Farewell Yield: Jonathan Clements' short-term bond barbell

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Kevin K
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Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Kevin K »

[Thread restored from The “Abandon Bonds” strategy, see below. --admin LadyGeek]

I'm curious to hear what the many knowledgeable posters here think about Jonathan Clements' decision to go all-short and all-Treasury with his fixed income:

"I want a pool of cash I can count on. As I buy more immediate annuities and once I claim Social Security, I’ll need less cash each year from my portfolio. But for the money I do need to withdraw, I want to be confident it’ll be there.

To that end, 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.

The quote is from the second article linked to below, which is a follow-up to the first one which outlines his updated approach to bonds and bond alternatives.

https://humbledollar.com/2020/06/farewell-yield/

https://humbledollar.com/2020/07/my-four-goals/

Perhaps this is just a 2020, pandemic-influenced version of the old "take all my risk on the equity side" view but I certainly find the simplicity of his approach appealing.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by nisiprius »

My intermediate-term bond funds (VBTLX, VAIPX) are currently showing SEC yields of +1.14% and -1.15%, respectively...

Admittedly, the obvious outlook is that my intermediate-term bond funds are going to be showing some volatility without much return to show for it. But it's not scary risk, just possibly unrewarded risk, and I can tolerate it.

I'm not making any big changes, and the reason is that, as always, I am thinking at least intermediate term. Vanguard says, for both, that they are in risk category 2 and "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." So if I'm not thinking of holding them for 4-10 years I shouldn't be in them in the first place. But if I am, I should be looking ahead for four to ten years.

Going from intermediate- to short-term in bonds is a gentle equivalent of going from stocks to cash, and poses the same question: great, but if I do that, how do I know when to get back in?

Over the next 4 to 10 years I think there's a reasonable chance that interest rates are not going to stay at zero. If they do rise, after the initial depression due to interest rate moves, they will start to earn more. Very likely, it will be a sneaky kind of thing, and you will miss out on some gains by the time it is obvious that you should be back in intermediate-term bonds.

I am not convinced that staying the course is a big mistake.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by jimkinny »

The difference in absolute dollars that I will get is pretty much insignificant between a short term and intermediate term bond.

I don't see the difference in yield between the two as being enough to take the term risk of intermediate term bond funds anymore.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by BuyAndHoldOn »

Might be a thread hijack here, but I moved my "safe" bonds (Total Bond, Investment Grade Munis) into "riskier" bonds due to ~dislocations and better pricing during the COVID panic months. (The safe bonds also appreciated a lot, once the Fed began its liquidity support programs).

I [now] have Emerging Market Sovereign bonds (LEMB, FNMIX) in my health savings account (so no tax impact), and the high-yield munis (HYD) in my taxable.

Only reason I did that is I didn't feel comfortable being 100% in equities. These bonds are not reverse-correlated to stocks, but they are at least an alternative.

Or so I reasoned. I am mostly (80%+) in equities anyway, but having some money outside of equity markets is comforting for me.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Kevin K »

The merging of the thread I started with this one not only caused some posts to be deleted but also replaced an accurate characterization of what Jonathan Clements is doing (going to all short-term Treasuries and TIPS in his bond allocation) with the misleading current title of this thread.

Clements' actual approach:

"As I buy more immediate annuities and once I claim Social Security, I’ll need less cash each year from my portfolio. But for the money I do need to withdraw, I want to be confident it’ll be there.

To that end, 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."

https://humbledollar.com/2020/07/my-four-goals/

Note that the only topic under discussion here is Treasury bonds. TBM doesn't offer protection in flights to safety, is intermediate duration and in general has no advantages over ITT's as far as I can tell. Clements prefers to take all his risk on the equity side. And remember both his nominal bonds and his TIPS are short duration - not intermediate.

If you look at current Treasury yields the only question I would ask is why he doesn't go to all T-bills given what's on offer:

Date 1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
09/01/20 0.09 0.11 0.12 0.13 0.12 0.13 0.14 0.26 0.46 0.68 1.20 1.43
09/02/20 0.10 0.10 0.12 0.12 0.13 0.14 0.16 0.26 0.45 0.66 1.16 1.38
09/03/20 0.10 0.11 0.11 0.12 0.12 0.13 0.15 0.24 0.43 0.63 1.13 1.34
09/04/20 0.09 0.10 0.11 0.12 0.13 0.14 0.18 0.30 0.50 0.72 1.25 1.46
Last edited by Kevin K on Sun Sep 06, 2020 6:48 pm, edited 1 time in total.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Kevin M »

Kevin K wrote: Sun Sep 06, 2020 11:08 am I'm curious to hear what the many knowledgeable posters here think about Jonathan Clements' decision to go all-short and all-Treasury with his fixed income:

"<snip>
... 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.
Yield on 1-year Treasury is 0.13%. A number of credit unions are offering about 1% on a 1-year CD, and even Ally Bank currently offers 0.80%. Other than convenience, I don't see much point in accepting 0.13% when I can easily earn 0.8% or more on a federally-insured CD.

The state income tax for Treasuries doesn't help much--for me, at 8% state (and 27% federal) it bumps the 1-year taxable-equivalent yield to 0.15%.

For a more cash-like investment with less reinvestment risk than a savings account, Ally currently offers 0.75% on an 11-month no-penalty CD.

FDIC/NCUA deposit insurance limits are a concern, more so in IRAs where there is no skirting the $250K limit, but it's easy to get up to $1.25M insured in a taxable account at one bank by assigning up to five beneficiaries in a payable on death (POD) account.

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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by LadyGeek »

Kevin K wrote: Sun Sep 06, 2020 5:42 pm The merging of the thread I started with this one not only caused some posts to be deleted but also replaced an accurate characterization of what Jonathan Clements is doing (going to all short-term Treasuries and TIPS in his bond allocation) with the misleading current title of this thread.
I apologize for the confusion and have moved the posts back into a stand-alone thread.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by 000 »

Short Term TIPS is a joke unless one's duration is also short.

To minimize inflation and interest rate risk, IMO TIPS should match expected duration.

Reinvestment of maturing Short Term TIPS during an inflationary event may not be pretty.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Robot Monster »

Kevin K wrote: Sun Sep 06, 2020 5:42 pm "...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."

If you look at current Treasury yields the only question I would ask is why he doesn't go to all T-bills given what's on offer.
The only problem with T-bills, and cash, is if the Fed changes its mind about negative interest rates, and follows other countries like Japan, Germany, and Switzerland into the abyss.

Japan 6 Month Government Bond: -0.131%
Germany 6 Month Government Bond: -0.591%
Switzerland 6 Month Bond: -0.800%
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by willthrill81 »

Kevin K wrote: Sun Sep 06, 2020 11:08 am 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.
I agree with Jonathan on those points, but I disagree that short-term Treasuries are the answer. CDs are paying much more and are FDIC insured to boot.
Kevin M wrote: Sun Sep 06, 2020 6:16 pm Yield on 1-year Treasury is 0.13%. A number of credit unions are offering about 1% on a 1-year CD, and even Ally Bank currently offers 0.80%. Other than convenience, I don't see much point in accepting 0.13% when I can easily earn 0.8% or more on a federally-insured CD.
Agreed.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by typical.investor »

Kevin K wrote: Sun Sep 06, 2020 5:42 pm 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."
I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by palanzo »

typical.investor wrote: Sun Sep 06, 2020 8:38 pm
Kevin K wrote: Sun Sep 06, 2020 5:42 pm 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."
I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
What do you think it the answer?
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by typical.investor »

palanzo wrote: Sun Sep 06, 2020 8:42 pm What do you think it the answer?
You mean leverage. I put "answer" in quotes because I don't think it's clear how it all works out.

So what I mean to suggest is that with falling costs of leverage and safe assets returning little, that people may see the widening between costs and returns (especially as more shift into equities boosting returns) as tempting and "an answer".

Calpers certainly has but also increased exposure to long dated treasuries to offset equity risk.

I'm not convince short term treasuries at negative real yields are what I'd like to do to offset my equity risk especially when I think big swings may be a new normal.

I guess for me five years of cash isn't enough to offset equity risk.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Always passive »

palanzo wrote: Sun Sep 06, 2020 8:42 pm
typical.investor wrote: Sun Sep 06, 2020 8:38 pm
Kevin K wrote: Sun Sep 06, 2020 5:42 pm 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."
I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
What do you think it the answer?
I think that what Clements is doing is following the FED statements to the letter. The FED said that they plan to let inflation go hot and not allow interest rates to go up for a long time. So the following can easily happen: once the crisis subsides, GDP begins incrasing and with that inflation. So you may have a situation where interest rates stay low (FED intervention) and inflation is up. The only way to protect for that is short term TIPS.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by jeffyscott »

willthrill81 wrote: Sun Sep 06, 2020 7:57 pm
Kevin K wrote: Sun Sep 06, 2020 11:08 am 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.
I agree with Jonathan on those points, but I disagree that short-term Treasuries are the answer. CDs are paying much more and are FDIC insured to boot.
Kevin M wrote: Sun Sep 06, 2020 6:16 pm Yield on 1-year Treasury is 0.13%. A number of credit unions are offering about 1% on a 1-year CD, and even Ally Bank currently offers 0.80%. Other than convenience, I don't see much point in accepting 0.13% when I can easily earn 0.8% or more on a federally-insured CD.
Agreed.
And, assuming the "short-term government fund" would include up to 5 year maturities, you may be able to get 5 year CDs at around 1.5% vs. 0.3% for treasuries.

I don't know if his reference to "government fund" might mean a fund that includes more than just treasuries and, if so, what that might do for yield (the reported SEC yield for Vanguard Short Term Federal is comparable to that for some of the better high yield savings accounts at 0.92% for Admiral, but I don't really trust that figure).
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by typical.investor »

Always passive wrote: Sun Sep 06, 2020 10:17 pm
palanzo wrote: Sun Sep 06, 2020 8:42 pm
typical.investor wrote: Sun Sep 06, 2020 8:38 pm
Kevin K wrote: Sun Sep 06, 2020 5:42 pm 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."
I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
What do you think it the answer?
I think that what Clements is doing is following the FED statements to the letter. The FED said that they plan to let inflation go hot and not allow interest rates to go up for a long time.
I believe they are targeting 2% instead of always trying to stay below it and aren't going to preemptively raise rates just because employment is low.
Always passive wrote: Sun Sep 06, 2020 10:17 pm So the following can easily happen: once the crisis subsides, GDP begins incrasing and with that inflation. So you may have a situation where interest rates stay low (FED intervention) and inflation is up. The only way to protect for that is short term TIPS.
If GDP is increasing, I assume stocks are too. Are you really going to be spending out of short term holdings and watch your equity allocation rise even more? And wouldn't having some duration going into a downturn have boosted your safe assets in the first place?

But yeah I agree this is really an anticipated-inflation strategy and not really a bonds-yield-little strategy. I think you are paying an insurance premium against inflation with short term TIPS and their sharply negative yields.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Always passive »

In my case I am fortunate that many years ago i built a ladder of annual TIPS that supply my retiree expenses for about 10 years, so I think that I can ride this thing with an intermediate term bond fund. Does anyone care to comment if the logic is right?
Morningstar seems to agree
https://www.morningstar.com/articles/99 ... rees-today
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Always passive »

000 wrote: Sun Sep 06, 2020 7:31 pm Short Term TIPS is a joke unless one's duration is also short.

To minimize inflation and interest rate risk, IMO TIPS should match expected duration.

Reinvestment of maturing Short Term TIPS during an inflationary event may not be pretty.
typical.investor wrote: Sun Sep 06, 2020 11:25 pm
Always passive wrote: Sun Sep 06, 2020 10:17 pm
palanzo wrote: Sun Sep 06, 2020 8:42 pm
typical.investor wrote: Sun Sep 06, 2020 8:38 pm
Kevin K wrote: Sun Sep 06, 2020 5:42 pm 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."
I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
What do you think it the answer?
I think that what Clements is doing is following the FED statements to the letter. The FED said that they plan to let inflation go hot and not allow interest rates to go up for a long time.
I believe they are targeting 2% instead of always trying to stay below it and aren't going to preemptively raise rates just because employment is low.
Always passive wrote: Sun Sep 06, 2020 10:17 pm So the following can easily happen: once the crisis subsides, GDP begins incrasing and with that inflation. So you may have a situation where interest rates stay low (FED intervention) and inflation is up. The only way to protect for that is short term TIPS.
If GDP is increasing, I assume stocks are too. Are you really going to be spending out of short term holdings and watch your equity allocation rise even more? And wouldn't having some duration going into a downturn have boosted your safe assets in the first place?

But yeah I agree this is really an anticipated-inflation strategy and not really a bonds-yield-little strategy. I think you are paying an insurance premium against inflation with short term TIPS and their sharply negative yields.
I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Always passive »

Here is the Vanguard report on short term TIPS
https://personal.vanguard.com/pdf/ISGCTIPS.pdf
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by columbia »

Always passive wrote: Mon Sep 07, 2020 6:53 am
000 wrote: Sun Sep 06, 2020 7:31 pm Short Term TIPS is a joke unless one's duration is also short.

To minimize inflation and interest rate risk, IMO TIPS should match expected duration.

Reinvestment of maturing Short Term TIPS during an inflationary event may not be pretty.
typical.investor wrote: Sun Sep 06, 2020 11:25 pm
Always passive wrote: Sun Sep 06, 2020 10:17 pm
palanzo wrote: Sun Sep 06, 2020 8:42 pm
typical.investor wrote: Sun Sep 06, 2020 8:38 pm

I don't particularly understand this view.

The author is age 57 and 75% equities. If portfolio protection and shock absorption is the goal, it would seem duration would be a good exposure to have while stocks are struggling.

In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.

In terms of inflation risk, short term might be desirable as well as inflation protected bonds. I don't see why short term tips would be advantageous at age 57.

The unconsidered perspective I think is volatility. With rates so stably low, and only equities as offering much in the way of returns - the (seeming but be careful) "answer" is obvious and we've seen it here on Bogleheads and in the news in Calpers new plan (and other retirement plans) and recently in the tech crash with Softbank. Leverage equities!!!

Which to me suggests more volatility that duration exposure is better at counteracting than cash.

Beyond that, the author is invested in value and international (which has more value companies) which itself reduces portfolio duration.

And honestly, while US rates are not going negative anytime soon I think, if we see a downturn for five years without recovery (as Jonathan plans for), I have little doubt that rates will be dropped.

Image

Jonathan's plan seems to be designed to handle stagflation. I'm not sure it's best for low rates and more volatility (with leverage/de-leveraging cycles).
What do you think it the answer?
I think that what Clements is doing is following the FED statements to the letter. The FED said that they plan to let inflation go hot and not allow interest rates to go up for a long time.
I believe they are targeting 2% instead of always trying to stay below it and aren't going to preemptively raise rates just because employment is low.
Always passive wrote: Sun Sep 06, 2020 10:17 pm So the following can easily happen: once the crisis subsides, GDP begins incrasing and with that inflation. So you may have a situation where interest rates stay low (FED intervention) and inflation is up. The only way to protect for that is short term TIPS.
If GDP is increasing, I assume stocks are too. Are you really going to be spending out of short term holdings and watch your equity allocation rise even more? And wouldn't having some duration going into a downturn have boosted your safe assets in the first place?

But yeah I agree this is really an anticipated-inflation strategy and not really a bonds-yield-little strategy. I think you are paying an insurance premium against inflation with short term TIPS and their sharply negative yields.
I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
Vangiard actually switched from intermediate to short term TIPS for their 30/70 target fund? I think so.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by typical.investor »

Always passive wrote: Mon Sep 07, 2020 6:53 am
I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
I don't really agree that only Short term TIPS captures inflation.

If you trust Vanguard, then have a look at their work which suggests that in 3/4 of the scenarios they look at, that they suggest a larger allocation to long term tips than short, and even in the high growth, high scenario they include long term tips.

https://personal.vanguard.com/pdf/ISGGMMIN.pdf

If your spending is far off, it short term tips don't make much sense to me.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by typical.investor »

columbia wrote: Mon Sep 07, 2020 7:23 am
Always passive wrote: Mon Sep 07, 2020 6:53 am
000 wrote: Sun Sep 06, 2020 7:31 pm Short Term TIPS is a joke unless one's duration is also short.

To minimize inflation and interest rate risk, IMO TIPS should match expected duration.

Reinvestment of maturing Short Term TIPS during an inflationary event may not be pretty.
typical.investor wrote: Sun Sep 06, 2020 11:25 pm
Always passive wrote: Sun Sep 06, 2020 10:17 pm
palanzo wrote: Sun Sep 06, 2020 8:42 pm

What do you think it the answer?
I think that what Clements is doing is following the FED statements to the letter. The FED said that they plan to let inflation go hot and not allow interest rates to go up for a long time.
I believe they are targeting 2% instead of always trying to stay below it and aren't going to preemptively raise rates just because employment is low.
Always passive wrote: Sun Sep 06, 2020 10:17 pm So the following can easily happen: once the crisis subsides, GDP begins incrasing and with that inflation. So you may have a situation where interest rates stay low (FED intervention) and inflation is up. The only way to protect for that is short term TIPS.
If GDP is increasing, I assume stocks are too. Are you really going to be spending out of short term holdings and watch your equity allocation rise even more? And wouldn't having some duration going into a downturn have boosted your safe assets in the first place?

But yeah I agree this is really an anticipated-inflation strategy and not really a bonds-yield-little strategy. I think you are paying an insurance premium against inflation with short term TIPS and their sharply negative yields.
I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
Vangiard actually switched from intermediate to short term TIPS for their 30/70 target fund? I think so.
Their Target Date Retirement funds haven't. https://www.vanguard.com/pdf/s167.pdf

Sure, I get the point that short-term TIPS will best track inflation, but as I said at a cost ...
Vanguard research shows that shorter-term TIPS have historically displayed a higher correlation to realized inflation with less duration risk than longer-term TIPS. This can provide investors with a stronger inflation hedge and less duration risk—albeit at the cost of somewhat lower total expected returns (Davis et al., 2012). The primary purpose of TIPS in the near-dated funds is to provide inflation protection, not to boost returns.
Anyway, I don't see why one needs short term TIPS to cover spending in down markets which is what Clements said his holdings are for. Inflation isn't likely to be a problem then, and having some duration will be a boost against equity volatility.

I guess we could have a supply shock out of the blue that induces inflation while the economy is still cold, but how likely is that (inflation when aggregate demand is low).
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by columbia »

BH Wiki indicates the switch happened in 2013:
https://www.bogleheads.org/wiki/Vanguar ... ment_funds
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Elysium »

Kevin K wrote: Sun Sep 06, 2020 11:08 am To that end, 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.
Shorten your duration if you wish to earn less than inflation. Stay with Interm-Term or Long-Term if you wish to earn at least inflation matching returns. This is the lesson from other developed markets that are most comparable to U.S in the global economic/capital cycles. See for instance returns from Europe domiciled iShares Govt bond funds from three countries that can be closely compared to U.S

UK Gilts are the equivalent of Long Term US Treasury bonds - they have an average duration of 12 years and have 10 year returns of 5%
UK Gilts [long term govt]

Swiss Govt bonds with average duration of 10 years had average returns of 2.15% over the last 10 years where rates have stayed low (went negative on shorter end). Swiss Interm-Term Bond with effective duration of 5 years had returns of 0.57% in the same period.
Swiss 7-15 year bonds

German Govt bonds with average duration of 5 years had returns of 1.72%. Rates stayed low, even negative on lower end.
German Govt 5 year bonds

Lesson to be learned is that interest rate bets to shorten duration hasn't worked out for investors in other developed markets that can be closely compared to the U.S. Going short often means locking in lower returns for the next 5-10 years, anyone with a duration of more than 5 to 10 years should be in Interm-Term or Long-Term bonds.

Based on examples from overseas markets, it is reasonable to expect inflation matching or better returns for US Bonds of Interm/Long duration, with Short Term bonds earning less than inflation. If rising inflation is a concern then buy TIPS.
Last edited by Elysium on Mon Sep 07, 2020 8:10 am, edited 1 time in total.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by typical.investor »

columbia wrote: Mon Sep 07, 2020 7:58 am BH Wiki indicates the switch happened in 2013:
https://www.bogleheads.org/wiki/Vanguar ... ment_funds
Switch seems a bit misleading in this discussion as Total Bond and Hedge International Bonds are still higher allocations that ST TIPS in Vanguard's funds, and JC was discussing having moved everything to short term.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by MikeG62 »

Kevin M wrote: Sun Sep 06, 2020 6:16 pm
Kevin K wrote: Sun Sep 06, 2020 11:08 am I'm curious to hear what the many knowledgeable posters here think about Jonathan Clements' decision to go all-short and all-Treasury with his fixed income:

"<snip>
... 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.
Yield on 1-year Treasury is 0.13%. A number of credit unions are offering about 1% on a 1-year CD, and even Ally Bank currently offers 0.80%. Other than convenience, I don't see much point in accepting 0.13% when I can easily earn 0.8% or more on a federally-insured CD.

The state income tax for Treasuries doesn't help much--for me, at 8% state (and 27% federal) it bumps the 1-year taxable-equivalent yield to 0.15%.

For a more cash-like investment with less reinvestment risk than a savings account, Ally currently offers 0.75% on an 11-month no-penalty CD.

FDIC/NCUA deposit insurance limits are a concern, more so in IRAs where there is no skirting the $250K limit, but it's easy to get up to $1.25M insured in a taxable account at one bank by assigning up to five beneficiaries in a payable on death (POD) account.

Kevin
Agree 100% with Kevin M.

I'd add that deals can be found, although they are few (and seemingly fewer as the months roll by). For example, in late July I opened a 15-month CD with a yield of 1.70% at a local(ish) bank. In August I established two 5-year CD ladders (one taxable and other within an IRA) at a CU in Louisiana. Yields ranged from 1.45% on the 12-month rung to 2.10% on the 60-month rung. These are all insured and much better than buying Treasuries at current yields IMHO.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Robot Monster »

Re-reading this thread, seems like Clements' approach is intrinsically tied up to his personal circumstance. For example,

"As I buy more immediate annuities and once I claim Social Security, I’ll need less cash each year from my portfolio. But for the money I do need to withdraw, I want to be confident it’ll be there..."

Therefore, it makes it difficult for me to understand how his strategy applies more generally, i.e. how it might apply to others whose circumstance doesn't match his.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by jeffyscott »

Elysium wrote: Mon Sep 07, 2020 8:05 am
Kevin K wrote: Sun Sep 06, 2020 11:08 am To that end, 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.
Shorten your duration if you wish to earn less than inflation. Stay with Interm-Term or Long-Term if you wish to earn at least inflation matching returns. This is the lesson from other developed markets that are most comparable to U.S in the global economic/capital cycles. See for instance returns from Europe domiciled iShares Govt bond funds from three countries that can be closely compared to U.S

UK Gilts are the equivalent of Long Term US Treasury bonds - they have an average duration of 12 years and have 10 year returns of 5%
UK Gilts [long term govt]

Swiss Govt bonds with average duration of 10 years had average returns of 2.15% over the last 10 years where rates have stayed low (went negative on shorter end). Swiss Interm-Term Bond with effective duration of 5 years had returns of 0.57% in the same period.
Swiss 7-15 year bonds

German Govt bonds with average duration of 5 years had returns of 1.72%. Rates stayed low, even negative on lower end.
German Govt 5 year bonds

Lesson to be learned is that interest rate bets to shorten duration hasn't worked out for investors in other developed markets that can be closely compared to the U.S. Going short often means locking in lower returns for the next 5-10 years, anyone with a duration of more than 5 to 10 years should be in Interm-Term or Long-Term bonds.

Based on examples from overseas markets, it is reasonable to expect inflation matching or better returns for US Bonds of Interm/Long duration, with Short Term bonds earning less than inflation. If rising inflation is a concern then buy TIPS.
The Swiss and German ones seem to be showing the limits to gains from falling rates. Both of those have negative average YTMs (-0.47% and -0.67%) and both had negative returns from June 2019 to June 2020 (-0.78% and -0.28%) and for the year ending Aug 31, 2020 (-5.62% and -2.13%). The 3 year and 5 year returns for those two are under 1%. So has buying when YTMs were already low really been such a great idea? If the equivalent of CDs at ~1% to 1.5% were available that would seem to have been the better choice for Germans and Swiss 3 or 5 years ago.

From the internet archive wayback machine that German bond fund had average YTM of 0.14% as of December 23, 2014, I wasn't able to find archived pages with the YTM for the Swiss fund. Comparable US funds, like Vanguard Intermediate Treasury are now not far from where the German bonds were at that time, SEC yield for VSIGX is 0.27%.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Elysium »

jeffyscott wrote: Mon Sep 07, 2020 10:10 am The Swiss and German ones seem to be showing the limits to gains from falling rates. Both of those have negative average YTMs (-0.47% and -0.67%) and both had negative returns from June 2019 to June 2020 (-0.78% and -0.28%) and for the year ending Aug 31, 2020 (-5.62% and -2.13%). The 3 year and 5 year returns for those two are under 1%. So has buying when YTMs were already low really been such a great idea? If the equivalent of CDs at ~1% to 1.5% were available that would seem to have been the better choice for Germans and Swiss 3 or 5 years ago.

From the internet archive wayback machine that German bond fund had average YTM of 0.14% as of December 23, 2014, I wasn't able to find archived pages with the YTM for the Swiss fund. Comparable US funds, like Vanguard Intermediate Treasury are now not far from where the German bonds were at that time, SEC yield for VSIGX is 0.27%.
Yes, once the rates actually hit negative then there is nothing to be gained. But we aren't there yet from an Intermediate/Long bonds perspective. These countries are, and that's why they show negative returns in this last one year period. This is why I picked those 3, since they most comparable to US and are about 5 to 7 years ahead of where we are now, if we end up with similar trajectory. No one knows for sure obviously, but if we think of Global Capital markets are correlated, and institutional money flows are based on where comparable risk/reward is available, then I would think GBP, EUR, USD denominated sovereign bonds from UK, Germany, Swiss, France, US, is to be viewed together. Trailing 5 & 10 year returns show that shorter duration bonds from these countries have performed lower than Intermediate/Long bonds up until this last one year period. Therefore, if we think we are 5 to 7 years behind, then it is reasonable to expect similar pattern here in US too. Obviously, no one knows for sure, and while no one likes low rates, I would take the relatively higher Interm-Term/Long rates now compared to almost nothing from Short Term. I see the point with CD/High Yield bank accounts, this is good for savings and/or taxable accounts. Retirement accounts for those who are still in accumulation will benefit from bonds with lower correlation to equities, until rates really do go negative. It's just a tough situation with no ideal solution, we have to make best of what is available.
Last edited by Elysium on Mon Sep 07, 2020 10:50 am, edited 2 times in total.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Kevin K »

In trying to learn more about short vs. long-duration TIPS I stumbled upon this helpful short series of articles:

https://movement.capital/when-tips-outp ... t-in-them/

"The market has typically overestimated inflation, although expectations in 2003 and 2008 were overly conservative and TIPS went on to outperform.

I use breakeven rates as a way to see if TIPS are trading expensive or cheap relative to regular Treasuries. The chart below groups TIPS performance into periods when 10-year breakevens were above and below 2%.

For example, the 12 month blue bar shows that TIPS have outperformed regular Treasuries by 1.9% on average over the next 12 months when the starting 10-year breakeven inflation rate was below 2%."

From what I can tell it looks like the author of these pieces, Adam Grossman, has typically used a barbell of intermediate Treasuries and TIPs but has gone to short-term for both due to the yield curve.

Thanks to those who shared the Vanguard papers on TIPS and on the thinking behind their target-date retirement funds.

I've been rereading Michael McClung's impressively data-driven tome "Living Off Your Money" and find it interesting that his recommended fixed income allocation for all of the most successful retirement portfolios is 12.5% each Short and Intermediate Treasuries and 50% intermediate TIPS. That seems like a good way of hedging one's bets, though of course the book was written before entering an era when even 30 year Treasuries have a negative real return.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by jeffyscott »

Elysium wrote: Mon Sep 07, 2020 10:38 am
jeffyscott wrote: Mon Sep 07, 2020 10:10 am The Swiss and German ones seem to be showing the limits to gains from falling rates. Both of those have negative average YTMs (-0.47% and -0.67%) and both had negative returns from June 2019 to June 2020 (-0.78% and -0.28%) and for the year ending Aug 31, 2020 (-5.62% and -2.13%). The 3 year and 5 year returns for those two are under 1%. So has buying when YTMs were already low really been such a great idea? If the equivalent of CDs at ~1% to 1.5% were available that would seem to have been the better choice for Germans and Swiss 3 or 5 years ago.

From the internet archive wayback machine that German bond fund had average YTM of 0.14% as of December 23, 2014, I wasn't able to find archived pages with the YTM for the Swiss fund. Comparable US funds, like Vanguard Intermediate Treasury are now not far from where the German bonds were at that time, SEC yield for VSIGX is 0.27%.
Yes, once the rates actually hit negative then there is nothing to be gained. But we aren't there yet from an Intermediate/Long bonds perspective. These countries are, and that's why they show negative returns in this last one year period. This is why I picked those 3, since they most comparable to US and are about 5 to 7 years ahead of where we are now, if we end up with similar trajectory. No one knows for sure obviously, but if we think of Global Capital markets are correlated, and institutional money flows are based on where comparable risk/reward is available, then I would think GBP, EUR, USD denominated sovereign bonds from UK, Germany, Swiss, France, US, is to be viewed together. Trailing 5 & 10 year returns show that shorter duration bonds from these countries have performed lower than Intermediate/Long bonds up until this last one year period. Therefore, if we think we are 5 to 7 years behind, then it is reasonable to expect similar pattern here in US too. Obviously, no one knows for sure, and while no one likes low rates, I would take the relatively higher Interm-Term/Long rates now compared to almost nothing from Short Term. I see the point with CD/High Yield bank accounts, this is good for savings and/or taxable accounts. Retirement accounts for those who are still in accumulation will benefit from bonds with lower correlation to equities, until rates really do go negative. It's just a tough situation with no ideal solution, we have to make best of what is available.
Yeah, I guess if the choices were limited to treasuries, I might take long term over short. My guess would be that the US rates will not go as low as Germany or Switzerland, though. The long-term UK fund is at 0.43% YTM, while Vanguard Long Term Treasury Index is at 1.22% (SEC yield). A fall to the UK level would mean a cap gain of roughly 15% and that might mean a total return of maybe 3-4% annualized, if it happened over 5-7 years as maybe about a best case scenario :?: .
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Elysium »

jeffyscott wrote: Mon Sep 07, 2020 1:03 pm Yeah, I guess if the choices were limited to treasuries, I might take long term over short. My guess would be that the US rates will not go as low as Germany or Switzerland, though. The long-term UK fund is at 0.43% YTM, while Vanguard Long Term Treasury Index is at 1.22% (SEC yield). A fall to the UK level would mean a cap gain of roughly 15% and that might mean a total return of maybe 3-4% annualized, if it happened over 5-7 years as maybe about a best case scenario :?: .
This is about the best case scenario for Treasuries looking at where UK Gilts are. The alternative is to take credit risk with Investment Grade Corporate bonds, something to consider for portfolios with equity at 60% or less. Given the fed has put backstop for corporate debt, I wouldn't worry too much about defaults rising. The only remaining attraction for Treasuries is the ability to purchase equities for cheap by exchanging during sell offs. If this isn't a consideration, then given the fed intervention, I would think the higher yields of corporate bonds makes them good choice.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by vineviz »

typical.investor wrote: Mon Sep 07, 2020 7:26 am
Always passive wrote: Mon Sep 07, 2020 6:53 am
I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
I don't really agree that only Short term TIPS captures inflation.
I agree.

The best you could say for short-term TIPS is that they capture short-term inflation, but unless the investor has a genuinely short-term investment horizon (e.g. 5 years or less) I'm not sure why anyone should care much about that. And even in that case, most investors are taking on more interest rate risk (by being "short" duration relative to their investment horizon).

Under the two-fund theorem, the investor can easily do a better job of matching their inflation duration and interest rate duration targets through a barbell approach using either an intermediate-term or long-term TIPS fund combined with a short-term nominal bond fund. (e.g. a short-term corporate bond fund).

By way of example, a 75/25 combination of Vanguard Short-Term Corporate Bond Index Fund (VSCSX) and Vanguard Inflation-Protected Securities Fund (VAIPX) would offer the same inflation protection with less interest rate risk and higher SEC yield than Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX) at roughly the same expense.
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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by Kevin M »

typical.investor wrote: Sun Sep 06, 2020 8:38 pm In terms of interest rate risk, FI will recover at the duration and afterward you'll be better off.
This is not really true for a fund. I've done a lot of empirical study of this, and an intermediate-term bond fund (with duration in the 5-6 year ballpark) can easily have a 5-year, 6-year or 10-year annualized return that is 0.5 or even 1 percentage point above or below the initial SEC yield (roughly yield to maturity minus expenses).

What you're thinking about is the insensitivity to change in yield characteristic of duration. For an individual bond, you will earn the initial yield (to maturity) if you hold for a period equal to the duration, and are able to invest the coupon payments at the new yield for the bond you are holding.

The only way this roughly works for a fund is for a one time parallel shift in the yield curve relevant to the bonds in the fund at the beginning of the holding period. Problem is that there are many changes in yields over a holding period equal to the duration, and the yield curve generally doesn't make parallel moves.

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Re: The “Abandon Bonds” strategy [Farewell Yield: Jonathan Clements]

Post by 000 »

Always passive wrote: Mon Sep 07, 2020 6:53 am I assume you have done some research on the subject. Short term TIPS are a very sad story, but are the only US vehicle that fully captures inflation. Vanguard did extensive work on the subject (I will look for the report) and frankly I trust Vanguard more than many others.
It is immediately obvious that a CPI-indexed duration-matched bond will track CPI over that duration better than short term TIPS in general.

The ST TIPS rationale confuses risk and volatility. The volatility of LT TIPS don't matter if you actually want them to mature in the LT.
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by drzzzzz »

Always passive wrote: Mon Sep 07, 2020 6:57 am Here is the Vanguard report on short term TIPS
https://personal.vanguard.com/pdf/ISGCTIPS.pdf
The paper looks at short term tips or commodities for unexpected inflation. Does Vanguard have a paper looking at longer term TIPS fund as well or comparing both short and term with inflation protection?
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Re: Farewell Yield: Jonathan Clements' short-term bond barbell

Post by Kevin K »

drzzzzz wrote: Mon Sep 07, 2020 5:18 pm
Always passive wrote: Mon Sep 07, 2020 6:57 am Here is the Vanguard report on short term TIPS
https://personal.vanguard.com/pdf/ISGCTIPS.pdf
The paper looks at short term tips or commodities for unexpected inflation. Does Vanguard have a paper looking at longer term TIPS fund as well or comparing both short and term with inflation protection?
Yes, this paper on that topic was shared earlier in this thread by typical.investor:

https://personal.vanguard.com/pdf/ISGGMMIN.pdf
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