Rising inflation with low or no yield in fixed income

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ChinchillaWhiplash
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Rising inflation with low or no yield in fixed income

Post by ChinchillaWhiplash »

How will this play out? Will be no place to park $$$s if rising inflation last with no safe instruments to keep up. How much increase in inflation does the Fed want before increasing interest rates? Will people just put their money into equities and call it good? Should help keep the markets pumped up for a while. Will bond funds drop a bunch if there is a rush to the exits? How do you see this playing out in the next 5 to 10 yrs. ?
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Re: Rising inflation with low or no yield in fixed income

Post by jebmke »

Real yields on TIPS are negative as far as the eye can see. That is probably the best available forward-looking information on bonds.
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Re: Rising inflation with low or no yield in fixed income

Post by Robot Monster »

I think instead of trying to figure out how things will play out, create a portfolio that is resilient to the various possibilities.

To answer your question about how much inflation does the Fed need to see before raising rates, I can only speculate. I would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.) Would they raise rates if inflation hits 3%, and unemployment was still high? I don't know. Have a portfolio that does okay if the Fed doesn't raise rates, is all.

Would write more, but off to lunch...
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Re: Rising inflation with low or no yield in fixed income

Post by willthrill81 »

Robot Monster wrote: Wed Sep 02, 2020 11:24 amI would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.)
Correct. The 'cure' for high inflation is high interest rates. Whether the Fed has the gumption to actually do that is a matter of conjecture that we cannot discuss openly on the forum.

I don't know why everyone is so concerned about high inflation right now. The money supply has increased substantially over the last 10+ years, but the velocity of money has consistently fallen, and, consequently, inflation has been very low. I see no reason why that trend could not continue.
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Re: Rising inflation with low or no yield in fixed income

Post by atdharris »

willthrill81 wrote: Wed Sep 02, 2020 11:35 am
Robot Monster wrote: Wed Sep 02, 2020 11:24 amI would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.)
Correct. The 'cure' for high inflation is high interest rates. Whether the Fed has the gumption to actually do that is a matter of conjecture that we cannot discuss openly on the forum.

I don't know why everyone is so concerned about high inflation right now. The money supply has increased substantially over the last 10+ years, but the velocity of money has consistently fallen, and, consequently, inflation has been very low. I see no reason why that trend could not continue.
Yes, agreed. I remember seeing posts like this 10 years ago and we never saw runaway inflation. I am certainly not going to position my money as if I am expecting it.
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Re: Rising inflation with low or no yield in fixed income

Post by willthrill81 »

atdharris wrote: Wed Sep 02, 2020 11:40 am
willthrill81 wrote: Wed Sep 02, 2020 11:35 am
Robot Monster wrote: Wed Sep 02, 2020 11:24 amI would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.)
Correct. The 'cure' for high inflation is high interest rates. Whether the Fed has the gumption to actually do that is a matter of conjecture that we cannot discuss openly on the forum.

I don't know why everyone is so concerned about high inflation right now. The money supply has increased substantially over the last 10+ years, but the velocity of money has consistently fallen, and, consequently, inflation has been very low. I see no reason why that trend could not continue.
Yes, agreed. I remember seeing posts like this 10 years ago and we never saw runaway inflation. I am certainly not going to position my money as if I am expecting it.
At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation). The only way you could lose, relatively speaking, is if interest rates drop even more, which would increase the value of existing bonds, or if inflation comes in significantly lower than the market is expecting.
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
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Re: Rising inflation with low or no yield in fixed income

Post by JoMoney »

I expect interest rates will rise a little when things start to normalize out of the current crisis, not sure what the new 'normal' will be, but there will be something that becomes the new normal. My guess is that 10yr treasuries will stay within the range they've been in the past ten years. Which is significantly lower then where I thought we would be if you had asked me at some other point in the past ten years... so I've been wrong before, and it won't surprise me if I'm wrong going forward.
If inflation picks up, the markets will react, and so will the Fed, but that's hardly the current situation.
I've been pretty much putting my money in equities and "calling it good" for a long time, even while bonds had significantly more appealing yields :wink:
Series I U.S. Savings Bonds continue to offer a safe and stable place for emergency savings, with inflation protection, and other beneficial features.
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Re: Rising inflation with low or no yield in fixed income

Post by Northern Flicker »

Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
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Re: Rising inflation with low or no yield in fixed income

Post by JoMoney »

Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
There is a penalty / lost interest if not held for 5 years, but Series I Savings Bonds can be redeemed anytime after the 12 month holding period without any principal lost... not sure if "liquidity" is even the right term to use, as these aren't marketable securities, they're redeemed directly by the U.S. Treasury.
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Re: Rising inflation with low or no yield in fixed income

Post by Ramjet »

If inflation increase but the Fed keeps rates as is, how does this affect long term corp and treasury bonds?
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Re: Rising inflation with low or no yield in fixed income

Post by jebmke »

Doc wrote: Wed Sep 02, 2020 11:52 am
willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
I agree. T-Bills (or very short notes) are scalable (isn't there a max on I-Bonds?). I'm using a short term treasury fund but I also have some short-term notes that I bought when yields were up near 3%; I'll probably roll those off and just use the fund.
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
Tax efficiency: Zero income = zero tax. Ditto ROTH.

"i-bonds are not fully liquid for the first 5 years after purchase." Ugh. I wasn't aware of that. (I gave up on TIPS in '08 when their price went down while the price of nominals went up.)
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Re: Rising inflation with low or no yield in fixed income

Post by Northern Flicker »

JoMoney wrote: Wed Sep 02, 2020 12:11 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
There is a penalty / lost interest if not held for 5 years, but Series I Savings Bonds can be redeemed anytime after the 12 month holding period without any principal lost... not sure if "liquidity" is even the right term to use, as these aren't marketable securities, they're redeemed directly by the U.S. Treasury.
Not being able to realize full face value is a loss of some liquidity. There is a tendency on BH to liquidity as a binary, all or nothing thing. It's not. There are gradations.
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Re: Rising inflation with low or no yield in fixed income

Post by Northern Flicker »

Doc wrote: Wed Sep 02, 2020 12:14 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
Tax efficiency: Zero income = zero tax. Ditto ROTH.
If you think they will track inflation if the latter increase, rates have to track higher, generating taxable income.
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Re: Rising inflation with low or no yield in fixed income

Post by columbia »

Doc wrote: Wed Sep 02, 2020 11:52 am
willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
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Re: Rising inflation with low or no yield in fixed income

Post by JoMoney »

Northern Flicker wrote: Wed Sep 02, 2020 12:17 pm
JoMoney wrote: Wed Sep 02, 2020 12:11 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
There is a penalty / lost interest if not held for 5 years, but Series I Savings Bonds can be redeemed anytime after the 12 month holding period without any principal lost... not sure if "liquidity" is even the right term to use, as these aren't marketable securities, they're redeemed directly by the U.S. Treasury.
Not being able to realize full face value is a loss of some liquidity. There is a tendency on BH to liquidity as a binary, all or nothing thing. It's not. There are gradations.
That hasn't been my perception of it, most seem to use liquidity as a sort of scale of "gradations" on how easily and how much of a security can be bought/sold with little impact to the market price... which is why it's a poor term to be used for a non-marketable security, where the "liquidity" is binary, either the U.S. Government/Treasury will make good on their promise to redeem it or they won't (which would be in default of the terms of the savings bond).
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Re: Rising inflation with low or no yield in fixed income

Post by alex_686 »

I am semi-relaxed about this issue. There are 2 legs to this issue.

First, I don't see increasing inflation as a issue. I actually hope we have a little more inflation. Deflation is horrible.

Second, if inflation increases than yield should also increase. What we want to think about is the long term real yield. i.e. nominal yield - inflation. I expect this to be negative for a long time. There have been time periods when it has been negative for a long time.

For actionable items, I am reducing my long term market expectations. So more savings and lowering of goals. I am confident of this. I have been moving to a shorter duration and reducing my Treasury exposure. Still thinking this one through.
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Re: Rising inflation with low or no yield in fixed income

Post by SantaClaraSurfer »

Us:

-Typical Bond Index Funds in Tax-advantaged, normal AA
-EE Bond quarterly purchase = 'do it yourself annuity' beginning in 20 yrs. coinciding with RMDs.
-LT CA Muni Bond Index Fund (VCITX) / I Bonds at around 75/25 in Taxable.

Not really 'worried' about yield.
Accept that there is an inflation risk for the EE and the LT CA Munis, but I Bonds hedge the Munis, and we can expect that EE Bond fixed rates would increase with inflation, too.

Bottom line: This strategy would have paid off quite nicely 20 years ago and still provided stability in the dips. (But going 100% stocks would have paid MORE, right?) More importantly, it's not just the yield but it's also where the strategy gets you. That's top of my mind when it comes to fixed income. Those EE Bonds look like a big question mark now, but in twenty years, with a further 20 year horizon of maturing EE Bonds every quarter, they will look quite different.

We stay focused on growing our income, maintaining a high savings rate and taking a balanced approach to our AA.
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

Robot Monster wrote: Wed Sep 02, 2020 11:24 am I think instead of trying to figure out how things will play out, create a portfolio that is resilient to the various possibilities.

To answer your question about how much inflation does the Fed need to see before raising rates, I can only speculate. I would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.) Would they raise rates if inflation hits 3%, and unemployment was still high? I don't know. Have a portfolio that does okay if the Fed doesn't raise rates, is all.
The Fed has pretty much said, though without the specific numerical example, that they would not tighten policy if inflation gets to 3% and unemployment remains high. The new explicit statement as of recent meeting was that approx 2% inflation* target should be the average of inflation over time, not an upper limit. CPI increase has been running around 1% pa since the start of the COVID crisis. Say it goes on like that till Mar 2021 with unemployment still elevated, but Fed can stimulate 3% inflation in Mar 21>Mar 22, unemployment still elevated all along. They've pretty much said they would not raise rates in that case*, or I believe this is market consensus of current Fed attitude.

The bigger question is probably whether Fed and other rich country central banks are able to create 3% pa inflation with the measures they are willing to take. Although, just because inflation has lagged their targets and efforts in recent times doesn't mean that situation can never reverse.

*in terms of PCI deflator, in recent years a 2% rate on PCI deflator was already something like 2.3% on CPI-U., 1% then 3%, avg of 2% since crisis start on CPI-U would still be under 'avg of 2%' target for PCI deflator if recent relationship holds.
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Re: Rising inflation with low or no yield in fixed income

Post by Robot Monster »

JackoC wrote: Wed Sep 02, 2020 12:49 pm
Robot Monster wrote: Wed Sep 02, 2020 11:24 am I think instead of trying to figure out how things will play out, create a portfolio that is resilient to the various possibilities.

To answer your question about how much inflation does the Fed need to see before raising rates, I can only speculate. I would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.) Would they raise rates if inflation hits 3%, and unemployment was still high? I don't know. Have a portfolio that does okay if the Fed doesn't raise rates, is all.
The Fed has pretty much said, though without the specific numerical example, that they would not tighten policy if inflation gets to 3% and unemployment remains high. The new explicit statement as of recent meeting was that approx 2% inflation* target should be the average of inflation over time, not an upper limit. CPI increase has been running around 1% pa since the start of the COVID crisis. Say it goes on like that till Mar 2021 with unemployment still elevated, but Fed can stimulate 3% inflation in Mar 21>Mar 22, unemployment still elevated all along. They've pretty much said they would not raise rates in that case*, or I believe this is market consensus of current Fed attitude.

The bigger question is probably whether Fed and other rich country central banks are able to create 3% pa inflation with the measures they are willing to take. Although, just because inflation has lagged their targets and efforts in recent times doesn't mean that situation can never reverse.

*in terms of PCI deflator, in recent years a 2% rate on PCI deflator was already something like 2.3% on CPI-U., 1% then 3%, avg of 2% since crisis start on CPI-U would still be under 'avg of 2%' target for PCI deflator if recent relationship holds.
https://blogs.uoregon.edu/timduyfedwatc ... lly-solid/

I posted this article about the Fed decision. It's well worth the read, but this part was especially interesting:
The new policy might mean 2.25% is acceptable. Or 2.5%. Or it depends on the speed inflation is changing. One thing it doesn’t depend on is any quantification of “average.” I guess R doesn’t do averages? Cleveland Federal Reserve President Loretta Mester sums up the situation:

Recognizing when inflation has risen too much will depend on what else is happening with the economy, Cleveland Fed President Loretta Mester said. “This isn’t really tied to a formula,” Mester said in an interview with CNBC, nodding to Fed Chair Jerome Powell’s speech on Thursday in which he laid out the new strategy. “It’s really going to depend on what’s going on with the economy and how stable your inflation expectations are.”

The new strategy is really about increasing the Fed’s policy flexibility. It’s not “average inflation targeting.”
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Re: Rising inflation with low or no yield in fixed income

Post by corn18 »

I am keeping my 2.75% fixed rate 30 year mortgage for the time being. Seems like a good inflation hedge.
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Re: Rising inflation with low or no yield in fixed income

Post by atdharris »

Ramjet wrote: Wed Sep 02, 2020 12:12 pm If inflation increase but the Fed keeps rates as is, how does this affect long term corp and treasury bonds?
Inflation is not good for long-term treasuries. I still hold TLT at the moment, but I am wondering if it's time to pair it back. Short-term treasuries are yielding nothing though.
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Re: Rising inflation with low or no yield in fixed income

Post by willthrill81 »

Doc wrote: Wed Sep 02, 2020 11:52 am
willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

Robot Monster wrote: Wed Sep 02, 2020 1:07 pm
JackoC wrote: Wed Sep 02, 2020 12:49 pm
Robot Monster wrote: Wed Sep 02, 2020 11:24 am I think instead of trying to figure out how things will play out, create a portfolio that is resilient to the various possibilities.

To answer your question about how much inflation does the Fed need to see before raising rates, I can only speculate. I would not expect them to raise rates if inflation hits 2.5%. (Not that I expect to see 2.5% inflation.) Would they raise rates if inflation hits 3%, and unemployment was still high? I don't know. Have a portfolio that does okay if the Fed doesn't raise rates, is all.
The Fed has pretty much said, though without the specific numerical example, that they would not tighten policy if inflation gets to 3% and unemployment remains high. The new explicit statement as of recent meeting was that approx 2% inflation* target should be the average of inflation over time, not an upper limit.
https://blogs.uoregon.edu/timduyfedwatc ... lly-solid/

I posted this article about the Fed decision. It's well worth the read, but this part was especially interesting:
The new policy might mean 2.25% is acceptable. Or 2.5%. Or it depends on the speed inflation is changing. One thing it doesn’t depend on is any quantification of “average.” I guess R doesn’t do averages? Cleveland Federal Reserve President Loretta Mester sums up the situation:

Recognizing when inflation has risen too much will depend on what else is happening with the economy, Cleveland Fed President Loretta Mester said. “This isn’t really tied to a formula,” Mester said in an interview with CNBC, nodding to Fed Chair Jerome Powell’s speech on Thursday in which he laid out the new strategy. “It’s really going to depend on what’s going on with the economy and how stable your inflation expectations are.”

The new strategy is really about increasing the Fed’s policy flexibility. It’s not “average inflation targeting.”
Fair enough, but the Fed always pushes back on simple characterization of their policies, and I think reasonable to say the market thinks it amounts to looking at something like an average, it was too low a long time so it can now be a little high, relative to 2%. Anyway I think bottom line is part of the greater flexibility Fed sought for itself in the new statement is that if inflation *does* go to 3% they want to be less boxed in by market expectation to raise rates (as much as they also deny that ever happens, but it does I believe) than previously.
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Re: Rising inflation with low or no yield in fixed income

Post by Kevin K »

What about Jonathan Clements' choice to do a Short Term Treasury/Short Term TIPS "barbell" for most or all of one's bond allocation (this post is from mid-July):

"I’ve taken my already conservative bond portfolio and made it more so. In June, I swapped my intermediate-term inflation-indexed bond fund for a short-term inflation-indexed bond fund, and I sold my short-term corporate fund and replaced it with a short-term government fund. In other words, all my bond money is now in government bonds, and the duration is so short that it’s almost like holding cash investments.

All this reflects my evolving view of bonds. They’re no longer a good source of income. How could they be with yields so low? Instead, their sole role is to provide portfolio protection, acting as both a shock absorber and a place from which to draw spending money when stocks are struggling. My goal is to have at least enough in my two short-term government bond funds to cover my next five years of portfolio withdrawals."
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

Northern Flicker wrote: Wed Sep 02, 2020 12:20 pm
Doc wrote: Wed Sep 02, 2020 12:14 pm
Northern Flicker wrote: Wed Sep 02, 2020 12:07 pm Rolling t-bills are less tax-efficient than i-bonds because you realize the income as it is earned.

i-bonds are not fully liquid for the first 5 years after purchase.
Tax efficiency: Zero income = zero tax. Ditto ROTH.
If you think they will track inflation if the latter increase, rates have to track higher, generating taxable income.
They track inflation because of their short duration. For example if you have a 12 month rolling return T-Bill ladder you have a duration of ~6 month so you are tracking inflation with a 6 month lag time.

I like generating income taxable or not. :D
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Re: Rising inflation with low or no yield in fixed income

Post by Hector »

I think people will take more risk by adding more stock or adding lower quality bonds by chasing the yield.
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Re: Rising inflation with low or no yield in fixed income

Post by Kevin K »

Hector wrote: Wed Sep 02, 2020 3:00 pm I think people will take more risk by adding more stock or adding lower quality bonds by chasing the yield.
See this thread from today on what Bridgewater and other hedge funds are doing:

viewtopic.php?f=10&t=324518

Bridgewater is loading up on short TIPS and gold, while according to a link within the article featured in the first post Jeremy Grantham of GMO is adding junk and EM bonds. All way too exotic for my tastes but I can certainly see moving a decent chunk of one's Treasuries into short TIPs and in general keeping durations on the short side.
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.

2) Paying more for how long? I can turn over T-Bills with a lot less agro than redoing a high-yield savings account that may come with restrictions. I don't expect to be in the T-Bill position for very long hopefully. And 1/5 of my position automatically becomes cash every 8 weeks and if I need cash sooner I can get it in less than 8 minutes.
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Re: Rising inflation with low or no yield in fixed income

Post by Hector »

Kevin K wrote: Wed Sep 02, 2020 3:08 pm
Hector wrote: Wed Sep 02, 2020 3:00 pm I think people will take more risk by adding more stock or adding lower quality bonds by chasing the yield.
See this thread from today on what Bridgewater and other hedge funds are doing:

viewtopic.php?f=10&t=324518

Bridgewater is loading up on short TIPS and gold, while according to a link within the article featured in the first post Jeremy Grantham of GMO is adding junk and EM bonds. All way too exotic for my tastes but I can certainly see moving a decent chunk of one's Treasuries into short TIPs and in general keeping durations on the short side.
Short terms TIPS are yielding around -1.5%. 5 Year Breakeven Inflation Rate is 1.65. Are you expecting a lot over 1.65% inflation in the short term?
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Re: Rising inflation with low or no yield in fixed income

Post by 000 »

willthrill81 wrote: Wed Sep 02, 2020 11:35 am I don't know why everyone is so concerned about high inflation right now. The money supply has increased substantially over the last 10+ years, but the velocity of money has consistently fallen, and, consequently, inflation has been very low. I see no reason why that trend could not continue.
Hmmmm, there seems to have been a lot of inflation in health care, housing, and higher education. And asset inflation.
JackoC
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

Doc wrote: Wed Sep 02, 2020 3:12 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.

2) Paying more for how long? I can turn over T-Bills with a lot less agro than redoing a high-yield savings account that may come with restrictions. I don't expect to be in the T-Bill position for very long hopefully. And 1/5 of my position automatically becomes cash every 8 weeks and if I need cash sooner I can get it in less than 8 minutes.
1) How is it any easier to withdraw money from a brokerage account where you sold t-bills than make a transfer from a savings account? I can't see that being a practical distinction in favor of bills for many people or situations. My *checking* account pays much more than bills.

2) This would be a reasonable argument where best bank account rates barely beat T-bill rates (as was true prior to COVID crisis). Now dozens of banks have savings rates several times t-bills. 11 mo no penalty CD's (just as easy to withdraw from as savings account) yield up to 0.75%, for 11 months you're going to beat bills handily almost for sure, if not withdraw and put in bills. :happy

A person has to have a *real* aversion of any mouse clicking and account tracking, or many times the $250k FDIC limit in cash, or very small scale (where the rate you get doesn't really matter) to justify bills over bank accounts now IMO.
Last edited by JackoC on Wed Sep 02, 2020 3:35 pm, edited 1 time in total.
000
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Re: Rising inflation with low or no yield in fixed income

Post by 000 »

Doc wrote: Wed Sep 02, 2020 3:12 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.
Clearly you weren't paying attention in March. The T-bill market became goopy for one or two days. Bank accounts had no such issue.

I can't see losing 0.60%+ in interest for a worse product.
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

Doc wrote: Wed Sep 02, 2020 11:52 am
willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
I wish T-Bills matched inflation. I don't see them matching inflation now. Inflation is around 1.6%.
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

Kevin K wrote: Wed Sep 02, 2020 2:41 pm What about Jonathan Clements' choice to do a Short Term Treasury/Short Term TIPS "barbell" for most or all of one's bond allocation (this post is from mid-July):

"I’ve taken my already conservative bond portfolio and made it more so. In June, I swapped my intermediate-term inflation-indexed bond fund for a short-term inflation-indexed bond fund, and I sold my short-term corporate fund and replaced it with a short-term government fund. In other words, all my bond money is now in government bonds, and the duration is so short that it’s almost like holding cash investments.

All this reflects my evolving view of bonds. They’re no longer a good source of income. How could they be with yields so low? Instead, their sole role is to provide portfolio protection, acting as both a shock absorber and a place from which to draw spending money when stocks are struggling. My goal is to have at least enough in my two short-term government bond funds to cover my next five years of portfolio withdrawals."
Can one use ST TIPS in a taxable account?
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

JackoC wrote: Wed Sep 02, 2020 3:30 pm
Doc wrote: Wed Sep 02, 2020 3:12 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.

2) Paying more for how long? I can turn over T-Bills with a lot less agro than redoing a high-yield savings account that may come with restrictions. I don't expect to be in the T-Bill position for very long hopefully. And 1/5 of my position automatically becomes cash every 8 weeks and if I need cash sooner I can get it in less than 8 minutes.
1) How is it any easier to withdraw money from a brokerage account where you sold t-bills than make a transfer from a savings account? I can't see that being a practical distinction in favor of bills for many people or situations. My *checking* account pays much more than bills.

2) This would be a reasonable argument where best bank account rates barely beat T-bill rates (as was true prior to COVID crisis). Now dozens of banks have savings rates several times t-bills. 11 mo no penalty CD's (just as easy to withdraw from as savings account) yield up to 0.75%, for 11 months you're going to beat bills handily almost for sure, if not withdraw and put in bills. :happy

A person has to have a *real* aversion of any mouse clicking and account tracking, or many times the $250k FDIC limit in cash, or very small scale (where the rate you get doesn't really matter) to justify bills over bank accounts now IMO.
There is a real practical distinction. Many banks and CUs do not allow you to transfer more than 5K or 10K a day. Some have lower limits.
JackoC
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

palanzo wrote: Wed Sep 02, 2020 3:35 pm
Doc wrote: Wed Sep 02, 2020 11:52 am
willthrill81 wrote: Wed Sep 02, 2020 11:42 am At the same time, I think that I bonds are a slam dunk right now. There's virtually no downside risk, and you're guaranteed to match inflation (though you're subject to taxflation).
T-Bills. :idea:

NO downside risk. They will match inflation unless it jumps significantly over a few months. And you are not subject to taxflation.

Also and perhaps more importantly, they won't lose hardly anything if real rates rise because they will mature at par in a few months.
I wish T-Bills matched inflation. I don't see them matching inflation now. Inflation is around 1.6%.
I also found that a strange statement as put. There is some element of truth though in that say the Fed gets inflation to 3%, then it's 4% and they need to put on the brakes: positive real Fed Funds rate. T-bills (though also bank saving rates) will follow suit. The person locked into today's apparent expectation of 'negative real rates forever' will still get their -1.4% real pre tax on 5 yr TIPS.

But obviously T-bills don't keep up with inflation when the similar FF rate is deliberately set below inflation to stimulate the economy. Not even good savings accounts rates do that now, though much more attractive than T-bills.
SantaClaraSurfer
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Re: Rising inflation with low or no yield in fixed income

Post by SantaClaraSurfer »

willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
Not responding on the T-bills question. But...

Fixed Income is like building up a freight train car by car. It's a slow, additive process.

Goal is to build wealth and get that wealth from point in Time A to point in Time B.

What do I want my fixed income to look like in x years? That is the core question.

That's harder to do if you are moving in and out of strategies and looking at yield more than considering timeframe and longterm goals.
000
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Re: Rising inflation with low or no yield in fixed income

Post by 000 »

SantaClaraSurfer wrote: Wed Sep 02, 2020 3:47 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
Not responding on the T-bills question. But...

Fixed Income is like building up a freight train car by car. It's a slow, additive process.

Goal is to build wealth and get that wealth from point in Time A to point in Time B.

What do I want my fixed income to look like in x years? That is the core question.

That's harder to do if you are moving in and out of strategies and looking at yield more than considering timeframe and longterm goals.
Not sure how <0% real yield bonds are going to "build wealth".

Perhaps you are succumbing to recency bias?
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Doc
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

palanzo wrote: Wed Sep 02, 2020 3:35 pm I wish T-Bills matched inflation. I don't see them matching inflation now. Inflation is around 1.6%.
I was thinking inflation increases not trying to "beat" the current inflation rate. The thread is about "Rising inflation ..."

I don't expect my cash like assets to beat current inflation. And I don't expect my fixed income assets to beat inflation increases either.

Boglehead mantra some 15 years ago: "TIPS are just like nominal Treasuries except for the inflation protection." NOT
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
JackoC
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Re: Rising inflation with low or no yield in fixed income

Post by JackoC »

palanzo wrote: Wed Sep 02, 2020 3:40 pm
JackoC wrote: Wed Sep 02, 2020 3:30 pm
Doc wrote: Wed Sep 02, 2020 3:12 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.

2) Paying more for how long? I can turn over T-Bills with a lot less agro than redoing a high-yield savings account that may come with restrictions. I don't expect to be in the T-Bill position for very long hopefully. And 1/5 of my position automatically becomes cash every 8 weeks and if I need cash sooner I can get it in less than 8 minutes.
1) How is it any easier to withdraw money from a brokerage account where you sold t-bills than make a transfer from a savings account? I can't see that being a practical distinction in favor of bills for many people or situations. My *checking* account pays much more than bills.

2) This would be a reasonable argument where best bank account rates barely beat T-bill rates (as was true prior to COVID crisis). Now dozens of banks have savings rates several times t-bills. 11 mo no penalty CD's (just as easy to withdraw from as savings account) yield up to 0.75%, for 11 months you're going to beat bills handily almost for sure, if not withdraw and put in bills. :happy

A person has to have a *real* aversion of any mouse clicking and account tracking, or many times the $250k FDIC limit in cash, or very small scale (where the rate you get doesn't really matter) to justify bills over bank accounts now IMO.
There is a real practical distinction. Many banks and CUs do not allow you to transfer more than 5K or 10K a day. Some have lower limits.
That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k). Also where there are low limits it's often on ACH 'push' and doesn't apply to 'pull' from another bank. Anyway I think this is in the general vein of arguments against bank accounts which hold some water when the very highest bank savings account rates barely beat T-bills, which is sometimes true. Now dozens of banks have rates way above bills. You'd just avoid ones which had restrictions like that.

I have no 'philosophy' in favor of one or other. Before the COVID crisis I had short term reserves concentrated in VUSXX (albeit giving up the expense ratio on that ~80% t-bill fund rather than individual bills): it paid more than all but a handful of savings accounts on after tax basis for me. I'd have had to chase rates and keep opening accounts to beat it. Now it pays nearly nothing and my savings accounts avg ~.80%, 1.25% in my checking account actually, and 1.50% in 11 mo no penalty CD (granted NPCD rates are lower now, but bills rates now are hardly different than when I opened it) comprising reserves, nothing in VUSXX or individual bills. That's in no brainer territory IMHO.
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

Doc wrote: Wed Sep 02, 2020 3:52 pm
palanzo wrote: Wed Sep 02, 2020 3:35 pm I wish T-Bills matched inflation. I don't see them matching inflation now. Inflation is around 1.6%.
I was thinking inflation increases not trying to "beat" the current inflation rate. The thread is about "Rising inflation ..."

I don't expect my cash like assets to beat current inflation. And I don't expect my fixed income assets to beat inflation increases either.

Boglehead mantra some 15 years ago: "TIPS are just like nominal Treasuries except for the inflation protection." NOT
OK. So if inflation goes to 2.1% over the next 6 months do you expect T-Bills to yield 0.5%. I wish they did. I'm trying to understand the current situation and the often conflicting advice.
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

JackoC wrote: Wed Sep 02, 2020 3:57 pm
palanzo wrote: Wed Sep 02, 2020 3:40 pm
JackoC wrote: Wed Sep 02, 2020 3:30 pm
Doc wrote: Wed Sep 02, 2020 3:12 pm
willthrill81 wrote: Wed Sep 02, 2020 1:48 pm Why would you buy T-bills yielding .13% when high-yield savings accounts are paying much more?
1) Liquidity.

2) Paying more for how long? I can turn over T-Bills with a lot less agro than redoing a high-yield savings account that may come with restrictions. I don't expect to be in the T-Bill position for very long hopefully. And 1/5 of my position automatically becomes cash every 8 weeks and if I need cash sooner I can get it in less than 8 minutes.
1) How is it any easier to withdraw money from a brokerage account where you sold t-bills than make a transfer from a savings account? I can't see that being a practical distinction in favor of bills for many people or situations. My *checking* account pays much more than bills.

2) This would be a reasonable argument where best bank account rates barely beat T-bill rates (as was true prior to COVID crisis). Now dozens of banks have savings rates several times t-bills. 11 mo no penalty CD's (just as easy to withdraw from as savings account) yield up to 0.75%, for 11 months you're going to beat bills handily almost for sure, if not withdraw and put in bills. :happy

A person has to have a *real* aversion of any mouse clicking and account tracking, or many times the $250k FDIC limit in cash, or very small scale (where the rate you get doesn't really matter) to justify bills over bank accounts now IMO.
There is a real practical distinction. Many banks and CUs do not allow you to transfer more than 5K or 10K a day. Some have lower limits.
That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k). Also where there are low limits it's often on ACH 'push' and doesn't apply to 'pull' from another bank. Anyway I think this is in the general vein of arguments against bank accounts which hold some water when the very highest bank savings account rates barely beat T-bills, which is sometimes true. Now dozens of banks have rates way above bills. You'd just avoid ones which had restrictions like that.

I have no 'philosophy' in favor of one or other. Before the COVID crisis I had short term reserves concentrated in VUSXX (albeit giving up the expense ratio on that ~80% t-bill fund rather than individual bills): it paid more than all but a handful of savings accounts on after tax basis for me. I'd have had to chase rates and keep opening accounts to beat it. Now it pays nearly nothing and my savings accounts avg ~.80%, 1.25% in my checking account actually, and 1.50% in 11 mo no penalty CD (granted NPCD rates are lower now, but bills rates now are hardly different than when I opened it) comprising reserves, nothing in VUSXX or individual bills. That's in no brainer territory IMHO.
I also used VUSXX. The problem with "push" is that it is then impossible to move a sizable amount to another bank if the original banks drops its rates as is happening now. I'm sure the banks love when you "pull" and then you are stuck. If you know of HYSA that have high "push" amounts please let me know.
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Re: Rising inflation with low or no yield in fixed income

Post by Wrench »

ChinchillaWhiplash wrote: Wed Sep 02, 2020 10:58 am How will this play out? Will be no place to park $$$s if rising inflation last with no safe instruments to keep up. How much increase in inflation does the Fed want before increasing interest rates? Will people just put their money into equities and call it good? Should help keep the markets pumped up for a while. Will bond funds drop a bunch if there is a rush to the exits? How do you see this playing out in the next 5 to 10 yrs. ?
Inflation won't be a problem... until it is. You can only print money for so long before the rubes figure out it's a shell game. It may take a while, but inflation will be back and the Fed won't be able to stop it easily. (IMHO economists in general and the Fed economists in particular believe they understand how to control the economy far better than they actually do). My response? Like willthrill - iBonds for one. Between my DW, me, my company and tax refund, $35K per year for a few more years is my buffer. That plus the TIPS ladder that I built prior to this year should provide a safe margin for me.
SantaClaraSurfer
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Re: Rising inflation with low or no yield in fixed income

Post by SantaClaraSurfer »

000 wrote: Wed Sep 02, 2020 3:52 pm Not sure how <0% real yield bonds are going to "build wealth".
Perhaps you are succumbing to recency bias?
When we purchase EE Bonds + I Bonds + CA LT Munis for our after tax fixed income AA, we are not focusing on either the short term environment or looking at past results.

We are focusing on where we want to be with our overall portfolio in 20 years.
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

palanzo wrote: Wed Sep 02, 2020 4:14 pm OK. So if inflation goes to 2.1% over the next 6 months do you expect T-Bills to yield 0.5%. I wish they did. I'm trying to understand the current situation and the often conflicting advice.
Quickcalc: that means an increase in inflation rate of 1.2%. I expect that new T-Bill rates would also increase by ~1.2% in six months.

I do not expect existing T-Bills to keep up with inflation but newly issue T-Bills should have most if not all of any inflation increase reflected in their return.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
palanzo
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Re: Rising inflation with low or no yield in fixed income

Post by palanzo »

Doc wrote: Wed Sep 02, 2020 4:26 pm
palanzo wrote: Wed Sep 02, 2020 4:14 pm OK. So if inflation goes to 2.1% over the next 6 months do you expect T-Bills to yield 0.5%. I wish they did. I'm trying to understand the current situation and the often conflicting advice.
Quickcalc: that means an increase in inflation rate of 1.2%. I expect that new T-Bill rates would also increase by ~1.2% in six months.

I do not expect existing T-Bills to keep up with inflation but newly issue T-Bills should have most if not all of any inflation increase reflected in their return.
Well current inflation is 1.6% so that would be an increase in 0.5%. Yes, agreed that only newly issued T-Bills would have that rate. I'm skeptical this will happen. Not sure why. Dynamics of the Fed and the markets.
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Doc
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Re: Rising inflation with low or no yield in fixed income

Post by Doc »

RE: Transfer limits.
JackoC wrote: Wed Sep 02, 2020 3:57 pm That's not typical. I have a pretty large number of accounts and one (a business MM account for my LLC) has restrictions anywhere near that low on ACH ($20k). Also where there are low limits it's often on ACH 'push' and doesn't apply to 'pull' from another bank.
During market hours I can have the 6 digit proceeds from a T-Bill sale in my bank in less than an hour. Maybe just a few minutes.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
alluringreality
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Re: Rising inflation with low or no yield in fixed income

Post by alluringreality »

palanzo wrote: Wed Sep 02, 2020 4:14 pm OK. So if inflation goes to 2.1% over the next 6 months do you expect T-Bills to yield 0.5%. I wish they did. I'm trying to understand the current situation and the often conflicting advice.
The period after 2008 had yearly inflation numbers in that range. T-bills did exceed 0.5% at times, but scanning through the numbers it looks like the average was likely well below 0.5% before the rate increases beginning at the end of 2015. From what I remember when I looked at I bonds going back to the last crash, I think it's safe to say that I bond returns were higher than T-bills across 2009-2015. Essentially T-bills and I bonds probably tend to serve different investors and interests. For example if I had to sell EE bonds after 1 year and before 20 years, I'd consider the opportunity cost reasonable in relation to my expectations for T-bills. Basically I have a limited need for things like liquidity and large purchases, so T-bills just don't fit my interests in comparison to I bonds.
https://www.treasurydirect.gov/indiv/re ... s.htm#past
https://www.treasury.gov/resource-cente ... data=yield
https://tipswatch.com/tracking-inflation-and-i-bonds/
Last edited by alluringreality on Wed Sep 02, 2020 4:42 pm, edited 1 time in total.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
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