Thoughts on bonds from Fed decision...

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TexasBorn
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Thoughts on bonds from Fed decision...

Post by TexasBorn »

Hello everyone,

I’m curious what people’s opinions are on how bonds will perform now given the Fed’s recent admission to hold rates low until inflation is “above 2%”. Before (now) and afternoon (inflation jumps above 2% for awhile causing Fed to begin raising rates.)

https://www.wsj.com/articles/fed-weighs ... 1596360600
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Re: Thoughts on bonds from Fed decision...

Post by Valuethinker »

TexasBorn wrote: Tue Aug 04, 2020 5:22 am Hello everyone,

I’m curious what people’s opinions are on how bonds will perform now given the Fed’s recent admission to hold rates low until inflation is “above 2%”. Before (now) and afternoon (inflation jumps above 2% for awhile causing Fed to begin raising rates.)

https://www.wsj.com/articles/fed-weighs ... 1596360600
On the face of it it is not good for bonds.

Quantitative Easing has driven yields to the lowest ever, historically - I believe. There is as yet no sign they will rise.

Given the problems the Bank of Japan has had in creating inflation, I do wonder if the Fed actually has that power? What we seem to have learned from the Japanese experience, and also from the experience in the West since 2008-09, that it's very hard to fight deflationary (or perhaps disinflationary?) forces. (Some) theories say the Central Bank creates money, causes currency depreciation, increases in nominal economic activity, and so inflation. Yet that does not seem to be happening.

I would take this as evidence that one should be watchful about inflation and bond yields. The main argument for bonds in a portfolio still remains. That equities are enormously volatile, and bonds provide (nominal) certainty of returns -- when you buy a bond, you are more or less likely to get its Yield To Maturity as your return for holding it.

(TIPS provide certainty of real returns, but are empirically quite volatile in nominal terms).

Thus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.

If interest rates rise, of course, TIPS will also fall along with nominal bonds. (TIPS are long duration instruments - a large part of your return comes at redemption, thus they are generally more sensitive to changes in *real* interest rates, than a conventional bond of the same maturity is to changes in *nominal* interest rates).
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

Valuethinker wrote: Tue Aug 04, 2020 5:30 amThus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.
10 year US TIPS now at about -1%, so closer to zero than -2.5% is, but still pretty far from it. The 20 and 30 year are at -0.69% and -0.44%, though.

The move to low rates has been good for bond and TIPS returns, of course. But I am now migrating some to CDs at around 2%. Special rate CDs along with I-bonds and EE-bonds, seem like the best escapes from low rates in the US.
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Re: Thoughts on bonds from Fed decision...

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Re: Thoughts on bonds from Fed decision...

Post by Robot Monster »

Valuethinker wrote: Tue Aug 04, 2020 5:30 am If interest rates rise, of course, TIPS will also fall along with nominal bonds. (TIPS are long duration instruments - a large part of your return comes at redemption, thus they are generally more sensitive to changes in *real* interest rates, than a conventional bond of the same maturity is to changes in *nominal* interest rates).
It's technically true, I suppose, that TIPS will fall if interest rates rise, but as a holder of individual TIPS, if I hold them to maturity, I don't care if interest rates rise in the same way I would if I held nominal bonds and inflation rose. As a holder of both cash and TIPS I especially don't care if rates rise (presuming a significant rise in bond yields coincides with a rise in the Fed Funds rate).
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Re: Thoughts on bonds from Fed decision...

Post by JoMoney »

I've been wrong about the direction of interest rates for the most part, going on about 10 years now.
I continue to hold cash and Series I Savings Bonds, seeking out high-yield/'reward' bank accounts for the cash. It wasn't the best returning 'safe' money for the past decade, but I don't fret about any of the money not being easily available, and it seems more pertinent now then ever.
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Re: Thoughts on bonds from Fed decision...

Post by midareff »

It makes for difficult decisions when the SEC of a ten year treasury is .556% and the SEC of the S&P500 is 1.81%. Deduct the CPI-U and your IRS rate and what have you got? How much of your portfolio are you willing to have in a negative real yield before tax on the dividends?

What are the solutions? Even the conservative retiree might hold a little less in bonds and more in equities.... The intermediate term corporate index still has an SEC of 1.72%, some money might go there.... the short term version has an SEC of .97% and the Total Bond Market is 1.16%... and unfortunately all three seem to be dropping rapidly.

It was a bit different IMHO when bonds would get you 1% real..... makes you rethink your AA as far as how much negative real money you wish to have before tax on the distributions.... and then if the Fed starts raising it will be welcome to the barber shop time, making high yield savings look good..
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Re: Thoughts on bonds from Fed decision...

Post by Robot Monster »

JoMoney wrote: Tue Aug 04, 2020 8:25 am I've been wrong about the direction of interest rates for the most part, going on about 10 years now.
I wouldn't beat yourself up over that. Jeremy Siegel And Jeremy Schwartz wrote an article entitled "The Great American Bond Bubble" on 18th, 2010 when the 10yr was at 2.8%, possibly scaring away great swathes of investors with fear and dread the 10yr would march higher from what was then apparently seen as a very low yield. Yes, 2.8% was at one point seen as low, strange as that may seem.

What I have learned: don't make investment decisions based on predictions, because economic predictions are unreliable.
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Re: Thoughts on bonds from Fed decision...

Post by LRDave »

To further refine OP's question:

1) Impact difference on individual bonds compared to bond funds?

2) Impact difference on corporates compared to treasuries?

Asking for a friend :happy .....TIA
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Re: Thoughts on bonds from Fed decision...

Post by Robot Monster »

I am fine with the Fed decision to let inflation average out at 2% over time. It seems kind of silly for the Fed to have to shift gears if inflation briefly ducks its head above 2%. Long term bondholders shouldn't spaz out over this, because it'll average out for them; they'll enjoy periods of inflation both below and above target, but the average will be 2%.
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Re: Thoughts on bonds from Fed decision...

Post by Valuethinker »

midareff wrote: Tue Aug 04, 2020 8:34 am It makes for difficult decisions when the SEC of a ten year treasury is .556% and the SEC of the S&P500 is 1.81%. Deduct the CPI-U and your IRS rate and what have you got? How much of your portfolio are you willing to have in a negative real yield before tax on the dividends?

What are the solutions? Even the conservative retiree might hold a little less in bonds and more in equities.... The intermediate term corporate index still has an SEC of 1.72%, some money might go there.... the short term version has an SEC of .97% and the Total Bond Market is 1.16%... and unfortunately all three seem to be dropping rapidly.

It was a bit different IMHO when bonds would get you 1% real..... makes you rethink your AA as far as how much negative real money you wish to have before tax on the distributions.... and then if the Fed starts raising it will be welcome to the barber shop time, making high yield savings look good..
In actual outcomes I think one would still be better off than in the 1970s - in real terms? Investing in bonds then v now.

I'd have to think this through but I suspect the tax drag in the 1970s on bondholders was much larger:

- few opportunities to save in tax protected accounts
- marginal tax rates were generally much higher (and bracket creep tended to thrust one into higher brackets)
- I'd have to think about the math, but I suspect if bonds yield 8% and inflation is 10% and tax rates are say 25% (same in both periods), that I pay more tax then (get a lower post tax real return) than if bonds yield 2% say and inflation is 4%? Trivially true if bonds yield 0% and inflation is 2%?

I think we are in for an extended Japan-like period. Hopefully not that bad. But where, as a deliberate policy tool of Central Bankers, bond yields lag inflation rates.

For secular reasons - aftermath of the GFC, demographics, Covid-19 etc - we seem to be stuck in a low inflationary not-quite-recovery economy, and the ability of companies to pass on cost increases to their customers is limited. Thus, inflation is low. Despite what some of the theories in our economics textbooks taught us, increasing the money supply just does not seem to create inflation, in and of itself.
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

In lieu of (or in addition to) bonds you might want to consider a multi-year guaranteed annuity (MYGA).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five and ten year rates per above link are as high as 3.45% and 3.60% respectively.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

7eight9 wrote: Tue Aug 04, 2020 9:44 am In lieu of (or in addition to) bonds you might want to consider a multi-year guaranteed annuity (MYGA).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five and ten year rates per above link are as high as 3.45% and 3.60% respectively.
I've seen MYGA's mentioned a couple of times recently.

I'd have to spend a lot of time thinking about the risks.

My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
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Re: Thoughts on bonds from Fed decision...

Post by Valuethinker »

TN_Boy wrote: Tue Aug 04, 2020 10:24 am
7eight9 wrote: Tue Aug 04, 2020 9:44 am In lieu of (or in addition to) bonds you might want to consider a multi-year guaranteed annuity (MYGA).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five and ten year rates per above link are as high as 3.45% and 3.60% respectively.
I've seen MYGA's mentioned a couple of times recently.

I'd have to spend a lot of time thinking about the risks.

My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
With the exception of the TIAA annuity ones (where there is a huge insurance company to back the guaranteed returns and one *hopes* that it is well capitalised and conservatively accounted) or ones where there is a public sector guarantee (and then the state legislature would presumably have to vote to renege on it), I would share your suspicion.

But. Annuity. Implying there is a mortality credit at work? Depending on your age when you purchase, a significant proportion of return could, in effect, be return of capital?
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Re: Thoughts on bonds from Fed decision...

Post by Valuethinker »

7eight9 wrote: Tue Aug 04, 2020 9:44 am In lieu of (or in addition to) bonds you might want to consider a multi-year guaranteed annuity (MYGA).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five and ten year rates per above link are as high as 3.45% and 3.60% respectively.
How do they achieve rates so far above market rates?

Who regulates them as to prudential risk?

Is this simply a return of capital, hence the high rates?
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?

No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?

No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
I'd already skimmed the first two links.

They do not answer my question, at all, of how they can offer an interest rate much higher than standard fixed income investments with a duration similar to the length of the annuity.

There is risk here somewhere -- and a lot of it -- or the companies providing these high payouts do have a magic money machine tucked away somewhere. Look at what even single A rated corporate bonds are paying, much less treasuries.

I would want a far deeper understanding of these things before I'd consider putting money in them.
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Re: Thoughts on bonds from Fed decision...

Post by Valuethinker »

7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
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Re: Thoughts on bonds from Fed decision...

Post by Hector »

jeffyscott wrote: Tue Aug 04, 2020 6:27 am
Valuethinker wrote: Tue Aug 04, 2020 5:30 amThus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.
10 year US TIPS now at about -1%, so closer to zero than -2.5% is, but still pretty far from it. The 20 and 30 year are at -0.69% and -0.44%, though.

The move to low rates has been good for bond and TIPS returns, of course. But I am now migrating some to CDs at around 2%. Special rate CDs along with I-bonds and EE-bonds, seem like the best escapes from low rates in the US.
You are fortunate. Most people don't have $$ outside retirement accounts where these options are not available.
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Re: Thoughts on bonds from Fed decision...

Post by dziuniek »

The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.

Guess I'm hedging my bets.

If REAL return on bonds goes really negative + we have a vaccine.... I would consider buying a rental condo.... Just maybe...
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Re: Thoughts on bonds from Fed decision...

Post by guyinlaw »

Image
https://www.marketwatch.com/investing/b ... trycode=bx

10Y Treasury rate continues to fall. Today it dropped to 0.509%.

As the Fed funds rate stays at zero for now (doesn't go negative), is there floor for 10Y rate? Can the yield curve invert with zero interest rate? :confused
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Re: Thoughts on bonds from Fed decision...

Post by Hector »

guyinlaw wrote: Tue Aug 04, 2020 12:13 pm Image
https://www.marketwatch.com/investing/b ... trycode=bx

10Y Treasury rate continues to fall. Today it dropped to 0.509%.

As the Fed funds rate stays at zero for now (doesn't go negative), is there floor for 10Y rate? Can the yield curve invert with zero interest rate? :confused
At this rate, we will soon find it out :(
Right now up to 3.s years Treasury yield curve is flat; under 0.12%.
Last edited by Hector on Tue Aug 04, 2020 12:37 pm, edited 1 time in total.
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Re: Thoughts on bonds from Fed decision...

Post by garlandwhizzer »

Bonds still provide, as Bogle said, an anchor to windward in an equity storm. They will reduce portfolio vocality and risk. Bonds reduce risk short term but given current yields bonds may increase the long term risk of running out of money in retirement if your portfolio is too much tilted toward bonds. IMO bonds are unlikely to provide positive real returns for the foreseeable future going forward. 60/40 is based on the concept that bonds provide significant positive real returns. Many have suggested that 60/40 needs to be modified now as a default position. Zero real return of 40% of the portfolio may not provide the portfolio asset growth necessary to meet financial goals, especially given the fact that expected future equity market returns are likely to be significantly lower, especially in the US, than in the historical past. The last 40 years has been a great time to be a US investor. We expect our portfolios to produce positive real long term returns going forward but IMO it would be a stretch to expect them to live up to the last 4 decades.

Regardless, as Bogle said, invest we must. In the past we've been able to get very high returns with a 60/40 balanced portfolio taking on very little risk, especially so after 4 decades of bond bull market. Those days appear to be behind us now, although we don't know that for sure. It is likely that if you need substantial portfolio growth for a long period of years, you are forced these days to take on significant equity risk.

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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

Hector wrote: Tue Aug 04, 2020 12:05 pm
jeffyscott wrote: Tue Aug 04, 2020 6:27 am
Valuethinker wrote: Tue Aug 04, 2020 5:30 amThus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.
10 year US TIPS now at about -1%, so closer to zero than -2.5% is, but still pretty far from it. The 20 and 30 year are at -0.69% and -0.44%, though.

The move to low rates has been good for bond and TIPS returns, of course. But I am now migrating some to CDs at around 2%. Special rate CDs along with I-bonds and EE-bonds, seem like the best escapes from low rates in the US.
You are fortunate. Most people don't have $$ outside retirement accounts where these options are not available.
Well, I didn't either until employer retirement account was rolled over to an IRA a few years ago, where these direct CDs can be used. I suppose I could've used Roth IRA for direct CDs prior to that,if I had wanted to.

For me to buy I and EE bonds now, I would have to take the money from tax deferred accounts, so I am not using those myself.
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

dziuniek wrote: Tue Aug 04, 2020 12:12 pm The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.
Ah, yes that is another option that can provide a temporary escape. Mine is down to about 2.2%. I had left some residual funds there and now they are staying in place for longer than I had expected. I even had considered rolling some back in but just went for a 1.9% 3 year CD instead.

Ultimately, I can keep $5000 or less there for free and retain the right to roll back in.
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Re: Thoughts on bonds from Fed decision...

Post by Anon9001 »

Look I know you are US investor but bonds are world asset class. You can invest in EM bonds for instance. Bonds that don't lose money to inflation. I would not trust passive index for this approach however. Use active funds like Fidelity New Markets Income (just googled it). Be careful though of expecting it to be anti-correlated to equities like your treasuries. Also there was some event in 1990s. Yields were much higher back then also. So risk should be lower now.
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Re: Thoughts on bonds from Fed decision...

Post by Hector »

I think we have no choice, but to take more risk by increasing bond duration and/or reducing bond quality and/or increasing equity portion of portfolio eventually.
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Re: Thoughts on bonds from Fed decision...

Post by JBTX »

https://fred.stlouisfed.org/series/M2

That M2 chart is pretty eye opening. It is a big spike in money supply. We did not see that spike post 2008. Whether or not that drives consumer price inflation, who knows.
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Re: Thoughts on bonds from Fed decision...

Post by gasman »

Hector wrote: Tue Aug 04, 2020 1:02 pm I think we have no choice, but to take more risk by increasing bond duration and/or reducing bond quality and/or increasing equity portion of portfolio eventually.
Or expect less from one's portfolio or delay retirement. :(
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Re: Thoughts on bonds from Fed decision...

Post by JBTX »

Valuethinker wrote: Tue Aug 04, 2020 5:30 am
TexasBorn wrote: Tue Aug 04, 2020 5:22 am Hello everyone,

I’m curious what people’s opinions are on how bonds will perform now given the Fed’s recent admission to hold rates low until inflation is “above 2%”. Before (now) and afternoon (inflation jumps above 2% for awhile causing Fed to begin raising rates.)

https://www.wsj.com/articles/fed-weighs ... 1596360600
On the face of it it is not good for bonds.

Quantitative Easing has driven yields to the lowest ever, historically - I believe. There is as yet no sign they will rise.

Given the problems the Bank of Japan has had in creating inflation, I do wonder if the Fed actually has that power? What we seem to have learned from the Japanese experience, and also from the experience in the West since 2008-09, that it's very hard to fight deflationary (or perhaps disinflationary?) forces. (Some) theories say the Central Bank creates money, causes currency depreciation, increases in nominal economic activity, and so inflation. Yet that does not seem to be happening.

I would take this as evidence that one should be watchful about inflation and bond yields. The main argument for bonds in a portfolio still remains. That equities are enormously volatile, and bonds provide (nominal) certainty of returns -- when you buy a bond, you are more or less likely to get its Yield To Maturity as your return for holding it.

(TIPS provide certainty of real returns, but are empirically quite volatile in nominal terms).

Thus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.

If interest rates rise, of course, TIPS will also fall along with nominal bonds. (TIPS are long duration instruments - a large part of your return comes at redemption, thus they are generally more sensitive to changes in *real* interest rates, than a conventional bond of the same maturity is to changes in *nominal* interest rates).

Our money supply has increased a lot faster on gross nominal terms, whatever that implies. That includes the last 3 months.

https://tradingeconomics.com/japan/money-supply-m2


https://fred.stlouisfed.org/series/M2
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Re: Thoughts on bonds from Fed decision...

Post by guyinlaw »

garlandwhizzer wrote: Tue Aug 04, 2020 12:35 pm Bonds still provide, as Bogle said, an anchor to windward in an equity storm. They will reduce portfolio vocality and risk. Bonds reduce risk short term but given current yields bonds may increase the long term risk of running out of money in retirement if your portfolio is too much tilted toward bonds. IMO bonds are unlikely to provide positive real returns for the foreseeable future going forward. 60/40 is based on the concept that bonds provide significant positive real returns. Many have suggested that 60/40 needs to be modified now as a default position. Zero real return of 40% of the portfolio may not provide the portfolio asset growth necessary to meet financial goals, especially given the fact that expected future equity market returns are likely to be significantly lower, especially in the US, than in the historical past. The last 40 years has been a great time to be a US investor. We expect our portfolios to produce positive real long term returns going forward but IMO it would be a stretch to expect them to live up to the last 4 decades.

Regardless, as Bogle said, invest we must. In the past we've been able to get very high returns with a 60/40 balanced portfolio taking on very little risk, especially so after 4 decades of bond bull market. Those days appear to be behind us now, although we don't know that for sure. It is likely that if you need substantial portfolio growth for a long period of years, you are forced these days to take on significant equity risk.

Garland Whizzer
Thank you for putting this in perspective.

- Bonds have gotten more risky with historically low rates and after 4 decades of bond bull market, especially long term bonds.
- Stocks have arguably gotten less risky because of Fed put. Fed has sprung into action anytime stocks have a minor panic attack.

Dr. William Bernstein on the Rational Reminder podcast goes into the long term risk of bonds.
https://www.youtube.com/watch?v=haLGx8KlFvk
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Re: Thoughts on bonds from Fed decision...

Post by JBTX »

jeffyscott wrote: Tue Aug 04, 2020 12:44 pm
Hector wrote: Tue Aug 04, 2020 12:05 pm
jeffyscott wrote: Tue Aug 04, 2020 6:27 am
Valuethinker wrote: Tue Aug 04, 2020 5:30 amThus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.
10 year US TIPS now at about -1%, so closer to zero than -2.5% is, but still pretty far from it. The 20 and 30 year are at -0.69% and -0.44%, though.

The move to low rates has been good for bond and TIPS returns, of course. But I am now migrating some to CDs at around 2%. Special rate CDs along with I-bonds and EE-bonds, seem like the best escapes from low rates in the US.
You are fortunate. Most people don't have $$ outside retirement accounts where these options are not available.
Well, I didn't either until employer retirement account was rolled over to an IRA a few years ago, where these direct CDs can be used. I suppose I could've used Roth IRA for direct CDs prior to that,if I had wanted to.

For me to buy I and EE bonds now, I would have to take the money from tax deferred accounts, so I am not using those myself.
You are in similar position. I have been doing ibonds but not EE. To continue to fund I bonds and also start EE I would probably have to dip into retirement accounts (or contribute less going forward), which I don't want to do, but could actually be the best play.
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Re: Thoughts on bonds from Fed decision...

Post by Godot »

jeffyscott wrote: Tue Aug 04, 2020 12:49 pm
dziuniek wrote: Tue Aug 04, 2020 12:12 pm The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.
Ah, yes that is another option that can provide a temporary escape. Mine is down to about 2.2%. I had left some residual funds there and now they are staying in place for longer than I had expected. I even had considered rolling some back in but just went for a 1.9% 3 year CD instead.

Ultimately, I can keep $5000 or less there for free and retain the right to roll back in.
Jeffyscott: Where are you finding a 2% three-year CD?
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

Godot wrote: Tue Aug 04, 2020 1:17 pm
jeffyscott wrote: Tue Aug 04, 2020 12:49 pm
dziuniek wrote: Tue Aug 04, 2020 12:12 pm The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.
Ah, yes that is another option that can provide a temporary escape. Mine is down to about 2.2%. I had left some residual funds there and now they are staying in place for longer than I had expected. I even had considered rolling some back in but just went for a 1.9% 3 year CD instead.

Ultimately, I can keep $5000 or less there for free and retain the right to roll back in.
Jeffyscott: Where are you finding a 2% three-year CD?
Found from deposit accounts last month, but that credit union has since dropped rates. Also what you will find there can vary by location and also what credit unions you may be able to join.
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Re: Thoughts on bonds from Fed decision...

Post by BogleFan510 »

I believe the deflationary pressures, despite robust money supply are due to the scenario described by this excellent presentation by Dr Woo. Long, but highly recommended.

https://www.youtube.com/watch?v=8YTyJzmiHGk

In essence, businesses are not seeing capital due to both a lack of perceived profitable growth opportunties and a fear of debt "shocks" which might cost them solvency, so the global economy, or the non govt US portion at least, are stuck in a ditch, so to speak. Robust government infrastructure investment is one of the few known remedies, but current poltical thinking seems against that based on principle and old economic ideas of labir and capital, which dont work well anymore.
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Re: Thoughts on bonds from Fed decision...

Post by Angst »

JBTX wrote: Tue Aug 04, 2020 1:03 pm https://fred.stlouisfed.org/series/M2

That M2 chart is pretty eye opening. It is a big spike in money supply. We did not see that spike post 2008. Whether or not that drives consumer price inflation, who knows.
I don't know if it's comparable, but back in 1990 in what was then West Germany, M2 spiked similarly during the reunification of East and West Germany, and although fear of inflation ensued, actual inflation did not. Germany's graph of M2 at the time (below) perhaps isn't as dramatic as ours appears to be:

Image


but if we do compare the two, on a percentage basis, Germany's increase in M2 was bigger than ours today (in red), so far at least:

Image

I haven't tried to look at this history in "gross nominal terms"... just read your newer post.
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Re: Thoughts on bonds from Fed decision...

Post by Oicuryy »

I wonder how much of that M2 increase is due to the stimulus payments everyone got.

Is this helicopter money? The Treasury issues bonds and sends the proceeds to everyone's bank account. Then the Fed creates new money, buys back the bonds and gives the interest back to the Treasury.

If the Fed's low interest rates can't spur more borrowing and spending by the private sector, maybe they can spur more Federal borrowing and spending. How much more of that will they need to do to push up inflation expectations?

Back on topic, CNBC also as an article on the Fed's upcoming policy change.
https://www.cnbc.com/2020/08/04/the-fed ... -soon.html
[Ed] Yardeni [head of Yardeni Research] said the approach would be “wildly bullish” for alternative asset classes and in particular growth stocks and precious metals like gold and silver. [Krishna] Guha [head of global policy and central bank strategy at Evercore ISI] said the Fed’s moves would see “real yields persistently lower, the dollar lower, volatility lower, credit spreads lower and equities higher.”
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

Valuethinker wrote: Tue Aug 04, 2020 11:58 am
7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

dziuniek wrote: Tue Aug 04, 2020 12:12 pm The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.

Guess I'm hedging my bets.

If REAL return on bonds goes really negative + we have a vaccine.... I would consider buying a rental condo.... Just maybe...
Probably 2.8 due to older holdings. I imagine the rate will go down over the next year or two. So that fund did not see the capital gain that traditional bond funds have seen recently, but is yielding (and will for a while perhaps) more income now.
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Re: Thoughts on bonds from Fed decision...

Post by DB2 »

Valuethinker wrote: Tue Aug 04, 2020 5:30 am
TexasBorn wrote: Tue Aug 04, 2020 5:22 am Hello everyone,

I’m curious what people’s opinions are on how bonds will perform now given the Fed’s recent admission to hold rates low until inflation is “above 2%”. Before (now) and afternoon (inflation jumps above 2% for awhile causing Fed to begin raising rates.)

https://www.wsj.com/articles/fed-weighs ... 1596360600
On the face of it it is not good for bonds.

Quantitative Easing has driven yields to the lowest ever, historically - I believe. There is as yet no sign they will rise.

Given the problems the Bank of Japan has had in creating inflation, I do wonder if the Fed actually has that power? What we seem to have learned from the Japanese experience, and also from the experience in the West since 2008-09, that it's very hard to fight deflationary (or perhaps disinflationary?) forces. (Some) theories say the Central Bank creates money, causes currency depreciation, increases in nominal economic activity, and so inflation. Yet that does not seem to be happening.

I would take this as evidence that one should be watchful about inflation and bond yields. The main argument for bonds in a portfolio still remains. That equities are enormously volatile, and bonds provide (nominal) certainty of returns -- when you buy a bond, you are more or less likely to get its Yield To Maturity as your return for holding it.

(TIPS provide certainty of real returns, but are empirically quite volatile in nominal terms).

Thus I am not motivated to change my asset allocation. However my equivalent to US TIPS are trading at -2.5% yields (yes, minus). US TIPS last time I looked were trading at much closer to zero yields. Thus, inflation protection is relatively cheap (compared to the UK) although absolutely expensive compared to historic levels.

If interest rates rise, of course, TIPS will also fall along with nominal bonds. (TIPS are long duration instruments - a large part of your return comes at redemption, thus they are generally more sensitive to changes in *real* interest rates, than a conventional bond of the same maturity is to changes in *nominal* interest rates).
I think if there is enough economic velocity, with the QE, we could see some increased inflation (more than 2%). However, I wonder if QE contributed to the high stock market and real estate market increases the last 10+ years? I recall Ben Bernanke stating some years back that asset inflation was a Fed goal (or words to that effect).
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Re: Thoughts on bonds from Fed decision...

Post by dziuniek »

TN_Boy wrote: Tue Aug 04, 2020 4:31 pm
dziuniek wrote: Tue Aug 04, 2020 12:12 pm The stable value fund in my 457b is still yielding 2.8% somehow.... - for now that's where my money is going for the fixed income part of my portfolio. Most of the fixed income is sitting in that right now. Some is in total bond, some in a TIPS fund.

Guess I'm hedging my bets.

If REAL return on bonds goes really negative + we have a vaccine.... I would consider buying a rental condo.... Just maybe...
Probably 2.8 due to older holdings. I imagine the rate will go down over the next year or two. So that fund did not see the capital gain that traditional bond funds have seen recently, but is yielding (and will for a while perhaps) more income now.
Yup.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

Anon9001 wrote: Tue Aug 04, 2020 12:56 pm Look I know you are US investor but bonds are world asset class. You can invest in EM bonds for instance. Bonds that don't lose money to inflation. I would not trust passive index for this approach however. Use active funds like Fidelity New Markets Income (just googled it). Be careful though of expecting it to be anti-correlated to equities like your treasuries. Also there was some event in 1990s. Yields were much higher back then also. So risk should be lower now.
A US investor has to decide if he or she wants to take currency risk investing in non-US bonds. Some foreign funds are hedged. EM bonds are volatile; some EM funds are about as volatile as EM equities.

I think I am being accurate saying most on this board consider EM bonds as having equity-like risk.

Currency fluctuations can easily exceed the yield of a bond fund; currency fluctuation could wipe out all gains in fact (or add to them!).
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Re: Thoughts on bonds from Fed decision...

Post by Seasonal »

Where do people think interest rates would be absent Fed action?

We have massive unemployment, just had a massive drop in GDP and there's some virus going around that's inhibiting economic activity. A lot of businesses that want to borrow seems to want funds to avoid closure rather than expansion. Most major economies have negative nominal rates on government debt.
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Re: Thoughts on bonds from Fed decision...

Post by sfmurph »

Hector wrote: Tue Aug 04, 2020 1:02 pm I think we have no choice, but to take more risk by increasing bond duration and/or reducing bond quality and/or increasing equity portion of portfolio eventually.
Another way to take more risk would be to use leverage.It would probably be some combination of bond duration and quality, bond-to-equity ratio, and leverage. But a simple 60:40 is unlikely to be good enough in the next 40 years.
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

TN_Boy wrote: Tue Aug 04, 2020 4:27 pm
Valuethinker wrote: Tue Aug 04, 2020 11:58 am
7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
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Re: Thoughts on bonds from Fed decision...

Post by TexasBorn »

I am thoroughly impressed with all the comments. I really appreciate everyone’s willingness to give input. I’m learning so much from this board and posts like all these really encourage me to keep reading and engaging.

Thank you all for that. I read them all.
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

7eight9 wrote: Tue Aug 04, 2020 5:25 pm
TN_Boy wrote: Tue Aug 04, 2020 4:27 pm
Valuethinker wrote: Tue Aug 04, 2020 11:58 am
7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
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7eight9
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

jeffyscott wrote: Tue Aug 04, 2020 10:16 pm
7eight9 wrote: Tue Aug 04, 2020 5:25 pm
TN_Boy wrote: Tue Aug 04, 2020 4:27 pm
Valuethinker wrote: Tue Aug 04, 2020 11:58 am
7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
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Re: Thoughts on bonds from Fed decision...

Post by Mel Lindauer »

While they're not very sexy and don't get a lot of press, I Bonds are something to consider because:
1. They protect against INflation.
2. They protect against DEflation.
3. Since the composite rate can never go below zero, the greater the rate of DEflation, the higher their REAL return.
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Re: Thoughts on bonds from Fed decision...

Post by midareff »

Valuethinker wrote: Tue Aug 04, 2020 9:24 am
midareff wrote: Tue Aug 04, 2020 8:34 am It makes for difficult decisions when the SEC of a ten year treasury is .556% and the SEC of the S&P500 is 1.81%. Deduct the CPI-U and your IRS rate and what have you got? How much of your portfolio are you willing to have in a negative real yield before tax on the dividends?

What are the solutions? Even the conservative retiree might hold a little less in bonds and more in equities.... The intermediate term corporate index still has an SEC of 1.72%, some money might go there.... the short term version has an SEC of .97% and the Total Bond Market is 1.16%... and unfortunately all three seem to be dropping rapidly.

It was a bit different IMHO when bonds would get you 1% real..... makes you rethink your AA as far as how much negative real money you wish to have before tax on the distributions.... and then if the Fed starts raising it will be welcome to the barber shop time, making high yield savings look good..
In actual outcomes I think one would still be better off than in the 1970s - in real terms? Investing in bonds then v now.

I'd have to think this through but I suspect the tax drag in the 1970s on bondholders was much larger:

- few opportunities to save in tax protected accounts
- marginal tax rates were generally much higher (and bracket creep tended to thrust one into higher brackets)
- I'd have to think about the math, but I suspect if bonds yield 8% and inflation is 10% and tax rates are say 25% (same in both periods), that I pay more tax then (get a lower post tax real return) than if bonds yield 2% say and inflation is 4%? Trivially true if bonds yield 0% and inflation is 2%?

I think we are in for an extended Japan-like period. Hopefully not that bad. But where, as a deliberate policy tool of Central Bankers, bond yields lag inflation rates.

For secular reasons - aftermath of the GFC, demographics, Covid-19 etc - we seem to be stuck in a low inflationary not-quite-recovery economy, and the ability of companies to pass on cost increases to their customers is limited. Thus, inflation is low. Despite what some of the theories in our economics textbooks taught us, increasing the money supply just does not seem to create inflation, in and of itself.
I was just a tiny bit in the market then so recollection is there.. just not much first hand. I do remember my dad dumped all his market holdings then in favor of 5 year 17% CDs at our local bank. When they were done he bought utilities.. electric, gas, phone and so forth. If it didn't pay a solid dividend he wouldn't own it. It's the old story.. when you are 15 you can't believe how stupid your folks are, by the time you are 21 you are just amazed how much they have learned in that short a time.
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