What bonds should I look at for the next 15 year period?

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zetsui
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What bonds should I look at for the next 15 year period?

Post by zetsui »

Truth be told no one knows what will happen to Fed rates, and I dont have the strongest Economics background but what would happen i)_ with lower interest rates over the next 15 yeras and ii) higher interest rates. Given these two situations, and in my opinion the latter being the more liekly option, what are some bonds (long or short term) to look into for a bond portfolio, and what are some considerations by age and proximity to retirement?
KlangFool
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Re: What bonds should I look at for the next 15 year period?

Post by KlangFool »

OP,

The best assumption is that we know nothing. Hence, you should pick the Total Bond Market Index Fund.

<<Truth be told no one knows what will happen to Fed rates, and I dont have the strongest Economics background but what would happen i)_ with lower interest rates over the next 15 yeras and ii) higher interest rates. Given these two situations, and in my opinion the latter being the more liekly option, what are some bonds (long or short term) to look into for a bond portfolio, and what are some considerations by age and proximity to retirement?>>

If you believe that, why do you think anyone knows anything? And, for anyone that knows, why won't they factor the prediction that they know into the interest rate that they charged for the bond that they underwrite?

The bond is issued with all the known information. Folks are paid millions to underwrite billions of bonds.

KlangFool
hackingdragon
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Re: What bonds should I look at for the next 15 year period?

Post by hackingdragon »

Since rates are already so low, would it be good to tilt towards intermediate and short term bonds? Intermediate treasury bonds provide a hedge during market drops and good protection against unexpected deflation. Long term treasuries seem to be too risky. I don't know if this is market timing or just looking at the potential risk vs reward given that rates are so low.
Robot Monster
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Re: What bonds should I look at for the next 15 year period?

Post by Robot Monster »

BlackRock's opinion:
We like U.S. Treasuries. Long-term yields are likely to fall further than other developed market peers, even as low rates reduce their ability to cushion against risk asset selloffs.
Source
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drk
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Re: What bonds should I look at for the next 15 year period?

Post by drk »

hackingdragon wrote: Mon Sep 21, 2020 5:04 pm Long term treasuries seem to be too risky. I don't know if this is market timing or just looking at the potential risk vs reward given that rates are so low.
Current rates are just one part of the equation. Buying and holding long-term Treasury fund with an effective duration around 15 years is an excellent fit for something like the OP. It could also make sense to add an intermediate-term Treasury fund to shorten the duration of the overall bond portfolio a little, though, such as a 75-25 split between VGLT and VGIT.
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patrick013
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Re: What bonds should I look at for the next 15 year period?

Post by patrick013 »

Robot Monster wrote: Mon Sep 21, 2020 5:33 pm BlackRock's opinion:
We like U.S. Treasuries. Long-term yields are likely to fall further than other developed market peers, even as low rates reduce their ability to cushion against risk asset selloffs.
Source
Here's the recent 10 year guess of the Congressional Budget Office.
What comment can be made except they want low rates.

Image

I'd like to target date a purchase between 2028-2030 but how to do that
without getting stuck at a super low rate. Probably increase maturity
gradually.

Blackrock likes some TIPS and expects LT TRSY yields to fall short-term.
Makes some sense but what is going to cause inflation ?
age in bonds, buy-and-hold, 10 year business cycle
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Re: What bonds should I look at for the next 15 year period?

Post by Robot Monster »

patrick013 wrote: Tue Sep 22, 2020 11:32 am Makes some sense but what is going to cause inflation ?
Of interest, as to possible things we could see:

Stanley Druckenmiller fears the possibility of either high inflation (5-10%) or 3%-4% deflation.
https://seekingalpha.com/news/3612423-a ... ts-on-cnbc
BlackRock expects inflation, as measured by US CPI, to average 2.5% to 3% from 2025-2030. "Rising global production costs are the trigger," with companies remapping supply chains, engaging in less offshoring & potentially seeing widespread deglobalization
Source
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
tibbitts
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Re: What bonds should I look at for the next 15 year period?

Post by tibbitts »

So to summarize: nobody knows but some outcomes are more likely than others?
zetsui wrote: Mon Sep 21, 2020 4:44 pm Truth be told no one knows what will happen to Fed rates... higher interest rates... in my opinion... being the more liekly option...
Would you have said the same thing ten years ago? Five? Two? One?
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Re: What bonds should I look at for the next 15 year period?

Post by garlandwhizzer »

I don't believe a magic bullet exists in the current bond market that will provide reliable real positive return risk-free. We are at the end of a massive 35+ years bond bull market during which 10 yr Treasury yields dropped from 15% to 0.6% and inflation declined similarly and consistently. During that entire time period there were massive positive returns for bonds, the longer the duration the better the returns, and inflation's gradual decline juiced real returns even more. There was essentially no risk in Treasuries and the return per unit of risk proved better than stocks for decades. Those days are over. Future returns are expected to be somewhere around zero real for a long time and there is considerable risk, especially in long term bonds, if inflation ever heats up again. The bond risk/reward tradeoff has shifted drastically in a negative way. They are still necessary for portfolio stability in market crashes but don't expect much in the way of returns and beware of potential risk. Higher bond quality and shorter duration has lower expected returns than longer duration and higher default risk. None of them offer a good risk/reward tradeoff in my view. Pick your preferred poison. It may be a time as Siegel has advocated for some to consider reducing bond allocation somewhat from the traditional 60/40 if you need more robust returns going forward.

Garland Whizzer













=
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vineviz
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Re: What bonds should I look at for the next 15 year period?

Post by vineviz »

hackingdragon wrote: Mon Sep 21, 2020 5:04 pm Since rates are already so low, would it be good to tilt towards intermediate and short term bonds? Intermediate treasury bonds provide a hedge during market drops and good protection against unexpected deflation. Long term treasuries seem to be too risky. I don't know if this is market timing or just looking at the potential risk vs reward given that rates are so low.
Who can reliably say that yields are already low?

Market timing doesn’t work, not even for bonds.

And besides, intermediate and short term bonds are MORE risky to an investor with a long-term investment goal than long term bonds are.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Robot Monster
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Re: What bonds should I look at for the next 15 year period?

Post by Robot Monster »

garlandwhizzer wrote: Tue Sep 22, 2020 2:20 pm We are at the end of a massive 35+ years bond bull market during which 10 yr Treasury yields dropped from 15% to 0.6% and inflation declined similarly and consistently.
Does there not remain the possibility of the bond bull market continuing if yields plummet into negative territory? Imagine how negative yielding bonds might be in the scenario that Stanley Druckenmiller fears: the possibility of 3%-4% deflation.
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vineviz
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Re: What bonds should I look at for the next 15 year period?

Post by vineviz »

Robot Monster wrote: Tue Sep 22, 2020 3:08 pm
garlandwhizzer wrote: Tue Sep 22, 2020 2:20 pm We are at the end of a massive 35+ years bond bull market during which 10 yr Treasury yields dropped from 15% to 0.6% and inflation declined similarly and consistently.
Does there not remain the possibility of the bond bull market continuing if yields plummet into negative territory? Imagine how negative yielding bonds might be in the scenario that Stanley Druckenmiller fears: the possibility of 3%-4% deflation.
Besides, ten years ago it would have been easy to say “we are at the end of massive 25+ year bond bull market”.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Kevin K
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Re: What bonds should I look at for the next 15 year period?

Post by Kevin K »

I can certainly see why TBM is most people's default choice (though I can see compelling arguments for going with intermediate-term Treasuries instead). But what I haven't seen talked about much - except in this article - is how the duration of the bonds in the most popular index has crept up since the 2008 crisis:

"Most core bond funds use the Bloomberg Barclays U.S. Aggregate Bond Index or similar high-quality indexes as benchmarks for "the market," and they all began to slowly morph after the 2008 global financial crisis. Until the crisis, the high-quality U.S. bond market's overall duration had almost always ranged in the neighborhood of four to five years--for decades. Shortly thereafter it began to slowly creep upward. It spiked again during the coronavirus crisis, and as of early September 2020 the duration of the Morningstar Core Bond Index stood above six years.

There are several moving parts driving the shift, most notably in the Treasury, investment-grade corporate, and agency mortgage sectors. The impact of the first two has been profound, and the biggest factor has simply been size. Both sectors surged following the crisis while the size of the mortgage market inched up more slowly. At the start of 2008, the two composed roughly 40% of the overall high-grade sector; by August 2020 that figure was 64%."

https://www.morningstar.com/articles/10 ... ource=link

I appreciate the author's balanced perspective: one still needs some duration, but also some dry powder in the form of cash or short-term bonds.
JBTX
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Re: What bonds should I look at for the next 15 year period?

Post by JBTX »

In our case, we have a mix of

-total bond market, including in target date funds,(in retirement account)
---TIPS (in retirement account)
- ibonds (in taxable account)

You can only put so much into ibonds but if you keep doing it it adds up.

Also, if are 20 years or less to retirement, and willing to hold them 20 years, eebonds look interesting. Again there are limits to how much you can purchase each year.
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Re: What bonds should I look at for the next 15 year period?

Post by Robot Monster »

Kevin K wrote: Tue Sep 22, 2020 4:06 pm ...But what I haven't seen talked about much - except in this article - is how the duration of the bonds in the most popular index has crept up since the 2008 crisis...
If the duration in Total Bond has fluctuated so significantly, we should really keep that in mind when looking at past performance, which was done, for example, in this otherwise excellent post.
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hackingdragon
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Re: What bonds should I look at for the next 15 year period?

Post by hackingdragon »

vineviz wrote: Tue Sep 22, 2020 2:35 pm And besides, intermediate and short term bonds are MORE risky to an investor with a long-term investment goal than long term bonds are.
Yes, that is true. Now, do you get the same type of long-term protection by buying a fund and holding long-term or is that only with the actual bond themselves? Sorry, I'm new.
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vineviz
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Re: What bonds should I look at for the next 15 year period?

Post by vineviz »

hackingdragon wrote: Wed Sep 23, 2020 7:37 am
vineviz wrote: Tue Sep 22, 2020 2:35 pm And besides, intermediate and short term bonds are MORE risky to an investor with a long-term investment goal than long term bonds are.
Yes, that is true. Now, do you get the same type of long-term protection by buying a fund and holding long-term or is that only with the actual bond themselves? Sorry, I'm new.
You can definitely get the same protection using bond funds that you would get with an actual bond.

The main difference is that the bond naturally grows shorter in duration over time, whereas using most bond funds you'd need to combine two funds to match that same sort of change to match your (presumably) decreasing investment horizon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
hackingdragon
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Re: What bonds should I look at for the next 15 year period?

Post by hackingdragon »

vineviz wrote: Wed Sep 23, 2020 11:34 am The main difference is that the bond naturally grows shorter in duration over time, whereas using most bond funds you'd need to combine two funds to match that same sort of change to match your (presumably) decreasing investment horizon.
Sorry, I'm having a hard time wrapping my head around that. Let's say I have a 10 year time horizon. So I would be shifting down something like this:
  1. iShares 7-10 Year Treasury Bond ETF
  2. iShares 3-7 Year Treasury Bond ETF
  3. iShares 1-3 Year Treasury Bond ETF
  4. iShares Short Treasury Bond ETF
  5. Cash
But what happens let's if there is a major change to treasury yields right when I'm changing from 7-10 to 3-7? Wouldn't I incur a loss there? Or would the over lap kind of balance out?
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vineviz
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Re: What bonds should I look at for the next 15 year period?

Post by vineviz »

hackingdragon wrote: Wed Sep 23, 2020 12:15 pm
vineviz wrote: Wed Sep 23, 2020 11:34 am The main difference is that the bond naturally grows shorter in duration over time, whereas using most bond funds you'd need to combine two funds to match that same sort of change to match your (presumably) decreasing investment horizon.
Sorry, I'm having a hard time wrapping my head around that. Let's say I have a 10 year time horizon. So I would be shifting down something like this:
  1. iShares 7-10 Year Treasury Bond ETF
  2. iShares 3-7 Year Treasury Bond ETF
  3. iShares 1-3 Year Treasury Bond ETF
  4. iShares Short Treasury Bond ETF
  5. Cash
But what happens let's if there is a major change to treasury yields right when I'm changing from 7-10 to 3-7? Wouldn't I incur a loss there? Or would the over lap kind of balance out?

I'm going to simplify a bit to make the explanation easier to write. Let's interpret your

If you have exactly one expected cash flow in 10 years, then your investment horizon starts at 10 years and decreases in a direct line with every passing day until on 9/24/2030 you have a time horizon of 0.00 years. Clearly no one wants to rebalance a portfolio every day, however, and that's really not necessary. Let's just imagine you're going to rebalance once per year. The following graph shows the exact remaining time horizon for every day in blue, with the orange being the target we set each year.

Image

To illustrate staying as close as possible to the actual remaining time horizon, I show what it would look like if you start with an average bond duration of 9.5 years today and reduce the duration by rebalancing the bond funds each year on September 23. Note that the number you want to manage is the average duration of your bond funds.

To make the process easier to manage, let's just stick to using just two funds. You could use any combination of 2 or more funds, but there's no need to use more than that unless you are really obsessive. The two funds I'll use are iShares 10-20 Year Treasury Bond ETF (TLH) and iShares Short Treasury Bond ETF (SHV). TLH has an average duration of 13.03 years and SHV has an average duration of 0.41 years.

So today you want to have a duration of 9.5 years. You can get this with 72% TLH and 28% SHV since (.78 x 13.03) + (.28 x 0.41) = 9.5. Just hold this for a year.

Then in a year (on 9/23/2021) you'll want to target a duration of 8.5 years. You can get this with 64% TLH and 36% SHV since (.64 x 13.03) + (.36 x 0.41) = 8.5.

Hold THAT combination for a year and then on 9/23/2022) you'll want to target a duration of 7.5 years. You can get this with 56% TLH and 44% SHV since (.56 x 13.03) + (.44 x 0.41) = 7.5.

And so forth.

The way that bond duration is calculated has some embedded assumptions, but the impact of those is extremely small. The calculations needed to do this can easily be done on a piece of paper or a simple calculator, and there is no need IMHO to fuss over precision: close is good enough.

Of course you can save yourself even this small amount of once-per-year work by using individual bonds or a bond ETF that is designed with a target maturity date (e.g. iShares® iBonds 2030 Term Treasury ETF - IBTK).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
hackingdragon
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Re: What bonds should I look at for the next 15 year period?

Post by hackingdragon »

Great description. That's really helpful. Thanks!
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Re: What bonds should I look at for the next 15 year period?

Post by Kevin K »

Might want to factor this paper from the CBO into your bond choices:

https://www.cbo.gov/publication/56598

"Deficits. Even after the effects of the 2020 coronavirus pandemic fade, deficits in coming decades are projected to be large by historical standards. In CBO’s projections, deficits increase from 5 percent of gross domestic product (GDP) in 2030 to 13 percent by 2050—larger in every year than the average deficit of 3 percent of GDP over the past 50 years.

Debt. By the end of 2020, federal debt held by the public is projected to equal 98 percent of GDP. The projected budget deficits would boost federal debt to 104 percent of GDP in 2021, to 107 percent of GDP (the highest amount in the nation’s history) in 2023, and to 195 percent of GDP by 2050.

High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities."

Those deficit and (especially) debt numbers are stunning, and make the "return free risk" of Treasuries unappealing to say the least, now and going forward.
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Re: What bonds should I look at for the next 15 year period?

Post by grabiner »

hackingdragon wrote: Wed Sep 23, 2020 12:15 pm
vineviz wrote: Wed Sep 23, 2020 11:34 am The main difference is that the bond naturally grows shorter in duration over time, whereas using most bond funds you'd need to combine two funds to match that same sort of change to match your (presumably) decreasing investment horizon.
Sorry, I'm having a hard time wrapping my head around that. Let's say I have a 10 year time horizon. So I would be shifting down something like this:
  1. iShares 7-10 Year Treasury Bond ETF
  2. iShares 3-7 Year Treasury Bond ETF
  3. iShares 1-3 Year Treasury Bond ETF
  4. iShares Short Treasury Bond ETF
  5. Cash
But what happens let's if there is a major change to treasury yields right when I'm changing from 7-10 to 3-7? Wouldn't I incur a loss there? Or would the over lap kind of balance out?
If you do a full switch every year, you would incur a small loss if rates rise or fall at the wrong time. If you still hold the 7-10 fund, with its 8-year duration, but have a 7-year time horizon, then you will lose 1% over 7 years if rates rise by 1%. If you hold all your money in the 3-7 fund, with its 5-year duration, but have a 7-year time horizon, then you will lose 2% if rates fall by 1%.

To keep a consistent duration, you would switch continuously. When your time horizon is 7 years, you should have 2/3 of your money in the fund with an 8-year duration, and 1/3 in the fund with a 5-year duration.
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zetsui
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Re: What bonds should I look at for the next 15 year period?

Post by zetsui »

Robot Monster wrote: Tue Sep 22, 2020 11:35 am
patrick013 wrote: Tue Sep 22, 2020 11:32 am Makes some sense but what is going to cause inflation ?
Of interest, as to possible things we could see:

Stanley Druckenmiller fears the possibility of either high inflation (5-10%) or 3%-4% deflation.
https://seekingalpha.com/news/3612423-a ... ts-on-cnbc
BlackRock expects inflation, as measured by US CPI, to average 2.5% to 3% from 2025-2030. "Rising global production costs are the trigger," with companies remapping supply chains, engaging in less offshoring & potentially seeing widespread deglobalization
Source
so which bonds are best in inflationary time periods and which in deflationary?
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zetsui
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Re: What bonds should I look at for the next 15 year period?

Post by zetsui »

garlandwhizzer wrote: Tue Sep 22, 2020 2:20 pm I don't believe a magic bullet exists in the current bond market that will provide reliable real positive return risk-free. We are at the end of a massive 35+ years bond bull market during which 10 yr Treasury yields dropped from 15% to 0.6% and inflation declined similarly and consistently. During that entire time period there were massive positive returns for bonds, the longer the duration the better the returns, and inflation's gradual decline juiced real returns even more. There was essentially no risk in Treasuries and the return per unit of risk proved better than stocks for decades. Those days are over. Future returns are expected to be somewhere around zero real for a long time and there is considerable risk, especially in long term bonds, if inflation ever heats up again. The bond risk/reward tradeoff has shifted drastically in a negative way. They are still necessary for portfolio stability in market crashes but don't expect much in the way of returns and beware of potential risk. Higher bond quality and shorter duration has lower expected returns than longer duration and higher default risk. None of them offer a good risk/reward tradeoff in my view. Pick your preferred poison. It may be a time as Siegel has advocated for some to consider reducing bond allocation somewhat from the traditional 60/40 if you need more robust returns going forward.

Garland Whizzer













=
What's the risk?

Longer = inflation risk
shorter is default? Even on something like a US treasury :shock: ?
Robot Monster
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Re: What bonds should I look at for the next 15 year period?

Post by Robot Monster »

zetsui wrote: Sat Sep 26, 2020 7:59 pm
Robot Monster wrote: Tue Sep 22, 2020 11:35 am
patrick013 wrote: Tue Sep 22, 2020 11:32 am Makes some sense but what is going to cause inflation ?
Of interest, as to possible things we could see:

Stanley Druckenmiller fears the possibility of either high inflation (5-10%) or 3%-4% deflation.
https://seekingalpha.com/news/3612423-a ... ts-on-cnbc
BlackRock expects inflation, as measured by US CPI, to average 2.5% to 3% from 2025-2030. "Rising global production costs are the trigger," with companies remapping supply chains, engaging in less offshoring & potentially seeing widespread deglobalization
Source
so which bonds are best in inflationary time periods and which in deflationary?
TIPS work best when there is unexpected inflation, and nominal bonds (particularly longer term ones) when there is deflation. The David Swensen Portfolio allocates to both types.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
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LTCM
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Re: What bonds should I look at for the next 15 year period?

Post by LTCM »

patrick013 wrote: Tue Sep 22, 2020 11:32 am Makes some sense but what is going to cause inflation ?
Supply side is damaged by COVID. Less workers. More expensive to make work safe for those that are left.
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