Effect of announced interest rates hike on current price of bonds etfs

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Betelgeuse79
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Effect of announced interest rates hike on current price of bonds etfs

Post by Betelgeuse79 »

Greetings everyone.

Several central banks have announced they will be raising interest rates in 2022. Would this information be already priced into the cost of a total bond market ETF? I assume so, or else who would be buying bonds at this time?

I understand we don't know how much the rates will increase, and that there are different variables at play here, but essentially I'd like to know if it still makes sense, from a buy and hold perspective, to be continuing my regular monthly purchases of bonds at this time.

Thanks in advance for any views you'll wanna share about this!
anoop
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by anoop »

Rate hikes tend to affect the very short end of the curve. There may be no movement at the long end despite the short end going up.

IMO...

The bond market only needs to worry if (a) inflation is persistent and (b) fed removes accommodation of buying bonds. (a) is probably going to be true, while (b) will be false.
dbr
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by dbr »

Betelgeuse79 wrote: Mon Jan 03, 2022 12:36 am
I understand we don't know how much the rates will increase, and that there are different variables at play here, but essentially I'd like to know if it still makes sense, from a buy and hold perspective, to be continuing my regular monthly purchases of bonds at this time.
If youi are regularly saving into bond assets as a part of a stock and bond portfolio for the long run, you should stick to your plan and ignore current events. Returns come and go and there is no useful tactic to maneuver the daily or monthly noise.

Hopefully you have a plan for saving and investing for the long run that is expected to be successful whatever the fluctuations in investment behavior might be.

What is dangerous is letting your fears be affected by current events resulting in making bad decisions day in and day out.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by livesoft »

Bond ETFs prices dropped by about 0.5% this morning. So something wasn't priced in until this morning. :twisted:

I do not buy bond ETF shares regularly, but I do trade them now and then, so today is an opportunity, but I don't know what kind of opportunity it is.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by nisiprius »

The Federal Reserve only controls overnight interest rates (and technically doesn't literally "control" even that).

The Vanguard Total Bond Market Index Fund and other "core" bond funds are, on the average, intermediate-term investments. For example, BND has an average maturity of 8.8 years. The bonds in BND are "competing" in the market against freshly-issued bonds with similar maturity. The market value reflects the interest rates for that term. If you own a bond that pays 1% and matures in 10 years, and you can buy a bond that pay 2% and matures in 10 years, your bond will no longer be worth as much as before.

Interest rates for intermediate-term investments are set by the market. They are only loosely coupled to the overnight rate. That's why there is a yield "curve" and why it is constantly changing shape.

This is in no sense a prediction, but we can look at what actually happened to four typical intermediate-term "core" bond funds from June 2004 through July 2006 when the Fed raises rates from 1% to 5.25%, a rise of more than 4% in just over two years.

Image

As you can see, despite the Fed "raising rates," over the two years when the Fed Funds rate was rising not a single bond fund lost money.

This doesn't prove that bonds are great, but it does prove that a lot of talk about (intermediate-term!) bonds tanking badly "because" the Fed has announced it will raise (overnight!) rates is just nonsense.
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stocksurfer
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by stocksurfer »

nisiprius wrote: Mon Jan 03, 2022 12:07 pm As you can see, despite the Fed "raising rates," over the two years when the Fed Funds rate was rising not a single bond fund lost money.
Ahem, depends on your definition of "lost money". If you tick the "inflation adjusted" box in PV the picture becomes less rosy and if you use june 2007 as endpoint for a 2-3 year period bond funds did "loose money". But really the picture looks flat, so your overall point stays, just don't have outsized expectations...
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by aristotelian »

The amount that the value of existing bonds could drop should interest rates rise depends on the duration of the bond. You might do a google search for duration risk for examples of how those values can be calculated.

Note that the "lost money" refers to the market value of the bond at any point in time. This value can go up and down. However, setting aside credit risk, the bond itself does not lose money if held to maturity. The principal will be paid back with interest. This is true of any bond you own individually or through an index fund. The bonds are just worth less because you can now buy equivalent bond with higher yield.
BitTooAggressive
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by BitTooAggressive »

Not sure how to post this link, but even if the Fed does not technically set the rate, when you purchase billions of dollars of bonds a month it affects interest rates.

https://fred.stlouisfed.org/series/FDHBFRBN
Firefly80
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Firefly80 »

nisiprius wrote: Mon Jan 03, 2022 12:07 pm The Federal Reserve only controls overnight interest rates (and technically doesn't literally "control" even that).

The Vanguard Total Bond Market Index Fund and other "core" bond funds are, on the average, intermediate-term investments. For example, BND has an average maturity of 8.8 years. The bonds in BND are "competing" in the market against freshly-issued bonds with similar maturity. The market value reflects the interest rates for that term. If you own a bond that pays 1% and matures in 10 years, and you can buy a bond that pay 2% and matures in 10 years, your bond will no longer be worth as much as before.

Interest rates for intermediate-term investments are set by the market. They are only loosely coupled to the overnight rate. That's why there is a yield "curve" and why it is constantly changing shape.

This is in no sense a prediction, but we can look at what actually happened to four typical intermediate-term "core" bond funds from June 2004 through July 2006 when the Fed raises rates from 1% to 5.25%, a rise of more than 4% in just over two years.

Image

As you can see, despite the Fed "raising rates," over the two years when the Fed Funds rate was rising not a single bond fund lost money.

This doesn't prove that bonds are great, but it does prove that a lot of talk about (intermediate-term!) bonds tanking badly "because" the Fed has announced it will raise (overnight!) rates is just nonsense.

Excellent comparison but this Time it's Different! That may actually be True.

It's well known that Fed buying of bonds at these levels was unchartered territory before 2008. So not only is the fed planning to raise Interest Rates but they hold a very big percentage (trillions?) of the govt Bond market. Eventually those would have to be sold or rolled off which would further lower bond prices. Those two factors combined might actually make those charts go Negative!
atdharris
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by atdharris »

I can't wait for my savings account to get a bump to a whopping 0.75% if we see rates go up!
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by nisiprius »

stocksurfer wrote: Tue Jan 04, 2022 4:24 pm...Ahem, depends on your definition of "lost money"...
There is only one definition of "lost money."

Rarely, if ever, do people use the phrase "lost money" to refer to "loss of purchasing power" except when they are attacking bonds.

2000-2009 is called a "lost decade" because US stocks lost in dollars. It was quite common, after the end, for people to say "it wasn't a lost decade for people who included international stocks." However, a 50/50 allocation between US and international stocks, specifically VTSMX and VGTSX,

Source

gained in dollars but lost to inflation.

Never have I heard anyone talk about stocks "losing money" if the number of dollars increased.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Robot Monster »

nisiprius wrote: Mon Jan 03, 2022 12:07 pm The Federal Reserve only controls overnight interest rates (and technically doesn't literally "control" even that).

The Vanguard Total Bond Market Index Fund and other "core" bond funds are, on the average, intermediate-term investments. For example, BND has an average maturity of 8.8 years. The bonds in BND are "competing" in the market against freshly-issued bonds with similar maturity. The market value reflects the interest rates for that term. If you own a bond that pays 1% and matures in 10 years, and you can buy a bond that pay 2% and matures in 10 years, your bond will no longer be worth as much as before.

Interest rates for intermediate-term investments are set by the market. They are only loosely coupled to the overnight rate. That's why there is a yield "curve" and why it is constantly changing shape.

This is in no sense a prediction, but we can look at what actually happened to four typical intermediate-term "core" bond funds from June 2004 through July 2006 when the Fed raises rates from 1% to 5.25%, a rise of more than 4% in just over two years.

Image

As you can see, despite the Fed "raising rates," over the two years when the Fed Funds rate was rising not a single bond fund lost money.

This doesn't prove that bonds are great, but it does prove that a lot of talk about (intermediate-term!) bonds tanking badly "because" the Fed has announced it will raise (overnight!) rates is just nonsense.
Bill Dudley discussed the period of tightening from 2004 to 2006 Bloomberg video link starts at 2:00. I had remembered you talked about this same period, above. About how well bonds did, even though the Fed Funds rate made a very large movement up, +4%! Just wanted to make an observation that if we did get a repeat of 2004-2006, with a +4% on the Fed Funds rate, and a +0.30% on the 10yr, we would (unlike 2004-2006) end up with a steeply inverted curve:

Fed Funds: 4%
10yr Treasury: 2.06%

These are the historical numbers:

06/01/04
1 Month Treasury: 0.97%
10yr Treasury: 4.71%

07/31/06
1 Month Treasury: 5.02%
10yr Treasury: 4.99%

Edit: But you are right to point out that Fed Funds rate could zoom up to 2%, without bond yields zooming up with them, because the curve could flatten like it did in 2004-2006.
Last edited by Robot Monster on Sat Jan 08, 2022 10:02 am, edited 1 time in total.
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alex_686
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by alex_686 »

Everybody knows that the Fed will likely raise rates. That is built into rates. The question is how fast. So it is a spread of possibilities.

So here is a great tool to help you think about this.

https://www.cmegroup.com/trading/intere ... -fomc.html#
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Robot Monster
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Robot Monster »

alex_686 wrote: Fri Jan 07, 2022 9:46 pm Everybody knows that the Fed will likely raise rates. That is built into rates. The question is how fast. So it is a spread of possibilities.

So here is a great tool to help you think about this.

https://www.cmegroup.com/trading/intere ... -fomc.html#
Kathy Jones, fixed income chief at Schwab, said,
"the slower the taper, the higher the yield at the long end. Opposite is true as well." Twitter link

So perhaps, if we did see a fast taper, a flat, or inverted curve is in the cards. Jeremy Siegel is predicting 2% on the Fed Funds, but says, "I don't think the long bond is going to move up that much. I think we may even have an inverted yield curve by the end of the year or early in 2023." He goes on to talk about the long bond staying at 2%. Starting at 1:28 in YouTube video
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Firefly80
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Firefly80 »

Robot Monster wrote: Fri Jan 07, 2022 9:18 pm Bill Dudley discussed the period of tightening from 2004 to 2006 Bloomberg video link starts at 2:00. I had remembered you talked about this same period, above. About how well bonds did, even though the Fed Funds rate made a very large movement up, +4%! Just wanted to make an observation that if we did get a repeat of 2004-2006, with a +4% on the Fed Funds rate, and a +0.30% on the 10yr, we would (unlike 2004-2006) end up with a steeply inverted curve:

Fed Funds: 4%
10yr Treasury: 2.06%

These are the historical numbers:

06/01/04
1 Month Treasury: 0.97%
10yr Treasury: 4.71%

07/31/06
1 Month Treasury: 5.02%
10yr Treasury: 4.99%

Edit: But you are right to point out that Fed Funds rate could zoom up to 2%, without bond yields zooming up with them, because the curve could flatten like it did in 2004-2006.

Not only is the rate of interest rate rise important but the rate at which the fed selling trillions of dollars of bonds which it holds will push the prices down further. The fed's purpose to buy bonds was to depress the 10 year yield when they have to sell those it will have the opposite effect irrespective of interest rate increase.

2004-2006 History is of no use here as the conditions are vastly different.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Robot Monster »

Firefly80 wrote: Sat Jan 08, 2022 1:11 pm
Robot Monster wrote: Fri Jan 07, 2022 9:18 pm Bill Dudley discussed the period of tightening from 2004 to 2006 Bloomberg video link starts at 2:00. I had remembered you talked about this same period, above. About how well bonds did, even though the Fed Funds rate made a very large movement up, +4%! Just wanted to make an observation that if we did get a repeat of 2004-2006, with a +4% on the Fed Funds rate, and a +0.30% on the 10yr, we would (unlike 2004-2006) end up with a steeply inverted curve:

Fed Funds: 4%
10yr Treasury: 2.06%

These are the historical numbers:

06/01/04
1 Month Treasury: 0.97%
10yr Treasury: 4.71%

07/31/06
1 Month Treasury: 5.02%
10yr Treasury: 4.99%

Edit: But you are right to point out that Fed Funds rate could zoom up to 2%, without bond yields zooming up with them, because the curve could flatten like it did in 2004-2006.

Not only is the rate of interest rate rise important but the rate at which the fed selling trillions of dollars of bonds which it holds will push the prices down further. The fed's purpose to buy bonds was to depress the 10 year yield when they have to sell those it will have the opposite effect irrespective of interest rate increase.

2004-2006 History is of no use here as the conditions are vastly different.
That's true. Seems like the Fed tapering could cause upward pressure on bond yields, but interestingly, doing a quick search I find not much expectation it will go too much higher.

"Strategists expect the yield on the 10-year Treasury note to reach 2% this year for the first time since 2019, but they do not expect the rate to go much higher than that." CNBC article link Jeremy Siegel had said he expected the curve would invert with bond yields at 2%, so this is similar to his thinking, it seems.

Well, anyway, in the same article it says Robert Tipp, head of global bonds and foreign exchange for PGIM Fixed Income, expects the 10yr yield to be 1.50% or lower by year's end.

Edit: Also found this:
Bond buyers face a “new conundrum” where Treasury yields will stay low even as the Federal Reserve hikes rates, despite the surge in the first week of the year, according to Goldman Sachs.

The investment bank expects the bond market to be reluctant to lift the terminal rate during the coming tightening cycle. So while raising its year-end forecast for the two-year yield, its calls for longer-dated yields stand. Goldman projects the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%. A Bloomberg survey of 2022 predictions for these Treasury benchmarks shows median yields of 1.63%, 2.01% and 2.40%, respectively.
Bloomberg article link
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Tenesmus83 »

bond funds don't lose money unless you sell early. If you hold to average duration of maturity, you should be up
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Wiggums »

Tenesmus83 wrote: Sat Jan 08, 2022 4:51 pm bond funds don't lose money unless you sell early. If you hold to average duration of maturity, you should be up
This is a key point.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Nowizard »

Short-term: bond funds decrease in price. If goal is returns, there will be concern. Longer-term: If bonds are viewed as assets less correlated with equities that provide portfolio protection, stay the course and deal with the issue of lesser, paper returns in the short-term until they recover, assuming you continue to reinvest bond distributions.

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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Tom_T »

Wiggums wrote: Thu Jan 13, 2022 9:43 am
Tenesmus83 wrote: Sat Jan 08, 2022 4:51 pm bond funds don't lose money unless you sell early. If you hold to average duration of maturity, you should be up
This is a key point.
Yes, but the problem is that if one is withdrawing from a portfolio on a regular basis to cover expenses, then there is no "holding to maturity." You're selling something every month. What then?
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by dbr »

Tom_T wrote: Thu Jan 13, 2022 10:10 am
Wiggums wrote: Thu Jan 13, 2022 9:43 am
Tenesmus83 wrote: Sat Jan 08, 2022 4:51 pm bond funds don't lose money unless you sell early. If you hold to average duration of maturity, you should be up
This is a key point.
Yes, but the problem is that if one is withdrawing from a portfolio on a regular basis to cover expenses, then there is no "holding to maturity." You're selling something every month. What then?
That is correct. The difference is that tiny amounts over long times are not the same game as holding something to be liquidated on date. By tiny amounts one would mean withdrawing a few percent of the asset every year for decades or taking out a few percent in RMD for a few decades and so.

But one has to orient oneself to a continuous process from a portfolio that varies in value all the time rather than specifically identifying where each withdrawal is going to "come from."

The idea that one needs to think about when you lose or don't lose money in bonds does not compute. Returns come and go all the time. It is just a question of degrees relative to the underlying trend of not depleting a portfolio too quickly. I prefer to think of duration as a factor that turns interest rate changes into variability in return, aka risk. I don't think it is useful to be concerned with duration as how long it will take to not lose money. Not losing is not a useful projection because to make it you have to know what interest rates will do in the future where I see interest rate variability as a natural process that imposes term risk on bonds all the time.

Thinking about anecdotes such as "If the Fed makes this change to interest rates, then such and such a fund will do that." is not helpful.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by nisiprius »

Firefly80 wrote: Sat Jan 08, 2022 1:11 pm2004-2006 History is of no use here as the conditions are vastly different.
Conditions are always different.

The future is always uncertain. That's my point. People talk as if "the Fed raising rates" means that there is certainty--specifically, that it is certain that bond funds will lose important money. And therefore ordinary investors should take action, ditch their plans, and dump their bond funds.

History is of great use in showing us that this is a false narrative.

2004-2006 illustrates sharply that "the Fed raising rates" does not tell us much. "The Fed raising rates" doesn't work the way many people think.

It proves something important, which is that the Fed can raise rates without bond funds losing money, even temporarily. If you already knew that, then history is no use to you. But a lot of people don't seem to know it.
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alex_686
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by alex_686 »

nisiprius wrote: Thu Jan 13, 2022 12:08 pm The future is always uncertain. That's my point. People talk as if "the Fed raising rates" means that there is certainty--specifically, that it is certain that bond funds will lose important money. And therefore ordinary investors should take action, ditch their plans, and dump their bond funds.

History is of great use in showing us that this is a false narrative.

2004-2006 illustrates sharply that "the Fed raising rates" does not tell us much. "The Fed raising rates" doesn't work the way many people think.

It proves something important, which is that the Fed can raise rates without bond funds losing money, even temporarily. If you already knew that, then history is no use to you. But a lot of people don't seem to know it.
Yes and no. While we don't know the future that does not mean the future is some vast unknowable void.

Let start with this little cool tool that predicts the Fed fund rates, which I have refenced before up thread. It is based on observable trades - so people are putting their money where their mouth is. It is well calibrated. i.e., it gives a range of possibilities and historic results fall in line with predicted results.

https://www.cmegroup.com/trading/intere ... -fomc.html

The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.

First, while it does not give us a single path to trod this does give us the likely paths it will go.

Second, there are casual links between Fed Fund rates and longer term rates.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by vineviz »

alex_686 wrote: Thu Jan 13, 2022 12:29 pm The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.

First, while it does not give us a single path to trod this does give us the likely paths it will go.

Second, there are casual links between Fed Fund rates and longer term rates.
Even if those expectations turn out to be accurate, the effect of Fed Funds rate increases on intermediate-term bond yields is pretty muted. A 100bps increase in the Federal Funds rate has historically increased the yield on 10-year Treasuries by only 20bps on average, with a 95% CI of -67bps to 119bps.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by alex_686 »

vineviz wrote: Thu Jan 13, 2022 1:15 pm
alex_686 wrote: Thu Jan 13, 2022 12:29 pm The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.

First, while it does not give us a single path to trod this does give us the likely paths it will go.

Second, there are casual links between Fed Fund rates and longer term rates.
Even if those expectations turn out to be accurate, the effect of Fed Funds rate increases on intermediate-term bond yields is pretty muted. A 100bps increase in the Federal Funds rate has historically increased the yield on 10-year Treasuries by only 20bps on average, with a 95% CI of -67bps to 119bps.
Eh - maybe. Currently the 5 year is around 1.5% and the 10 year is at 1.7. So you are suggesting that a historically flat yield curve will become even flatter. And maybe that is true but not in my opinion.

But yes, at this point we are moving from observable data to informed speculation.

I doubt we will see a -67 bps change in the 10 year - that would mean the yield curve is totally flat. Improbably and programmatic. I doubt that Treasuries can fall anymore but then again I never expected them to get so low. In my opinion the medium of the probability curve skews much higher with the current circumstances than the 20 bps you suggest.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Tom_T »

I tried to find a comparable situation in historical data. The closest I found was 2013. The 10-year Treasury rate at the start of the year was 1.86%. At the end of the year, it had risen to 3.04%. Vanguard Intermediate Term Treasury fund had a total return of -3.09%.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by vineviz »

Tom_T wrote: Thu Jan 13, 2022 1:56 pm I tried to find a comparable situation in historical data. The closest I found was 2013. The 10-year Treasury rate at the start of the year was 1.86%. At the end of the year, it had risen to 3.04%. Vanguard Intermediate Term Treasury fund had a total return of -3.09%.
It's just one example, but here's a plot of the Federal Funds rate and the 10-year Treasury yield from 7/2003 to 8/2007:

FFR increase: 425 bps
10-year yield increase: 69 bps

Image
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by vineviz »

alex_686 wrote: Thu Jan 13, 2022 1:48 pm
Eh - maybe. Currently the 5 year is around 1.5% and the 10 year is at 1.7. So you are suggesting that a historically flat yield curve will become even flatter. And maybe that is true but not in my opinion.
This is generally what happens when the FFR increases. Yields at the short end of the curve are more volatile than yields at the long end, so increases in the FFR are generally associated with flattening of the yield curve whereas decreases are generally associated with steepening of the yield curve.
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by vineviz »

Okay, here's another example. A plot of the Federal Funds rate and the 10-year Treasury yield from 1/2016 to 06/2019.

FFR increase: 220 bps
10-year yield decrease: 2 bps

You could certainly quibble with the start/end points, but I think these historical examples illustrate that even if predictions about FFR increases are accurate that significant increases in bond yields are not necessarily a given.



Image
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by AlphaLess »

nisiprius wrote: Mon Jan 03, 2022 12:07 pm The Federal Reserve only controls overnight interest rates (and technically doesn't literally "control" even that).

The Vanguard Total Bond Market Index Fund and other "core" bond funds are, on the average, intermediate-term investments. For example, BND has an average maturity of 8.8 years. The bonds in BND are "competing" in the market against freshly-issued bonds with similar maturity. The market value reflects the interest rates for that term. If you own a bond that pays 1% and matures in 10 years, and you can buy a bond that pay 2% and matures in 10 years, your bond will no longer be worth as much as before.

Interest rates for intermediate-term investments are set by the market. They are only loosely coupled to the overnight rate. That's why there is a yield "curve" and why it is constantly changing shape.

This is in no sense a prediction, but we can look at what actually happened to four typical intermediate-term "core" bond funds from June 2004 through July 2006 when the Fed raises rates from 1% to 5.25%, a rise of more than 4% in just over two years.

Image

As you can see, despite the Fed "raising rates," over the two years when the Fed Funds rate was rising not a single bond fund lost money.

This doesn't prove that bonds are great, but it does prove that a lot of talk about (intermediate-term!) bonds tanking badly "because" the Fed has announced it will raise (overnight!) rates is just nonsense.
Hi Nisiprius, good posts, with good points to demonstrate.

It is important to understand, in hindsight, how the return of the intermediate-term bond funds can be explained. 2 things matter:
- the starting yield of the fund at the beginning of the period,
- the ending yield of the fund at the end of the period.

In Jun of 2004 and Jul 2006, the yield of BND was roughly 4.x%, so not much change in yield. Thus, the price was roughly unchanged.
But in those two years, those funds earned the average of the period yield, and given that start and end were BOTH 4.x%, then they earned around 4.x% a year, in a fairly steady fashion.

Also, during the time that you specify (Jun-2004 to Jul-2006) the 10-year US Treasury yield was ROUGHLY unchanged, at 4.7%. This was a FORTUNATE coincidence, as the yield went up and down a bit (range: 3.91% to 5.2%). Again: the range is NOT that wide, but the fact that both beginning and ending yield was roughly the same (4.7%) contributed to the BND not losing capital value (price).

I think the BIGGER picture items are the following:
- BND yield at 4.x% in Jun-2006 vs 1.6% in now, in Jan-2022,
- inflation at 2.6-3.2% range vs 7.x% now, https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
- USA Debt to GDP at 60% in Jun-2006 vs 150% now, https://fred.stlouisfed.org/series/GFDEGDQ188S
- furthermore, the intermediate-term yields on US Treasury in Jun-2006 had just gotten HIGHER prior to the increases in the FOMC rate increases, as the market is forward-looking,

At the end of the day, investors need to have a realistic view of what is going on:
- Jun-2004, BND was yielding 4.5%, with inflation at 2.6%,
- Jan-2022, BND is yielding 1.6%, with inflation at 7.x%.

Assuming an average case scenario that BND is yielding 1.6% in 2 or 3 years, then:
- investors will have made 1.6% in total returns over that period,
- inflation has eaten up whatever the inflation is in those 2-3 years.

So, I think investors need to feel comfortable with the fact that they are going to lose money on BND in inflation-adjusted terms.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
milktoast
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by milktoast »

anoop wrote: Mon Jan 03, 2022 12:48 am The bond market only needs to worry if (a) inflation is persistent and (b) fed removes accommodation of buying bonds. (a) is probably going to be true, while (b) will be false.
If I was market timing bonds (which I'm definitely not doing cause what's the point), I think fed maintaining the QE (buying bonds) is actually a sell signal on longer duration bonds. That [QE] may cause their price to hold steady for a while, but it likely increases inflation and makes the ultimate correction stronger.

That said, if you are going to market time. Might as well do it on stocks where you can make money.
TropikThunder
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by TropikThunder »

alex_686 wrote: Thu Jan 13, 2022 12:29 pm The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.
That’s for the whole year, right? The prediction for the Jan 26 meeting is 96.9% for unchanged.
alex_686
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by alex_686 »

TropikThunder wrote: Thu Jan 13, 2022 4:45 pm
alex_686 wrote: Thu Jan 13, 2022 12:29 pm The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.
That’s for the whole year, right? The prediction for the Jan 26 meeting is 96.9% for unchanged.
Well, 13 months. February 2023. Should have made that clearer.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
TropikThunder
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by TropikThunder »

alex_686 wrote: Thu Jan 13, 2022 5:06 pm
TropikThunder wrote: Thu Jan 13, 2022 4:45 pm
alex_686 wrote: Thu Jan 13, 2022 12:29 pm The medium result is a 100 bps increase. There is over a 75% chance that we will have a increase of 75 bps or more.
That’s for the whole year, right? The prediction for the Jan 26 meeting is 96.9% for unchanged.
Well, 13 months. February 2023. Should have made that clearer.
Thanks. I’m glad you posted that link, I’d been trying to find it (upcoming mortgage application).
alex_686
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by alex_686 »

TropikThunder wrote: Thu Jan 13, 2022 5:13 pm Thanks. I’m glad you posted that link, I’d been trying to find it (upcoming mortgage application).
So you know, 30 year mortgage track the 10 Treasury in terms of movement better than the Fed Funds rate.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Greg in Idaho
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Re: Effect of announced interest rates hike on current price of bonds etfs

Post by Greg in Idaho »

nisiprius wrote: Wed Jan 05, 2022 10:55 am
Rarely, if ever, do people use the phrase "lost money" to refer to "loss of purchasing power" except when they are attacking bonds.

...

Never have I heard anyone talk about stocks "losing money" if the number of dollars increased.
In light of recent discussions of bond bashing around here, I find this pretty interesting...so much for "keeping it 'real' "
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