"The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

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Robot Monster
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"The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by Robot Monster »

It was one decade ago today that Jeremy Siegel and Jeremy Schwartz issued the following stern warning in an article entitled "The Great American Bond Bubble".

"Those who are now crowding into bonds and bond funds are courting disaster."

What Total US Bond investors actually courted in the ensuing decade: an inflation adjusted CAGR of 1.95%.
https://www.portfoliovisualizer.com/bac ... ion1_1=100

This is a friendly reminder to ignore these types of predictions, to ignore the noise.

The article itself in full glory,
https://www.wsj.com/articles/SB10001424 ... 4002846058
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by jason2459 »

But this time it's different... :shock:
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by asif408 »

Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. 5-7 year Treasuries, which total bond held a decent amount of, yielded 2.5%-3.5% in August 2010, and the return of the last decade was 3.7%, boosted a bit by falling rates. So no real surprises. In the previous decade (2000-2010), 5-7 year Treasuries yield ~6% at the start. The return of TBM was 6.3% over that decade. So in the last 2 decades the bond return was within 0.5% or so of the starting yield of 5-7 year Treasuries.

As of August 2020 5-7 year Treasuries are yielding 0.3%-0.5%. That yield is the best predictor of future returns for TBM. So expecting much more than 0.5% return from TBM over the next decade would be unrealistic. So while I don't know exactly what the return will be next decade, expecting anything over 1% nominal from today is being extremely optimistic, and expecting a positive real return also appears to be extremely optimistic.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by Chicken Little »

Paywall.

I get the general idea, but what specific point are you making to readers?

Are you saying we don’t know the future of bonds in the same way we don’t know the future of stocks? I’m not sure that is true.

That the trend has continued since that article doesn’t invalidate their point, it makes it more exigent.

For all of the champions of the free markets, how do you turn around and knock these guys for not being able to predict things that they probably thought never could happen? Current interest rates aren’t “market rates”, they are “policy rates”.

If your point is that whether we have another 10, 20, 30 years of bond bull market is simply a coin flip, I think you are doing the average reader a disservice. I say that as someone who is objectively overweight bonds, albeit short duration overall and 50/50 STIPs.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by willthrill81 »

asif408 wrote: Tue Aug 18, 2020 10:13 am Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. 5-7 year Treasuries, which total bond held a decent amount of, yielded 2.5%-3.5% in August 2010, and the return of the last decade was 3.7%, boosted a bit by falling rates. So no real surprises. In the previous decade (2000-2010), 5-7 year Treasuries yield ~6% at the start. The return of TBM was 6.3% over that decade. So in the last 2 decades the bond return was within 0.5% or so of the starting yield of 5-7 year Treasuries.

As of August 2020 5-7 year Treasuries are yielding 0.3%-0.5%. That yield is the best predictor of future returns for TBM. So expecting much more than 0.5% return from TBM over the next decade would be unrealistic. So while I don't know exactly what the return will be next decade, expecting anything over 1% nominal from today is being extremely optimistic, and expecting a positive real return also appears to be extremely optimistic.
Great summary. Unless interest rates keep falling and/or inflation falls even more, it's pretty much mathematically impossible for bonds to have a robustly positive real return over the next decade.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by nisiprius »

There is a very important detail here.

The actual numbers--not a precise prediction, but the range of possible interest rate increases they warned about--actually occurred. And furthermore, their remarks about the effect that could potentially cause were also accurate.

What was unforgivably wrong, exaggerated and alarmist is their rhetoric about the catastrophe it would cause--when the reality was that a Total Bond investor would hardly have noticed it.

Their numerical warning:
Furthermore, the possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield.
Here is what interest rates did, with the peak not only above 3.15%, but closer to 4% than to 3.15%. The interest rate rise they warned about absolutely came true:

Image

Rhetoric:
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.
A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds.
The reality as I experienced it in the bond portion of my personal portfolio:

Image

Do the math. For reasons only they can explain, they didn't. But "the current yield" was 2.8%, so "a capital loss equal to... [or] more than three times the current yield" means -2.8% to -7.2%. That "capital loss," of course, meant a depression in the market value of the bond, which would be a temporary depression, both according to bond math and according to what really happened.

Yes, a Total Bond investor who bought exact peak after their article on 10/8/2010, then sold four months later, at the exact bottom, 2/10/2011, would have experienced a loss of -3.1%, which is in the their range of "capital losses."

They also would have been back to even on 5/10/2011, just three months later.

Source

Image

Yes, Siegel and Schwartz called it. It unfolded just as they warned, with a potential -3.1% loss for Total Bond owners who reverse-market-timed perfectly. It just didn't turn out to have "far more serious consequences" for investors than the 2000 dot-com bubble.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by LFS1234 »

Robot Monster wrote: Tue Aug 18, 2020 9:50 am It was one decade ago today that Jeremy Siegel and Jeremy Schwartz issued the following stern warning in an article entitled "The Great American Bond Bubble".

"Those who are now crowding into bonds and bond funds are courting disaster."

https://www.wsj.com/articles/SB10001424 ... 4002846058
The final blurb of the now 10-year old Siegel/Schwartz article:

"With future government finances so precarious, private asset accumulation and dividend income must become the major sources of retirement funding. At current interest rates, government bonds will not be the answer. One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds."

It's quite a reasonable and compelling argument. The first part of their conclusion (regarding dividends) has turned out to be good advice. The second part (regarding bonds) has, as of yet, turned out to be incorrect.

What this ought to be is humbling. Regardless of how absurd a market seems to be, it can get even more absurd. It is difficult to see the attraction of investing in 10-year bonds yielding 0.67%, holding them for a decade, paying one's top marginal income tax rate on the meager interest payments, and all the while losing purchasing power in what still seems to be an inflationary environment. The only way this makes sense is if we have a deflationary environment going forward. Is this what the market is telling us? Who knows. A decade from now, we will know; and those of us who still are posting here will probably have cause to be even humbler.

The Siegel/Schwartz conclusion is reminiscent of Alan Greenspan's famous "irrational exuberance" comment of December 5, 1996:

"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

1996 was just around the very beginning of what was to become the historic 1999-2000 blue chip and tech bubble, many years before the "irrational exuberance" actually hit full steam.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

This lends more support to tune out the market noise!

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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by alluringreality »

Yesterday's 30 year rate was approximately the 5 year rate from that time, so considerable portions of the yield curve from that time were higher than today. The entire real yield curve was also positive at that time, and it's entirely negative today. If anyone is actually expecting real returns approaching 2% from marketable bonds purchased today based on the posted backtest, there might be reasons to reconsider.
https://www.treasury.gov/resource-cente ... data=yield
https://www.treasury.gov/resource-cente ... =realyield
viewtopic.php?p=4950992#p4950992
Last edited by alluringreality on Tue Aug 18, 2020 11:01 am, edited 1 time in total.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by cheezit »

Nb. that even if yields keep falling continuously at about the same rate that they have averaged over the last few decades, it's not going to be a miracle for intermediate term bond funds (nb. the average duration of BND/VBTLX is 6.6 years) - the break-even point for a single step change in rates is 1*duration, and the break-even point for a continuous ramp is 2*duration, so excepting some wacky scenarios it probably isn't going to be much different than the current YTM plus the (currently quite small) rolling-down-the-yield-curve return.

This also means that rising rates wouldn't be a disaster for an intermediate bond fund over a ~1 decade time span, again excepting something goofy like no rate changes for 9 years 363 days followed by a +10% rate increase on year 9 day 364.

Of course, if your investment horizon were actually 10 years you'd need to manage duration as time went on to mitigate the aforementioned risk.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by X528 »

Vanguard Total Bond market Index fund (VBTLX) is up 7.10% year-to-date. Even with a current low yield of 1.14%, this fund is still able to give a decent return IMHO for a bond fund that is mostly government and treasury bonds and it's low risk profile.

https://investor.vanguard.com/mutual-fu ... ance/vbtlx
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by nisiprius »

Siegel and Schwartz told the truth about what could happen with interest rates and how it could potentially affect bond value.

They lied about the size of the consequences.

If you think "lied" is too strong, then perhaps we could guess that their intended audience was not ordinary investors, but institutional investors building leveraged asset cathedrals with balance of forces as precise as the Sagrada Familia* cathedral in Barcelona. If so, they could have at least dropped a hint about that in the article.



*The Sagrada Familia was in the news a few years ago because it is approaching completion, after 138 years. The structural engineering is radically different from medieval cathedrals and is based on a complex network of catenary arches. The architect, Gaudi, designed it with the aid of a sort of analog computer made out of hanging chains.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by texasfight »

cheezit wrote: Tue Aug 18, 2020 10:58 am Nb. that even if yields keep falling continuously at about the same rate that they have averaged over the last few decades, it's not going to be a miracle for intermediate term bond funds (nb. the average duration of BND/VBTLX is 6.6 years) - the break-even point for a single step change in rates is 1*duration, and the break-even point for a continuous ramp is 2*duration, so excepting some wacky scenarios it probably isn't going to be much different than the current YTM plus the (currently quite small) rolling-down-the-yield-curve return.

This also means that rising rates wouldn't be a disaster for an intermediate bond fund over a ~1 decade time span, again excepting something goofy like no rate changes for 9 years 363 days followed by a +10% rate increase on year 9 day 364.

Of course, if your investment horizon were actually 10 years you'd need to manage duration as time went on to mitigate the aforementioned risk.
Rising interest rates cannot happen. Would take down entire financial system. I can tell you how a 60/40 portfolio will generate a real return over the next decade, falling real interest rates due to '"deflation", and expanding P/E ratios. Nasdaq 100 will have to be at a 100x P/E multiple to keep the asset price bubble going, and so it will. Don't need profits growth when you get negative real interest rates and eventually negative nominal interest rates.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by garlandwhizzer »

Lots of highly respected market mavens have been wrong calling for the collapse of the bond bubble for more than a decade. Making pronouncements for the future, whether it be the bond bubble or the return of robust SCV outperformance, often turns out to be hazardous the predictor's ego. There is no certainty when predicting the future in markets no matter who does it. Market action in the future is determined by so many known unknowns plus so many unanticipated unknown unknowns that no one speaks with certainty about the future. We can speak about probabilities however. Based on current interest rates, challenging US macro economic status, FED and fiscal policy, it is likely, not certain, that bond total returns going forward will be much less robust than in the past 40 years. Probably close to zero real, perhaps less. In the event of unexpected inflation and rising rates in the future there is considerable principal risk imbedded in today's ultra low yielding bonds. What we can say with some certainty today is that the risk/reward tradeoff of bonds going forward looks considerably less attractive than it did in 1982 when 10 yr Treasuries yielded 15%. That does not mean that our concerns about bonds dim future will prove to be true. What we can say is that current probabilities are weighted strongly in the direction of lower real bond returns going forward than in the past.

The same can be said of the equity market. No certainty, a higher range of dispersion about future return results, but based on current valuations, high debt levels, aging demographics, and expected sluggish macroeconomic growth in the future, there is a good probability that equities will not perform as well in the future as in the past, although it is likely, but not certain, that equities will outperform bonds. As hazy as that future is I believe there is even more uncertainty about how effectively factor based investment strategies will perform in the long term future in risk adjusted terms.

That's IMO about all we know and how to deal with these current probabilities is up to each one of us. Nobody knows nothing means you ignore present circumstances and plow on with market cap weight 2 or 3 fund which has worked quite well in the past. Factor true believers hold on their strategies in spite of recent underperformance expecting future outperformance. Those with less perfect faith and patience move assets around in response to current circumstances. Slight/modest movements are okay, sudden severe changes are very like damaging IMO. The good news is that it is likely that over the long haul all of these approaches will produce considerable real growth in the asset base. It is IMO more important to stay invested in both equities and bonds attuned to your risk tolerance and goals--and I believe all these approaches above are to be basically sound--than it is to choose the perfect portfolio details.

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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by xxd091 »

UK investor using Vanguard Global Bond Index Tracker Fund hedged to the Pound (VIGBBD)
Since it’s inception-2009-averaged 4.65% pa
YTD -5.03%
Admittedly a few corporate bonds
Does the business for me.
Retd -aged 74- this fund is 65% of my Portfolio
I made enough so have a conservative asset allocation
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

willthrill81 wrote: Tue Aug 18, 2020 10:44 am
asif408 wrote: Tue Aug 18, 2020 10:13 am Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. 5-7 year Treasuries, which total bond held a decent amount of, yielded 2.5%-3.5% in August 2010, and the return of the last decade was 3.7%, boosted a bit by falling rates. So no real surprises. In the previous decade (2000-2010), 5-7 year Treasuries yield ~6% at the start. The return of TBM was 6.3% over that decade. So in the last 2 decades the bond return was within 0.5% or so of the starting yield of 5-7 year Treasuries.

As of August 2020 5-7 year Treasuries are yielding 0.3%-0.5%. That yield is the best predictor of future returns for TBM. So expecting much more than 0.5% return from TBM over the next decade would be unrealistic. So while I don't know exactly what the return will be next decade, expecting anything over 1% nominal from today is being extremely optimistic, and expecting a positive real return also appears to be extremely optimistic.
Great summary. Unless interest rates keep falling and/or inflation falls even more, it's pretty much mathematically impossible for bonds to have a robustly positive real return over the next decade.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 10:53 am This lends more support to tune out the market noise!

Nobody knows nothing!
I couldn't disagree more. The current 10 year yield, plus or minus a small range, is a pretty good indication of what government bonds will earn over the next 10 years.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 8:00 pm
abuss368 wrote: Tue Aug 18, 2020 10:53 am This lends more support to tune out the market noise!

Nobody knows nothing!
I couldn't disagree more. The current 10 year yield, plus or minus a small range, is a pretty good indication of what government bonds will earn over the next 10 years.
I recall 12 years ago this same exact talk and forum posts (which can be searched for). Many investors have been waiting for the bond cliff since 2008.

Tune out the market noise.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 8:03 pm
JBTX wrote: Tue Aug 18, 2020 8:00 pm
abuss368 wrote: Tue Aug 18, 2020 10:53 am This lends more support to tune out the market noise!

Nobody knows nothing!
I couldn't disagree more. The current 10 year yield, plus or minus a small range, is a pretty good indication of what government bonds will earn over the next 10 years.
I recall 12 years ago this same exact talk and forum posts (which can be searched for). Many investors have been waiting for the bond cliff since 2008.

Tune out the market noise.
Math = market noise?
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 8:06 pm
Math = market noise?
Correct = financial media is often called financial porn!

Agree that investors are wise to tune out.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 8:08 pm
JBTX wrote: Tue Aug 18, 2020 8:06 pm
Math = market noise?
Correct = financial media is often called financial porn!

Agree that investors are wise to tune out.
In 2008 total bond market likely had a yield near 4.5%. Over 12 years that is 70% growth compounded. Vanguard total bond market has increased about 70% over 12 years. Funny how that works.

Total bond market index now has yield of 1.5%. That is what you should expect over the next 10 years.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 8:22 pm
abuss368 wrote: Tue Aug 18, 2020 8:08 pm
JBTX wrote: Tue Aug 18, 2020 8:06 pm
Math = market noise?
Correct = financial media is often called financial porn!

Agree that investors are wise to tune out.
In 2008 total bond market likely had a yield near 4.5%. Over 12 years that is 70% growth compounded. Vanguard total bond market has increased about 70% over 12 years. Funny how that works.

Total bond market index now has yield of 1.5%. That is what you should expect over the next 10 years.
When investment experts recommend moving away I would then consider. Until then, I agree and tune our the financial porn.

Investors are best served by doing what allows them to sleep best at night. Total Bond does that for us and for good reason as it is the largest bond fund on the PLANET!

Keep investing simple!
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by wootwoot »

Clickbait article
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 8:24 pm
JBTX wrote: Tue Aug 18, 2020 8:22 pm
abuss368 wrote: Tue Aug 18, 2020 8:08 pm
JBTX wrote: Tue Aug 18, 2020 8:06 pm
Math = market noise?
Correct = financial media is often called financial porn!

Agree that investors are wise to tune out.
In 2008 total bond market likely had a yield near 4.5%. Over 12 years that is 70% growth compounded. Vanguard total bond market has increased about 70% over 12 years. Funny how that works.

Total bond market index now has yield of 1.5%. That is what you should expect over the next 10 years.
When investment experts recommend moving away I would then consider. Until then, I agree and tune our the financial porn.

Investors are best served by doing what allows them to sleep best at night. Total Bond does that for us and for good reason as it is the largest bond fund on the PLANET!

Keep investing simple!

Over 10 years, $10,000 invested in total bond market will likely leave you with somewhere between $8700 and $10,000 in inflation adjusted dollars. And that is assuming it is in a tax advantaged account. If that helps you sleep at night, more power to you.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by Random Musings »

They were just a little premature in their call.

At the least, we are in a low interest rate hell period for bond holders.

I guess they used the proceeds from the book to purchase equities, which did better during that time period.

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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 8:33 pm
Over 10 years, $10,000 invested in total bond market will likely leave you with somewhere between $8700 and $10,000 in inflation adjusted dollars. And that is assuming it is in a tax advantaged account. If that helps you sleep at night, more power to you.
Agree and absolutely it allows many investors to sleep well as it is now the largest bond fund!
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by depressed »

asif408 wrote: Tue Aug 18, 2020 10:13 am . . . Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. . . .
[This is not a criticism, just a question.]

I still run into idiomatic English that I don't really understand. Can someone please explain what the phrase "I have to say" changes the meaning of the sentence? How would the shorter sentence--Can't speak to their prediction, but the starting yields did a decent job predicting returns.--differ from the sentence as it is written?

[I have to say?] I make a point of asking native speakers in the area of discourse about any idiom I don't understand. Then I try to remember it and use it myself. I am not as good at remembering as I was in my twenties.

Thanks.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by nisiprius »

JBTX wrote: Tue Aug 18, 2020 8:06 pm
abuss368 wrote: Tue Aug 18, 2020 8:03 pm Tune out the market noise.
Math = market noise?
It is only "mathematically impossible" if you know the future values of both interest and inflation going forward to plug into the math.

Certainly, if it is mathematically certain that interest rates for 10-year Treasuries will be -2% forever and that inflation will be +1% forever, then, yes, it would be mathematically impossible for bonds to have a positive real return. But otherwise there are many ways it would be mathematically possible.

One would be near-zero interest rates coupled with deflation.

Another would be near-zero interest rates, but only for a little while, followed by a long period of gently rising interest rates; for example, in this simulation. Interest rates stay near zero for a year, then gradually rise to 4% over a period of four years. The value of a rotating bond ladder with a duration of about six years loses -16%. The instant the interest rate stops rising, the bond ladder begin to earn a 4% annual return, digs itself out of the hole by year 9, and continues to make money at 4% per year. Not a cheery prospect but not hopeless for a long-term retirement saver.

Image

Whether that's a positive real return depends on the inflation rate, but it certainly could be.

That interest rate regime is not mathematically impossible. You might feel that it is impossible based on macroeconomic projections or whatever, but that would be a prediction, a fallible opinion, not a mathematical certainty.
Last edited by nisiprius on Tue Aug 18, 2020 8:47 pm, edited 3 times in total.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

depressed wrote: Tue Aug 18, 2020 8:36 pm
asif408 wrote: Tue Aug 18, 2020 10:13 am . . . Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. . . .
[This is not a criticism, just a question.]

I still run into idiomatic English that I don't really understand. Can someone please explain what the phrase "I have to say" changes the meaning of the sentence? How would the shorter sentence--Can't speak to their prediction, but the starting yields did a decent job predicting returns.--differ from the sentence as it is written?

[I have to say?] I make a point of asking native speakers in the area of discourse about any idiom I don't understand. Then I try to remember it and use it myself. I am not as good at remembering as I was in my twenties.

Thanks.
I'm no grammar expert, but it doesn't change the meaning substantially, it is just a point of emphasis, that seems to imply contradiction or an unexpected result. Kind of like, "I have to admit". It can be used as a qualifier when you admit you are wrong, or in this case it is used as a bit of hesitant self deprication or modesty before asserting that you are right.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

nisiprius wrote: Tue Aug 18, 2020 8:43 pm
JBTX wrote: Tue Aug 18, 2020 8:06 pm
abuss368 wrote: Tue Aug 18, 2020 8:03 pm Tune out the market noise.
Math = market noise?
It is only "mathematically impossible" if you know the future values of both interest and inflation going forward to plug into the math.

Certainly, if it is mathematically certain that interest rates for 10-year Treasuries will be -2% forever and that inflation will be +1% forever, then, yes, it would be mathematically impossible for bonds to have a positive real return. But otherwise there are many ways it would be mathematically possible.

One would be near-zero interest rates coupled with deflation.

Another would be near-zero interest rates, but only for a little while, followed by a long period of gently rising interest rates; for example, in this simulation. Interest rates stay near zero for a year, then gradually rise to 4% over a period of four years. The value of a rotating bond ladder with a duration of about six years loses -16%. The instant the interest rate stops rising, the bond ladder begin to earn a 4% annual return, digs itself out of the whole by year 9, and continues to make money at 4% per year. Not a cheery prospect but not hopeless for a long-term retirement saver.

Image

Whether that's a positive real return depends on the inflation rate, but it certainly could be.

That interest rate regime is not mathematically impossible. You might feel that it is impossible based on macroeconomic projections or whatever, but that would be a prediction, a fallible opinion, not a mathematical certainty.
You are correct that I am assuming the federal reserve will not allow a sustained deflation. Yes, that is an assumption and opinion.

What is a near mathematical certainty that the 10 year yield will predict within a tight band your 10 year actual nominal return.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by depressed »

JBTX wrote: Tue Aug 18, 2020 8:45 pm
depressed wrote: Tue Aug 18, 2020 8:36 pm
asif408 wrote: Tue Aug 18, 2020 10:13 am . . . Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. . . .
[This is not a criticism, just a question.]

I still run into idiomatic English that I don't really understand. Can someone please explain what the phrase "I have to say" changes the meaning of the sentence? How would the shorter sentence--Can't speak to their prediction, but the starting yields did a decent job predicting returns.--differ from the sentence as it is written?

[I have to say?] I make a point of asking native speakers in the area of discourse about any idiom I don't understand. Then I try to remember it and use it myself. I am not as good at remembering as I was in my twenties.

Thanks.
I'm no grammar expert, but it doesn't change the meaning substantially, it is just a point of emphasis, that seems to imply contradiction or an unexpected result. Kind of like, "I have to admit". It can be used as a qualifier when you admit you are wrong, or in this case it is used as a bit of hesitant self deprication or modesty before asserting that you are right.
Thank you, JBTX. That's a great explanation, and I like the nuances that you were able to explain. Thanks again!
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by nisiprius »

JBTX wrote: Tue Aug 18, 2020 8:48 pm...What is a near mathematical certainty that the 10 year yield will predict within a tight band your 10 year actual nominal return...
Only if that's the last bond you ever buy, not if you are investing in a bond mutual fund that continually buys new bonds paying new interest rates.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by 000 »

Whether or not bonds are a good investment today should have no dependence on future interest rate movements unless one is a rate speculator.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

nisiprius wrote: Tue Aug 18, 2020 9:04 pm
JBTX wrote: Tue Aug 18, 2020 8:48 pm...What is a near mathematical certainty that the 10 year yield will predict within a tight band your 10 year actual nominal return...
Only if that's the last bond you ever buy, not if you are investing in a bond mutual fund that continually buys new bonds paying new interest rates.
Exactly. Another reason why investors do not need the assertional risk of individual bonds.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

Bonds provide ballast and dry powder to a portfolio.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

nisiprius wrote: Tue Aug 18, 2020 9:04 pm
JBTX wrote: Tue Aug 18, 2020 8:48 pm...What is a near mathematical certainty that the 10 year yield will predict within a tight band your 10 year actual nominal return...
Only if that's the last bond you ever buy, not if you are investing in a bond mutual fund that continually buys new bonds paying new interest rates.
If you put $10000 in total bond market now, hold it for 7-8 years, you will earn very close to the current yield of 1.5% at the end of 7-8 years, it's duration.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by 000 »

JBTX wrote: Tue Aug 18, 2020 9:24 pm
abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
You're fighting the good fight, JBTX.

The nominal return of bonds held to maturity is more or less known in advance.

If interest rates go down, bonds gets a NAV bump, and one sells before maturity, the "gain" still has to be reinvested somewhere. If put into lower yielding bonds, there was no gain.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 9:24 pm
abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

Vanguard investment experts recommend a two fund bond strategy of Total Bond and Total International Bond.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by JBTX »

abuss368 wrote: Tue Aug 18, 2020 9:51 pm
JBTX wrote: Tue Aug 18, 2020 9:24 pm
abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
With 10 year treasuries, rates are at 0.6%. If they went to zero, that would be about a 4% gain. That's not much ballast if the stock market drops 30-50%. Sure, rates could go negative, but absolute best case scenario you'd look at an 8-10% gain on the bonds.

As to bond index at 1.5%, that includes corporates, which tend to have an offsetting quality component when rates go down due to an economic event. So the ballast effect at these rates will likely be low.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by willthrill81 »

nisiprius wrote: Tue Aug 18, 2020 8:43 pmIt is only "mathematically impossible" if you know the future values of both interest and inflation going forward to plug into the math.
I was the one who brought up the phrase 'pretty much mathematically impossible' and put only said that after first making a disclaimer pertaining to interest rates and inflation. So I think that we probably agree. For the sake of clarity, I said the following:
willthrill81 wrote: Tue Aug 18, 2020 10:44 amUnless interest rates keep falling and/or inflation falls even more, it's pretty much mathematically impossible for bonds to have a robustly positive real return over the next decade.
VBTLX currently has a 30 day SEC yield of 1.14%. The current spread between 10 year nominal Treasuries and 10 year TIPS is 1.64%, a pretty good proxy for the market's expected inflation and lower than the Fed's 2% target. So VBTLX seems very likely to lose out to inflation over the next decade unless interest rates fall further and/or inflation falls significantly.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

JBTX wrote: Tue Aug 18, 2020 10:09 pm
abuss368 wrote: Tue Aug 18, 2020 9:51 pm
JBTX wrote: Tue Aug 18, 2020 9:24 pm
abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
With 10 year treasuries, rates are at 0.6%. If they went to zero, that would be about a 4% gain. That's not much ballast if the stock market drops 30-50%. Sure, rates could go negative, but absolute best case scenario you'd look at an 8-10% gain on the bonds.

As to bond index at 1.5%, that includes corporates, which tend to have an offsetting quality component when rates go down due to an economic event. So the ballast effect at these rates will likely be low.
Jack Bogle notes during the financial crisis that one could add more corporates to Total Bond.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by zarci »

nisiprius wrote: Tue Aug 18, 2020 10:45 am
The reality as I experienced it in the bond portion of my personal portfolio:

Image

This made my day :sharebeer
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by Kevin K »

abuss368 wrote: Tue Aug 18, 2020 10:49 pm
JBTX wrote: Tue Aug 18, 2020 10:09 pm
abuss368 wrote: Tue Aug 18, 2020 9:51 pm
JBTX wrote: Tue Aug 18, 2020 9:24 pm
abuss368 wrote: Tue Aug 18, 2020 9:18 pm Bonds provide ballast and dry powder to a portfolio.
Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
With 10 year treasuries, rates are at 0.6%. If they went to zero, that would be about a 4% gain. That's not much ballast if the stock market drops 30-50%. Sure, rates could go negative, but absolute best case scenario you'd look at an 8-10% gain on the bonds.

As to bond index at 1.5%, that includes corporates, which tend to have an offsetting quality component when rates go down due to an economic event. So the ballast effect at these rates will likely be low.
Jack Bogle notes during the financial crisis that one could add more corporates to Total Bond.
Did you mean to say add more Treasuries in a crisis? LTT's are the extreme case here (TLT up 22.77% YTD and was up around 30% during the height of the March meltdown; same story in 2008).

If the point of holding bonds at all in a zero interest/negative real return era is "dry powder" I don't see any point to owning TBM vs. ITT's, or maybe (per Jonathan Clements and, apparently, Ray Dalio/Bridgewater) just STT's and perhaps some short-duration TIPS.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by cheezit »

Kevin K wrote: Wed Aug 19, 2020 9:17 am
abuss368 wrote: Tue Aug 18, 2020 10:49 pm
JBTX wrote: Tue Aug 18, 2020 10:09 pm
abuss368 wrote: Tue Aug 18, 2020 9:51 pm
JBTX wrote: Tue Aug 18, 2020 9:24 pm

Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
With 10 year treasuries, rates are at 0.6%. If they went to zero, that would be about a 4% gain. That's not much ballast if the stock market drops 30-50%. Sure, rates could go negative, but absolute best case scenario you'd look at an 8-10% gain on the bonds.

As to bond index at 1.5%, that includes corporates, which tend to have an offsetting quality component when rates go down due to an economic event. So the ballast effect at these rates will likely be low.
Jack Bogle notes during the financial crisis that one could add more corporates to Total Bond.
Did you mean to say add more Treasuries in a crisis? LTT's are the extreme case here (TLT up 22.77% YTD and was up around 30% during the height of the March meltdown; same story in 2008).

If the point of holding bonds at all in a zero interest/negative real return era is "dry powder" I don't see any point to owning TBM vs. ITT's, or maybe (per Jonathan Clements and, apparently, Ray Dalio/Bridgewater) just STT's and perhaps some short-duration TIPS.
I don't have a citation handy, but I believe Bogle was advocating a market-timing move, with the rationale being that the 2007/2008 crash had increased the yield on corporates to the point that they became attractive to tilt towards. He did something similar in late 1999, when he reduced his equity allocation severely because bond yields were high, PE ratios were high, and dividend yields on equities were low (cf. Enough pages 105 and 237).
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by asif408 »

depressed wrote: Tue Aug 18, 2020 8:36 pm
asif408 wrote: Tue Aug 18, 2020 10:13 am . . . Can't speak to their prediction, but I have to say the starting yields did a decent job predicting returns. . . .
[This is not a criticism, just a question.]

I still run into idiomatic English that I don't really understand. Can someone please explain what the phrase "I have to say" changes the meaning of the sentence? How would the shorter sentence--Can't speak to their prediction, but the starting yields did a decent job predicting returns.--differ from the sentence as it is written?

[I have to say?] I make a point of asking native speakers in the area of discourse about any idiom I don't understand. Then I try to remember it and use it myself. I am not as good at remembering as I was in my twenties.

Thanks.
I'm not sure why I use idioms other than that likely I grew up with people and/or worked with people who used phrases like that. Not necessary, and doesn't change the meaning of what I am saying.
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by Kevin K »

[/quote]
I don't have a citation handy, but I believe Bogle was advocating a market-timing move, with the rationale being that the 2007/2008 crash had increased the yield on corporates to the point that they became attractive to tilt towards. He did something similar in late 1999, when he reduced his equity allocation severely because bond yields were high, PE ratios were high, and dividend yields on equities were low (cf. Enough pages 105 and 237).
[/quote]

It makes sense to me that he'd have recommended that, as I recall that his complaint about TBM was that it had too many Treasuries and not enough corporates. Obviously over long periods of time TBM and an ITT fund have had similar returns but their behavior during market meltdowns is quite different. And that applies exponentially more to barbell strategies like those used in the Permanent Portfolio or Golden Butterfly which hold equal weights of T-bills and 30 year Treasuries. Not that I see much sense in owning LTT's paying ~1.4%!

If Ray Dalio and Jonathan Clements are correct in thinking it's likely that zero bond returns will be the new normal for awhile I can see a lot of sense to their recommendations to take risk elsewhere (globally-diversified, small-cap and value-tilted equities for Clements, those plus typical hedge fund exotica [precious metals, Chinese government bonds, leveraged this and that] for Dalio.

Here's a link to one of several thoughtful posts on this from Clements:

https://humbledollar.com/2020/06/farewell-yield/
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by depressed »

asif408 wrote: Wed Aug 19, 2020 9:51 am I'm not sure why I use idioms other than that likely I grew up with people and/or worked with people who used phrases like that. Not necessary, and doesn't change the meaning of what I am saying.
Thanks, asif408. I do the same kind of thing, probably most people do, especially when writing informally, and I think it serves a purpose of helping me plan my next thought. It's interesting to observe ourselves like this sometimes. Thanks, again!
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Re: "The Great American Bond Bubble" by Jeremy Siegel And Jeremy Schwartz

Post by abuss368 »

Kevin K wrote: Wed Aug 19, 2020 9:17 am
abuss368 wrote: Tue Aug 18, 2020 10:49 pm
JBTX wrote: Tue Aug 18, 2020 10:09 pm
abuss368 wrote: Tue Aug 18, 2020 9:51 pm
JBTX wrote: Tue Aug 18, 2020 9:24 pm

Not much ballast at 1.5%.
Plenty of ballast at 1.50% which helps a portfolio asset allocation with riskier stocks.
With 10 year treasuries, rates are at 0.6%. If they went to zero, that would be about a 4% gain. That's not much ballast if the stock market drops 30-50%. Sure, rates could go negative, but absolute best case scenario you'd look at an 8-10% gain on the bonds.

As to bond index at 1.5%, that includes corporates, which tend to have an offsetting quality component when rates go down due to an economic event. So the ballast effect at these rates will likely be low.
Jack Bogle notes during the financial crisis that one could add more corporates to Total Bond.
Did you mean to say add more Treasuries in a crisis? LTT's are the extreme case here (TLT up 22.77% YTD and was up around 30% during the height of the March meltdown; same story in 2008).

If the point of holding bonds at all in a zero interest/negative real return era is "dry powder" I don't see any point to owning TBM vs. ITT's, or maybe (per Jonathan Clements and, apparently, Ray Dalio/Bridgewater) just STT's and perhaps some short-duration TIPS.
I believe that any short or intermediate term investment grade bond fund will provide safety and income to a portfolio.
John C. Bogle: “Simplicity is the master key to financial success."
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