to looking at ITT, you might want to also check out GOVT, if ETFs are an option:

https://www.ishares.com/us/products/239 ... y-bond-etf

It's one of the few total Treasury market funds out there.

(I wish Vanguard would make one, too)
Last edited by watchnerd on Wed Mar 04, 2020 9:51 am, edited 1 time in total.
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DB2
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by DB2 » Tue Mar 03, 2020 4:42 pm

watchnerd wrote:
Tue Mar 03, 2020 4:29 pm
tombonneau wrote:
Tue Mar 03, 2020 2:01 pm


Figure may as well ask here as I've got the eyeballs of what I consider the two most intelligent bond board posters in @garland and @watchnerd:

When I make the exchange over from VBILX to ITTs is there anything I should be aware of for timing-wise so I don't shoot myself in the foot? I'm not referring to trying to time rates or the market or anything but anything with the mechanics of the bond fund itself? It's only 10% of port so not terribly significant, just don't want to be dumb. :)
I can't think of anything major, timing-wise, on the logistics of the exchange.

In addition to looking at ITT, you might want to also check out GOVT, if ETFs are an option:

https://www.ishares.com/us/products/239 ... y-bond-etf

It's one of the view total Treasury market funds out there.

(I was Vanguard would make one, too)
Wouldn't Vanguard Intermediate Treasury fund basically even it out (from a maturity perspective) to be a fine enough pick?

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by JoeRetire » Tue Mar 03, 2020 4:45 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Anyone nervous about this?
Not nervous at all.

Some folks just like to worry.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by dkturner » Tue Mar 03, 2020 5:07 pm

nisiprius wrote:
Tue Mar 03, 2020 12:29 pm
Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
No, I'm not. It's the usual garbage that considers direction and not magnitude. Let's unpack this a little bit.

"That means every percentage point increase in average yields would spark a price decline of about 8.6%."

Yes, but that's only temporary. That price decline immediately creates an upward pull on price, because the price has to equal the face value at maturity. If a bond's market value is $8,000 today, and it is going to pay out $10,000 when it matures, it can't stay down at $8,000 indefinitely. As it approaches maturity, the price will approach $10,000. That isn't any vague "reversion to the mean," it's bond math and it's fundamental.

Second, a price decline does not change the number of dollars the bond is going to pay out in coupon payments. This isn't a case where a business that's having a bad year decides whether or not to cut or skip a dividend, it's a debt that the bond issuer has contracted to pay. On a total return growth chart, those up and down market movements are waves on top of a rising tide. Normally, the waves are relatively slow compared to the tidal rise.

Third, "huge losses." How much is that in dollars? Run your eyeball along a chart of the price of the Vanguard Total Bond Market fund. Please notice how magnified the vertical axis is. Let's say there's an irrational elevation. By how much?

Image

Let's say the rise is froth It's not like it was irrationally worth triple what it had been, like the NASDAQ was in 2000. It's just up, let's take the whole chart and say 20%. Let's say the bubble pops and collapses. How much does it lose? That 20%.

Here's the growth chart, the total return, not just prices. In a stock fund, dividends are just "important;" in a bond fund, they're almost everything.

Image

During that time period, mostly through steady accumulation of coupon interest, Total Bond would have turned a $10,000 into $68,696. 6.9X what you started with. (A gain of 590%). So if it suddenly and precipitously drops 20% all at once, you'd knock 20% off that You'd have "only" 5.5X what you started with.

And that "20%" is insanely pessimistic, because if you look at the growth chart, see 1993? That was called a "bond bubble." 1994 was called "the bond massacre." That's probably the worst thing that's happened to Total Bond, and it was only about 4% loss.

You can run the numbers all kinds of ways, and sure, there are scenarios when other things might not do as well as bonds. But "huge losses" without numbers on it is just scare talk.

Yes, if you are making huge bets on the short-term direction of bond movements, or if you are used bonds with leverage as part of a complicated piece of financial engineering that relies on predictable behavior, you could have "huge" losses. I don't see how this is at all likely for someone who's just holding Total Bond as part of a retirement portfolio.
What you say is true assuming a portfolio of individual bonds held to maturity. But, bond funds, even index funds, almost never hold bonds to maturity. They sell them after a few years and replace them with bonds having longer maturities. Even total bond market funds sell most of their holdings prior to maturity. With intermediate and long term bond index funds bonds are never held to maturity.

I have no idea how one can anticipate the ultimate return of a portfolio of bonds when the manager is constantly buying and selling the portfolio’s holdings. Doesn’t the timing of individual sales and purchases pay a role in the ultimate return of the fund?

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 5:18 pm

DB2 wrote:
Tue Mar 03, 2020 4:42 pm


Wouldn't Vanguard Intermediate Treasury fund basically even it out (from a maturity perspective) to be a fine enough pick?
Yeah, it's fine enough.

I'm just being a 'own the haystack' / total market cap perfectionist. ;)
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by nisiprius » Tue Mar 03, 2020 6:20 pm

dkturner wrote:
Tue Mar 03, 2020 5:07 pm
...What you say is true assuming a portfolio of individual bonds held to maturity. But, bond funds, even index funds, almost never hold bonds to maturity. They sell them after a few years and replace them with bonds having longer maturities. Even total bond market funds sell most of their holdings prior to maturity. With intermediate and long term bond index funds bonds are never held to maturity.

I have no idea how one can anticipate the ultimate return of a portfolio of bonds when the manager is constantly buying and selling the portfolio’s holdings. Doesn’t the timing of individual sales and purchases pay a role in the ultimate return of the fund?...
Yes, my first two points were theory and intrinsically doubtful for an actual bond fund. But the third was simply based on the actually history of a real-world bond fund.

Most bubbles involve expansions of at least three times their starting value, often as much as eight times, followed by a crash of a similar size. I argued that +20% is the absolute maximum outside limit of how much Total Bond could have been bid up by hot money. And as noted, the most dramatic bond market event in that time period, the "bond massacre" of 1994, only knocked the value down by 4%.

Here's another datum. The duration of Total Bond has varied, IIRC from four years a decade ago to six years now. Vanguard is on record as saying that funds in its risk category "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." Now, the idea that the duration is the "point of indifference" is theory, and might not work out in practice for a real bond fund, for the reasons you state.

Nevertheless, in the history of Total Bond so far, there has yet to be any five-year period in which it has lost money. Over five-year periods, it has made money 100% of the time.

This is the worst five-year period that has occurred so far in the history of Total Bond.

Source

Image

This doesn't prove that Total Bond can't lose money when held for a period of time equal to its duration, but it gives me considerable confidence.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Northern Flicker » Tue Mar 03, 2020 6:25 pm

The thing to be concerned about is what the bond market is telling us with the current action, not what it might do in the future. It is flashing recession risk in bright red letters. It may be over-reacting. Time will tell.
Risk is not a guarantor of return.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 6:46 pm

Northern Flicker wrote:
Tue Mar 03, 2020 6:25 pm
The thing to be concerned about is what the bond market is telling us with the current action, not what it might do in the future. It is flashing recession risk in bright red letters. It may be over-reacting. Time will tell.
That would be consistent with OECD updated data.

And, if I read correctly, I believe the yield curve would have been inverted right now if the Fed hadn't dropped rates.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by fsrph » Tue Mar 03, 2020 6:54 pm

With the strong bond market today, anyone have a theory why all VG's tax exempt bond funds declined today?

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 7:02 pm

fsrph wrote:
Tue Mar 03, 2020 6:54 pm
With the strong bond market today, anyone have a theory why all VG's tax exempt bond funds declined today?

Francis
My guess:

Flight to quality in the face of recession / stock market fears.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by physixfan » Tue Mar 03, 2020 7:57 pm

Image

I just checked the Treasury Yield 10 Yr today, and I am shocked. The yield is even below 1% during today! That's a historical low number, during the whole human history... This really worries me, and I don't know what's next...

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by physixfan » Tue Mar 03, 2020 8:52 pm

physixfan wrote:
Tue Mar 03, 2020 7:57 pm
Image

I just checked the Treasury Yield 10 Yr today, and I am shocked. The yield is even below 1% during today! That's a historical low number, during the whole human history... This really worries me, and I don't know what's next...
OK... After I checked treasury yield data for Japan and some European countries, I realized a negative 10-yr yield is quite normal among them, and Germany even has a negative yield for 30-yr treasury!
https://tradingeconomics.com/germany/30-year-bond-yield This world is crazy... What will happen if a bad recession occur to them?!

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by ballons » Tue Mar 03, 2020 9:06 pm

physixfan wrote:
Tue Mar 03, 2020 8:52 pm
physixfan wrote:
Tue Mar 03, 2020 7:57 pm
Image

I just checked the Treasury Yield 10 Yr today, and I am shocked. The yield is even below 1% during today! That's a historical low number, during the whole human history... This really worries me, and I don't know what's next...
OK... After I checked treasury yield data for Japan and some European countries, I realized a negative 10-yr yield is quite normal among them, and Germany even has a negative yield for 30-yr treasury!
https://tradingeconomics.com/germany/30-year-bond-yield This world is crazy... What will happen if a bad recession occur to them?!
There is nothing normal about negative rates. Nothing will happen so long as people have faith in their government's credit, debts, and ability to pay.

Crazy is Greek bonds paying 1%:
https://www.barrons.com/articles/greek- ... 1581891611

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by palanzo » Tue Mar 03, 2020 9:08 pm

nisiprius wrote:
Tue Mar 03, 2020 12:29 pm
Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
No, I'm not. It's the usual garbage that considers direction and not magnitude. Let's unpack this a little bit.

"That means every percentage point increase in average yields would spark a price decline of about 8.6%."

Yes, but that's only temporary. That price decline immediately creates an upward pull on price, because the price has to equal the face value at maturity. If a bond's market value is $8,000 today, and it is going to pay out $10,000 when it matures, it can't stay down at $8,000 indefinitely. As it approaches maturity, the price will approach $10,000. That isn't any vague "reversion to the mean," it's bond math and it's fundamental.

Second, a price decline does not change the number of dollars the bond is going to pay out in coupon payments. This isn't a case where a business that's having a bad year decides whether or not to cut or skip a dividend, it's a debt that the bond issuer has contracted to pay. On a total return growth chart, those up and down market movements are waves on top of a rising tide. Normally, the waves are relatively slow compared to the tidal rise.

Third, "huge losses." How much is that in dollars? Run your eyeball along a chart of the price of the Vanguard Total Bond Market fund. Please notice how magnified the vertical axis is. Let's say there's an irrational elevation. By how much?

Image

Let's say the rise is froth It's not like it was irrationally worth triple what it had been, like the NASDAQ was in 2000. It's just up, let's take the whole chart and say 20%. Let's say the bubble pops and collapses. How much does it lose? That 20%.

Here's the growth chart, the total return, not just prices. In a stock fund, dividends are just "important;" in a bond fund, they're almost everything.

Image

During that time period, mostly through steady accumulation of coupon interest, Total Bond would have turned a $10,000 into $68,696. 6.9X what you started with. (A gain of 590%). So if it suddenly and precipitously drops 20% all at once, you'd knock 20% off that You'd have "only" 5.5X what you started with.

And that "20%" is insanely pessimistic, because if you look at the growth chart, see 1993? That was called a "bond bubble." 1994 was called "the bond massacre." That's probably the worst thing that's happened to Total Bond, and it was only about 4% loss.

You can run the numbers all kinds of ways, and sure, there are scenarios when other things might not do as well as bonds. But "huge losses" without numbers on it is just scare talk.

Yes, if you are making huge bets on the short-term direction of bond movements, or if you are used bonds with leverage as part of a complicated piece of financial engineering that relies on predictable behavior, you could have "huge" losses. I don't see how this is at all likely for someone who's just holding Total Bond as part of a retirement portfolio.
Yes but rates were higher in 1993. If rates rose from 1% today to 4% you would have a 20% loss. Who is to say rates could not go higher than 4%?

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by CoastalWinds » Tue Mar 03, 2020 9:13 pm

Re-balance.

And remember that a bad year for bond funds is a bad day for stocks.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by hudson » Tue Mar 03, 2020 9:19 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Anyone nervous about this? If so, what are you doing about it:
I don't know if I'm nervous. I disregard all predictions. I'm constantly on the lookout for a better deal that fits the criteria below. Many times I'll opt for a lower payout if that means more safety.
Intermediate funds with high amounts of US/AAA/AA/A bonds.
Intermediate term CDs
Funds that are Vanguard Risk Potential 1 or 2 or the equivalent.
I avoid investment grade bonds even if they are Vanguard Risk Potential 1 or 2.
So far, the above plan has worked. When it doesn't, I'll look around and adjust the sails.

I really liked Swedroe's bond book; it instantly changed my thoughts about bonds.
Last edited by hudson on Wed Mar 04, 2020 5:17 am, edited 1 time in total.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Elysium » Tue Mar 03, 2020 9:48 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.
I reject the whole premise of the article. First of all, there is an obvious near term risk that is causing the flight to safety into long term treasuries, the ultimate safe haven. When confronted with the risk of losing out on stock side with risk of recession looming, investors flock to safety, they worry about bond yields later. At this time it is all about bond prices which will go up as stocks slide, not about yields. I am talking about institutional investors.

Coming to the main idea of the article, the potential for large losses in bond prices when good news comes out, that is secondary. The key point being, when good news comes out. At that point there are many options, and stocks rising will rapidly erase any losses in bond prices for people holding balanced portfolios. Thus, the overall portfolio should do well regardless of the situation.

Another important point is most of the investors flocking to extend duration are either traders parking short term money or large institutions, they will move out when they think it is safe to bet their big dollars on stocks. Individual investors should have a balanced portfolio, presumably more stock heavy, they should be fine. Bond heavy investors will have to consider splitting up allocations between various maturities as well as nominal vs TIPS, and a smaller allocation to stocks to offset any drag from bonds.

Obviously, we would all love to have higher yielding bonds, and a stable steady stock market, but we don't live in a world like that, so the best bet is to deal with what we have using the tools we have.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by drk » Tue Mar 03, 2020 10:07 pm

watchnerd wrote:
Tue Mar 03, 2020 7:02 pm
fsrph wrote:
Tue Mar 03, 2020 6:54 pm
With the strong bond market today, anyone have a theory why all VG's tax exempt bond funds declined today?

Francis
My guess:

Flight to quality in the face of recession / stock market fears.
Many municipal bonds are subject to call risk, as explained in the portfolio page for VWIUX:
Call risk: The chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the fund’s income.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by MoneyMarathon » Tue Mar 03, 2020 10:33 pm

Frank2012 wrote:
Tue Mar 03, 2020 7:15 am
Interesting article on Bloomberg....

https://www.bloomberg.com/news/articles ... nd=premium

Thesis is that if "everyone" piles into bonds and bond funds, and then we get some good news (e.g., coronavirus not as bad as feared, no recession, etc.), that could lead to huge losses in bond funds and bonds.

Anyone nervous about this? If so, what are you doing about it:

1.) Nothing
2.) Rebalancing
3.) Selling bonds/bond funds and putting in money market (i.e., taking a little off the table)
I think the obvious option is (2) - most people here that are in long duration bonds, already bought stocks too. They hold both. If recession fears are overblown and the long bond gets hit, the stocks are happy, and you can refresh the allocation to bonds if rebalancing is triggered. If recession happens, well, you have some long bonds to rebalance into stocks with.

(Obviously stocks and long bonds might not always have this relationship... sometimes long bonds and stocks both go down.)

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Tue Mar 03, 2020 10:39 pm

Elysium wrote:
Tue Mar 03, 2020 9:48 pm

Obviously, we would all love to have higher yielding bonds, and a stable steady stock market, but we don't live in a world like that, so the best bet is to deal with what we have using the tools we have.
Gosh, I hope not!

A low risk stock market would be low rewards.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by Elysium » Tue Mar 03, 2020 11:00 pm

watchnerd wrote:
Tue Mar 03, 2020 10:39 pm
Elysium wrote:
Tue Mar 03, 2020 9:48 pm

Obviously, we would all love to have higher yielding bonds, and a stable steady stock market, but we don't live in a world like that, so the best bet is to deal with what we have using the tools we have.
Gosh, I hope not!

A low risk stock market would be low rewards.
Not necessarily, we could get a stretch of low volatility with plenty of good news that keeps the stocks up.

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Wed Mar 04, 2020 1:14 am

Elysium wrote:
Tue Mar 03, 2020 11:00 pm

Not necessarily, we could get a stretch of low volatility with plenty of good news that keeps the stocks up.
Yes, in the long run, necessarily -- one must have increased risk in order to get excess return above the risk-free rate.

If risk becomes equivalent to risk-free, then returns will, as well.
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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by tombonneau » Wed Mar 04, 2020 4:19 am

watchnerd wrote:
Tue Mar 03, 2020 4:29 pm
tombonneau wrote:
Tue Mar 03, 2020 2:01 pm


Figure may as well ask here as I've got the eyeballs of what I consider the two most intelligent bond board posters in @garland and @watchnerd:

When I make the exchange over from VBILX to ITTs is there anything I should be aware of for timing-wise so I don't shoot myself in the foot? I'm not referring to trying to time rates or the market or anything but anything with the mechanics of the bond fund itself? It's only 10% of port so not terribly significant, just don't want to be dumb. :)
I can't think of anything major, timing-wise, on the logistics of the exchange.

In addition to looking at ITT, you might want to also check out GOVT, if ETFs are an option:

https://www.ishares.com/us/products/239 ... y-bond-etf

It's one of the view total Treasury market funds out there.

(I was Vanguard would make one, too)
Thanks for confirming, Nerd. :)

Yeah I'd love to have GOVT, in fact, my portfolio would be a smidge different if I could get in ETFs, but bulk of my contributions are to my Vanguard solo 401k which is mutual fund only and so to keep it simple I stick with funds across IRA and taxable.

I'm with you, from a purist perspective I'd rather haystack US Treasuries, but in lieu of that will just stick with ITT which probably would net about the same anyway. 🤷‍♂️

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Re: Hottest Bond Market in History Is Starting to Make Some Nervous

Post by watchnerd » Wed Mar 04, 2020 9:57 am

tombonneau wrote:
Wed Mar 04, 2020 4:19 am

I'm with you, from a purist perspective I'd rather haystack US Treasuries, but in lieu of that will just stick with ITT which probably would net about the same anyway. 🤷‍♂️
ITT is certainly good enough for what we've seen historically.

A total market Treasury fund might be interesting if the market cap weighting of the total Treasury market were to drift either more heavily towards the long or short end over time in response to market conditions.

But I've never found a study of how Treasury market cap distribution has trended over time.
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