2022: Worst. Bond. Market. Ever?

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McQ
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2022: Worst. Bond. Market. Ever?

Post by McQ »

This thread builds on an earlier one by Feh (viewtopic.php?t=375988). See especially the charts posted by vineviz in the middle of page two, and vineviz’ own thread here: viewtopic.php?t=376814

I take the analysis farther back in time across multiple types of bonds. The immediate stimulus was a query by Jason Zweig—you can see his take on the question here: https://www.wsj.com/articles/its-the-wo ... 1651849380

2022 thus far

Returns for the first four months of 2022 have come as a shock to many bond holders. Using Vanguard Index ETFs as the measure, through April 29th, Long Treasuries (VGLT) had notched a negative total return of -18.09%, Long Corporate bonds (VCLT) had declined -19.86%, and even Intermediate Treasuries (VGIT) had declined -7.54%. Those are total returns, income included.

The Vanguard Total Bond Market Index ETF (BND, keyed to the AGG) was also sharply down, by 9.56%.

The magnitude of these declines raises a question: Is this the worst bond performance ever? I went on a search through several historical databases to find out.

Here is a preview of what I found:
-Will 2022 enter the record books as the worst bond market ever? Not quite; or maybe, not yet.
-Is 2022 high up on the leader board of most devastating bond market declines? Yes.
-Has it been an unprecedented decline—do 2022 and its cognates gap below the next worst outcome? No; 2022 and the like come in one or two points worse, last among equals if you will.

The remainder of this post puts 2022 in historical context to back up the points just made.

The discussion begins with post-1926 US data, then looks at US data back to 1793, and then examines UK data back to 1753.

Total bond index (1973 to 2008; BND thereafter)

Here are rolling 4-month returns on the total bond index since inception.

Image

On this metric, 2022 notches a win: it is the worst ever, slightly exceeding what happened in early 1980.

But the aggregate bond index has only been in existence for about 50 years. Next section looks back a little further in time. 

Stocks, Bonds, Bills and Inflation yearbook

Monthly returns begin January 1926. I first look at rolling four month returns from April 1926 through December 2019 for long government bonds. Dashed line shows the Long Treasury return (VGLT) for the first four months of 2022.

Image

On this measure 2022 again takes the prize as worst ever. But four-month returns of about -10% have not been uncommon. And parts of 1980, near the depths of the great bond bear market that began in 1946, were almost as bad as the first four months of 2022.

However, long bonds are famously volatile. Next chart looks at Intermediate Treasuries from 1926.

Image

Same conclusion: the first four months of 2022 have been the worst ever. But early 1980 came close, and there are again a surprising number of occasions where the Intermediate Treasury lost 5% within a few months. 

Most of the older historical data is annual, so in preparation for a deeper dive into history, the next chart switches to rolling 12 month returns. Note that projecting the total return for the entire 12 months of 2022 is dicey at this early point. About 2 points of coupon income will be added over the next eight months, raising the current negative 18% return on VGLT to negative 16%, if there is no further price decline. And even the most modest rally at year end, to yields of 2.75% instead of 3%, would probably drive the 2022 loss to below 15%. Please keep that in mind when interpreting the 12-month data. And given these concerns, this chart adds a dotted line showing the realized 12-month return on VGLT from end of April 2021 to end of April 2022 (which was -12.19%).

Image

Relative to 12-month rolls, the first four months of 2022 again take the crown, exceeding the 12 months ending in March 1980. But if there is a modest year-end rally that takes the 12-month 2022 return above negative 15%, then 2022 will lose out to 1980 and to the twelve months ending in October 2008. (Oh—you didn’t know that the safest bonds in the world can temporarily lose a lot of money during a great crisis? Fall 1931 was not a fun time either).

Turning to the realized returns for the twelve months from April 2021 to April 2022, these have several times been matched or exceeded. Negative total returns on long Treasuries, of about -12% over twelve months, are not rare.

On this metric, then, the past 12 months have been a really bad stretch, but not the worst ever.

The conclusion thus far: 1) On a four-month basis, the first trimester of 2022 looks to be the worst since at least 1926. 2) however, on a trailing 12-month basis, while April 2021-2022 has been pretty bad, history has seen worse, and more important, has several times recorded results about as bad.

The long run in the US, 1792 to 1973

[These data come from my paper “Stocks for the Long Run? Sometimes Yes. Sometimes No,” which can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927]. See also the thread on that paper started by SimpleGift: viewtopic.php?t=352394

These are 12 month returns January to January. I do not have rolling 12 month returns, so the next chart probably does not capture the very worst case. It stops in 1973 because that marks the end of my data collection. Before 1857, the index contains mostly Federal and municipal bonds, after which corporate bonds are added; after 1897, it is only corporate bonds (the SBBI corporate bond measure has problems before about 1974, hence the fresh data collection through 1973.)

Image

If we take a broader historical view, then 2022 is certainly on track to rank as among the very worst; but to take the title, it will have to get past 1842, at the depths of the Panic of 1837, after several states had defaulted, with a 12 month return of negative -22.88%; and for corporate bonds, it will have to get past 1931, when downgrades and defaults came thick and fast on what had been AAA rated railroads as the Depression plumbed the depths (for reference, trailing 12-month return on the VCLT has been -15.40%). 

The very long run: the United Kingdom back to 1753

These annual data keyed to December were shared with me by Bryan Taylor of Global Financial Data. Because only December to December returns are shown, this chart, like the preceding, may omit the very worst cases (but see below).

Before World War I, after which US Treasuries became the safest bond you could buy, British Consols played that role (although Dutch bonds were an alternative in the early 1700s). Here is a chart from 1753 to 1925, to link up with the SBBI Treasury chart.

Image

As before, 2022 is right up there with the worst Consol returns, but does not take the crown. Near the worst part of the Napoleonic wars, the 12-month Consol return was even worse than the 4-month 2022 Treasury return, about negative -20%. And as before, there are a surprising number of occasions where the safest bond you can buy still managed to lose 10% or more over a calendar year.

Finally, the Bank of England has a monthly series of Consol yields: millenium dataset, https://www.bankofengland.co.uk/statist ... h-datasets. As it is a perpetuity, price can be calculated by dividing the coupon of 3% by the stated yield. Here is a chart of 4-month rolling price changes from 1753 to 1823, which seems to be where the worst 12-month returns occurred.

Image

Here at last we find 4-month rolls just a little bit worse than 2022. The first four months of 2022 hold their own as among the worst ever, but do not quite take the prize. And this chart confirms that four-month declines of 15% or more, for a safe government bond, are far from unprecedented.

Spun another way: you have to go back two centuries to find a worse four month stretch than the beginning of 2022.

Summary

It seems clear from a broader view of history that annual returns, from the safest (long) bonds you can buy, of negative 20% or more, are not without precedent. And although 2022 is in the running to become the Worst. Bond. Market. Ever, it still has a ways to go before securing that title on an annual basis.

In short: what isn’t cash can always be trashed.

[Caveat: the universe of interest is confined to “the safest bond you can buy.” Weimar Germany saw much worse declines in government bond prices, but no one could have thought in the 1920s that German government bonds were the safest bond you could buy.]
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Re: 2022: Worst. Bond. Market. Ever?

Post by SimpleGift »

McQ wrote: Fri May 06, 2022 4:09 pm It seems clear from a broader view of history that annual returns, from the safest (long) bonds you can buy, of negative 20% or more, are not without precedent.
Thank you, Professor McQuarrie. Always appreciate you sharing your historical research here on the Bogleheads Forum.
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Re: 2022: Worst. Bond. Market. Ever?

Post by BolderBoy »

SimpleGift wrote: Fri May 06, 2022 5:09 pm
McQ wrote: Fri May 06, 2022 4:09 pm It seems clear from a broader view of history that annual returns, from the safest (long) bonds you can buy, of negative 20% or more, are not without precedent.
Thank you, Professor McQuarrie. Always appreciate you sharing your historical research here on the Bogleheads Forum.
+1.
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Re: 2022: Worst. Bond. Market. Ever?

Post by HomerJ »

2022 isn't over yet.
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Re: 2022: Worst. Bond. Market. Ever?

Post by SimpleGift »

Granted, we're a long way from the end of the year, but looking at the 10 worst years of real, inflation-adjusted bond returns in U.S. history, going back to 1794 (from Professor McQuarrie's database here), it's worth noting how often these were accompanied by substantial real stock losses in the same year (in yellow below):
  • Image
    Data Source: McQuarrie database, 1793-2019 ver.2
Not surprisingly, these were mostly years with high inflation, often during post-war periods in U.S. history.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Random Musings »

The super low interest rates generated by Fed policy is an experiment still in progress. If they continue to contract their balance sheet, more woe may occur, but at least there is a current 3% (or so) yield present.

They were late in responding to inflationary pressures as they were going to be "temporary". If inflation remains sticky, and I think that is the case, these scheduled 50 basis point hikes are a little behind schedule too.

Rates are higher now, to be sure, but 10 yrs were almost down to 0.5% or so not that long ago. We are still at low interest rate levels when comparing over the past 60 years for 10 years. Perhaps rates will go higher than most people expect under the "nobody knows nothing" theorem.

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Re: 2022: Worst. Bond. Market. Ever?

Post by retireIn2020 »

SimpleGift wrote: Fri May 06, 2022 9:58 pm Granted, we're a long way from the end of the year
You should stop right there!
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Re: 2022: Worst. Bond. Market. Ever?

Post by stocknoob4111 »

Dave Ramsey is having the last laugh here.. he said avoid bonds and everyone ridiculed him but now bonds are having a collapse many times worse than equities risk adjusted.

When financial engineering is an option and the true price of risk cannot be set by the free market it's time to ditch this asset class completely.
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Re: 2022: Worst. Bond. Market. Ever?

Post by livesoft »

Yields and interest rates are still much much much lower than the early 1980s. When am I going to be able to buy a CD that pays 12%?
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Re: 2022: Worst. Bond. Market. Ever?

Post by donaldfair71 »

stocknoob4111 wrote: Sat May 07, 2022 12:20 am Dave Ramsey is having the last laugh here.. he said avoid bonds and everyone ridiculed him but now bonds are having a collapse many times worse than equities risk adjusted.

When financial engineering is an option and the true price of risk cannot be set by the free market it's time to ditch this asset class completely.
I don’t know what Dave’s policy on bonds is, but if he’s been no bonds forever, he’s missed a historical bond bull market.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

SimpleGift wrote: Fri May 06, 2022 9:58 pm Granted, we're a long way from the end of the year, but looking at the 10 worst years of real, inflation-adjusted bond returns in U.S. history, going back to 1794. . . . Not surprisingly, these were mostly years with high inflation, often during post-war periods in U.S. history.
Yeah, from the perspective of a broader financial history, both in the US and in fact in other countries as well, it is a truism that an inflationary stock crisis is typically a very bad time for nominal bonds too (in real terms, of course).

But I gather around 40 years of that sort of situation not happening in the US caused a good number of US investors to more or less view that as a negligible academic theory.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

donaldfair71 wrote: Sat May 07, 2022 6:08 am I don’t know what Dave’s policy on bonds is, but if he’s been no bonds forever, he’s missed a historical bond bull market.
I don't know either, but of course if you favored taking risk with US stocks instead of US nominal bonds (the sort of thing the "take your risk on the equity side" camp might do), you did even better.

I think the disconnect in this discussion is often that a lot of people were sold on the idea that longer USD nominal bonds were actually really low risk, or even no risk. And on that specific point, I do think this being a long favorable period for that type of fixed income made that seem true to some people, meaning it seemed to them that in practice longer-term USD nominal bonds could be both very-low-risk AND also provide a nice return boost over the forms of fixed income those stuffy academics said are the true low-risk choices.

But at least for a little bit now, we have seen some of the risk inherent in that type of fixed income strategy actually realized. Of course it is still possible it will just be a blip.

But the risk is still there, meaning this could actually just be the beginning of the next long period where nominal USD bonds do really poorly in real terms.

And if so, I am pretty sure that people who went for the "take your risk on the equity side" philosophy will end up doing better. Indeed, they might do better on both ends.

But again, that remains to be seen.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Call_Me_Op »

stocknoob4111 wrote: Sat May 07, 2022 12:20 am Dave Ramsey is having the last laugh here.. he said avoid bonds and everyone ridiculed him but now bonds are having a collapse many times worse than equities risk adjusted.

When financial engineering is an option and the true price of risk cannot be set by the free market it's time to ditch this asset class completely.
Note so sure. Dave advocates 100% equities for everyone. Even though bonds are down by about 10%, I am sure glad I hold some of them along with my stocks. Of course, there are alternatives to bonds that fall in the fixed-income category - and they have fared better than marketable bonds (in terms of recent loss in value). All in all, I strongly disagree with Dave Ramsey on this point.

People are confusing a temporary reduction in value with the much greater risk that stocks can pose. Bonds (of high quality) are guaranteed to come back. Stocks are not.
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Re: 2022: Worst. Bond. Market. Ever?

Post by FCM »

Thank goodness for my 401K stable value fund, which is where I have the bulk (about 60%) of my income generating funds!
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Re: 2022: Worst. Bond. Market. Ever?

Post by KlangFool »

Folks,

In summary, cash is not trash. Have some gold and silver too.

Diversification is a good thing.

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Re: 2022: Worst. Bond. Market. Ever?

Post by Samuel Glover »

My response to the situation: Do nothing different.

1. Sell nothing.

2. Continue to collect the interest on the bond funds I own.

3. Continue to purchase bonds and stocks at my chosen asset allocation.

What else am I going to do?

As someone retiring in 3-4 years, I'm looking forward to and have been hoping for somewhat higher interest rates.
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Re: 2022: Worst. Bond. Market. Ever?

Post by KlangFool »

Folks,

Interest rate going up is a win for savers.

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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

Call_Me_Op wrote: Sat May 07, 2022 6:35 am Bonds (of high quality) are guaranteed to come back.
Not in real terms.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

KlangFool wrote: Sat May 07, 2022 7:04 am Folks,

Interest rate going up is a win for savers.

KlangFool
So real rates have gone up substantially, and that is good news for people who have not yet bought their fixed income but plan to do so soon.

Still, real rates are currently still low by historic standards. They were just lower still back before the recent increase.

Anyway, to the extent you are rolling TIPS, higher real rates is at least somewhat good news. But to the extent you are rolling nominal bonds--well, you are looking at the possibility of large real losses on the old bonds thanks to unexpectedly high inflation, but maybe you will do better on the new bonds . . . unless, of course, this unexpectedly high inflation trend continues.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

KlangFool wrote: Sat May 07, 2022 7:01 am Folks,

In summary, cash is not trash. Have some gold and silver too.

Diversification is a good thing.

KlangFool
Not to get derailed, but I want to note there are potential alternatives to both nominal bonds and cash, gold, or silver. For example, things like stable value funds, the TSP G fund, or TIPS are alternatives to cash. And diversified commodities funds are an alternative to just gold or silver (obviously precious metals might be part of such a fund).
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Re: 2022: Worst. Bond. Market. Ever?

Post by rich126 »

I'll never understand why someone keeps an investment they were told was going to go down. The FED has made it clear they are raising rates for a long time now. Throw in the fact (well, to me) rates were pushed down way too low last year due to non-financial reasons (covid), it just makes no sense to me unless people really thought the FED wouldn't go through with it.

People here try to spin this but honestly they make no sense. If you keep cash, sure you are losing to inflation but at least I'm not losing twice like you are with bonds (to inflation and the value of the bond itself). Maybe the last few decades of a bull market in bonds led people astray. investing is like life, you adapt to the circumstances for best results.

Leaving money in the stock market I can better understand since even when it is over-valued, that can continue to persist for a long time before it is corrected (as it seems to be right now) but when you have the main driving force in determining rates (the FED) telling you what is going to happen it just makes no sense to me.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Call_Me_Op »

NiceUnparticularMan wrote: Sat May 07, 2022 7:05 am
Call_Me_Op wrote: Sat May 07, 2022 6:35 am Bonds (of high quality) are guaranteed to come back.
Not in real terms.
I was speaking nominally. The only things guaranteed to keep-up with inflation are IBonds and perhaps long TIPS - in both cases assuming a low tax rate and for the TIPS you may need to wait for maturity.
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Re: 2022: Worst. Bond. Market. Ever?

Post by jeffyscott »

livesoft wrote: Sat May 07, 2022 5:28 am Yields and interest rates are still much much much lower than the early 1980s. When am I going to be able to buy a CD that pays 12%?
Hopefully never, because you will probably only get that chance if inflation stays very high for several years.

In 1979-81 inflation was 11.25%, 13.55%, and 10.33%. For the 10 years from 1972-82, CPI rose at an annualized average of 9%.

Unlike then, you do have the ability to buy TIPS right now, if you think the current level of inflation is going to persist for something like a decade.
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Re: 2022: Worst. Bond. Market. Ever?

Post by SimpleGift »

NiceUnparticularMan wrote: Sat May 07, 2022 6:18 am Yeah, from the perspective of a broader financial history, both in the US and in fact in other countries as well, it is a truism that an inflationary stock crisis is typically a very bad time for nominal bonds too (in real terms, of course).

But I gather around 40 years of that sort of situation not happening in the US caused a good number of US investors to more or less view that as a negligible academic theory.
Going back to 1794 in the U.S. markets (using McQuarrie's data), years with nominal, concurrent stock-bond losses have been fairly rare (about 4%-5% of years, table below). But years with real, concurrent stock-bond losses have been much more prevalent (about 15% of years):
  • Image
So inflationary crises, impacting the real returns of both stocks and bonds together, have not been all that unusual — both historically and in the so-called modern era, since 1928.

For bond-heavy portfolios, thank goodness for the availability of TIPS and IBonds today as insurance. For stock-heavy portfolios, not sure there's much one can do for insurance, other than to focus on long-term stock returns, with perhaps tilts towards value stocks, REITs, commodity stocks and the like. Not a pleasant time to be holding financial assets!
Last edited by SimpleGift on Sat May 07, 2022 8:19 am, edited 1 time in total.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Tom_T »

rich126 wrote: Sat May 07, 2022 7:21 am I'll never understand why someone keeps an investment they were told was going to go down. The FED has made it clear they are raising rates for a long time now. Throw in the fact (well, to me) rates were pushed down way too low last year due to non-financial reasons (covid), it just makes no sense to me unless people really thought the FED wouldn't go through with it.

People here try to spin this but honestly they make no sense. If you keep cash, sure you are losing to inflation but at least I'm not losing twice like you are with bonds (to inflation and the value of the bond itself). Maybe the last few decades of a bull market in bonds led people astray. investing is like life, you adapt to the circumstances for best results.

Leaving money in the stock market I can better understand since even when it is over-valued, that can continue to persist for a long time before it is corrected (as it seems to be right now) but when you have the main driving force in determining rates (the FED) telling you what is going to happen it just makes no sense to me.
If I buy a Treasury, be it 30 days, a year, two years, whatever, there is zero risk if I hold to maturity, outside of inflation. Interest rates could go to the moon and I'll still know exactly what I'll have at maturity. I could create a ladder to take advantage of higher rates down the road. It's safe, and it's better than earning zero percent. I've also loaded up on I Bonds as much as possible, starting last fall and taking advantage of gifts. I am trying to make the best of a difficult fixed income landscape.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

Call_Me_Op wrote: Sat May 07, 2022 7:25 am
NiceUnparticularMan wrote: Sat May 07, 2022 7:05 am
Call_Me_Op wrote: Sat May 07, 2022 6:35 am Bonds (of high quality) are guaranteed to come back.
Not in real terms.
I was speaking nominally. The only things guaranteed to keep-up with inflation are IBonds and perhaps long TIPS - in both cases assuming a low tax rate and for the TIPS you may need to wait for maturity.
So I do think it is important to be consistently explicit about this, because both stocks and nominal bonds can experience large real losses, and nominal bonds can do so permanently. I would still agree stocks are more risky in this sense, but people thinking about large investments in nominal bonds should keep in mind this possibility.

By the way, the expected real rates on nominal bonds are generally going to be very nearly as bad as the real rates on comparable TIPS, adjusted for other risks. They are just less transparent.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

Tom_T wrote: Sat May 07, 2022 8:15 am If I buy a Treasury, be it 30 days, a year, two years, whatever, there is zero risk if I hold to maturity, outside of inflation.
Inflation over 30 years can be a very large variable, and such a bond could lose a lot of its real value. So unless you are doing something like matching a fixed-rate loan over the same term, I am not sure that really counts as "safe" in a practical sense.
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Re: 2022: Worst. Bond. Market. Ever?

Post by JoMoney »

When looking at really old pre-Fed, pre-great depression bonds, something that always bugs me, is the numéraire currency wasn't the same thing... it might have the same name, but a "dollar" that was a silver/gold certificate was fundamentally different than a modern fiat dollar, and it was the norm in bonds of that era to have a "gold clause" or similar allowing for the redemption in some equivalent commodity value. I believe it had a very real inflation adjusted/purchasing power impact on the value of the numéraire being used to judge the value of everything else.

I'm not sure how that should effect ones interpretation of it, but it's something I think is noteworthy.
If one looks at the classic Prof. Jeremy Siegel "Stocks For The Long Run" chart,
you see a very clear change in the dollars "real" value vs. gold , but also in the "real" return of Bonds & Bills in inflation adjusted terms.
Image
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Re: 2022: Worst. Bond. Market. Ever?

Post by Elysium »

McQ wrote: Fri May 06, 2022 4:09 pm Returns for the first four months of 2022 have come as a shock to many bond holders. Using Vanguard Index ETFs as the measure, through April 29th, Long Treasuries (VGLT) had notched a negative total return of -18.09%, Long Corporate bonds (VCLT) had declined -19.86%, and even Intermediate Treasuries (VGIT) had declined -7.54%. Those are total returns, income included.

The Vanguard Total Bond Market Index ETF (BND, keyed to the AGG) was also sharply down, by 9.56%.

The magnitude of these declines raises a question: Is this the worst bond performance ever? I went on a search through several historical databases to find out.
I understand the intent of this thread is to show historical comparison and it is very helpful. Writing this below only to express my thoughts based on many other threads on bonds lately, not as a response of the content of the original post,

Is it really that shocking, truly speaking bonds are doing what they are expected to do. I mean, everyone here on BH at least should know about the inverse relationship between interest rates and bond prices. Given that when we buy a bond or bond fund we look at it's duration to determine how much it can lose in value for every unit increase in rates. We then use the new rate to figure out how long before we can recover the value. We also know inflation and deflation are additional factors to consider when selecting bonds to pair with our other assets.

Given those, LTT bonds with an average duration of 18 years fell by 18% when interest rate went from 2% at end of 2021 to 3% as of this week. Did we not know that this relationship or we did not expect rates to rise like that. Neither should be unexpected. We should be prepared for both. The other possibility could have been rates dropping from 2% to 1%, or at some future date rates going to 4% for another 18% loss in value. These rate movements aren't permeant though, there would be other cycles and other possibilities. In a deflation / recession scenario we need protection of nominal Treasury bonds, since we do not know when that will happen we hedge our bets with some nominal treasury bonds, some TIPS, some short term bonds and may be a bit of cash for stability.

While this is one of the worst bond markets in history, it still is no reason for us to avoid nominal treasury bonds, we simply don't know when we will need them. Personally, on average my fixed income portfolio is down about 8.5%, slightly better than TBM, mainly due to the presence of TIPS and a small cash components, with an average maturity close to 9 years and everything is high quality. The positive side is that the average rate on the highest quality longest duration is now looking 3% and on the TIPS front is nearing zero real rates from being negative for so long. Ignoring the price drop, I can see positive returns if the cycles change in the next 8-9 years when I need to think of using some of this money. Even if it doesn't I can still go another 8-9 years without using this money because there are stocks. In the end, it appears there isn't anything shocking or unexpected about this bond market than what we could have expected it to be at some point in our lifetime.
Last edited by Elysium on Sat May 07, 2022 9:00 am, edited 1 time in total.
Booglie
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Re: 2022: Worst. Bond. Market. Ever?

Post by Booglie »

What this period proves to me is that ETF bonds are garbage. If you like bonds, hold the real deal.

As for a quick anecdote, I checked a 5-year bond ETF from another country and compared to holding a 6-year bond (there are no bonds that exactly match that 5-year period) through the same duration. Holding the actual bonds actually gave more than double the return, and taxes are actually lower too.

Also, UNLESS THE ENTITY ISSUING THE BONDS DEFAULTS, holding the actual bonds won't ever give you negative nominal returns, like it can happen with bond ETFs.
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Re: 2022: Worst. Bond. Market. Ever?

Post by donaldfair71 »

Elysium wrote: Sat May 07, 2022 8:54 am
McQ wrote: Fri May 06, 2022 4:09 pm Returns for the first four months of 2022 have come as a shock to many bond holders. Using Vanguard Index ETFs as the measure, through April 29th, Long Treasuries (VGLT) had notched a negative total return of -18.09%, Long Corporate bonds (VCLT) had declined -19.86%, and even Intermediate Treasuries (VGIT) had declined -7.54%. Those are total returns, income included.

The Vanguard Total Bond Market Index ETF (BND, keyed to the AGG) was also sharply down, by 9.56%.

The magnitude of these declines raises a question: Is this the worst bond performance ever? I went on a search through several historical databases to find out.
Is it really that shocking, truly speaking bonds are doing what they are expected to do. I mean, everyone here on BH at least should know about the inverse relationship between interest rates and bond prices. Given that when we buy a bond or bond fund we look at it's duration to determine how much it can lose in value for every unit increase in rates. We then use the new rate to figure out how long before we can recover the value. We also know inflation and deflation are additional factors to consider when selecting bonds to pair with our other assets.

Given those, LTT bonds with an average duration of 18 years fell by 18% when interest rate went from 2% at end of 2021 to 3% as of this week. What's shocking, that we didn't know this relationship or we did not expect rates to rise like that. Neither should be unexpected. We should be prepared for both. The other possibility could have been rates dropping from 2% to 1%, or at some future date rates going to 4% for another 18% loss in value. These rate movements aren't permeant though, there would be other cycles and other possibilities. In a deflation / recession scenario we need protection of nominal Treasury bonds, since we do not know when that will happen we hedge our bets with some nominal treasury bonds, some TIPS, some short term bonds and may be a bit of cash for stability.

While this is one of the worst bond markets in history, it still is no reason for us to avoid nominal treasury bonds, we simply don't know when we will need them. Personally, on average my fixed income portfolio is down about 8.5%, slightly better than TBM, mainly due to the presence of TIPS and a small cash components, with an average maturity close to 9 years and everything is high quality. The positive side is that the average rate on the highest quality longest duration is now looking 3% and on the TIPS front is nearing zero real rates from being negative for so long. Ignoring the price drop, I can see positive returns if the cycles change in the next 8-9 years when I need to think of using some of this money. Even if it doesn't I can still go another 8-9 years without using this money because there are stocks.
Good post.

The only thing shocking to me, and maybe to others, is that I think there was still this debate among financial media (not just the middle of the day CNBC and Fox Business programming) about how much Fed rates would impact yields/prices.

There were/are(?) people who believe that yields would not rise, at least to this degree, even as Fed rates rose, because the decline in rates was more secular due to demographics than the Fed (and that would persist regardless of Fed rate). I never understood this POV, and never really ascribed to it.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Harry Livermore »

Very thoughtfully presented data, thank you Professor, and also SimpleGift for additional context.
Following the discussion.
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Re: 2022: Worst. Bond. Market. Ever?

Post by WillRetire »

HomerJ wrote: Fri May 06, 2022 8:31 pm 2022 isn't over yet.
+1

2022 isn't even half over.

Also, most rebalancing activity that is executed in order to maintain AA has been mostly into stocks as they have lost a greater % so far than bonds. But again, 2022 isn't even half over yet.
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Re: 2022: Worst. Bond. Market. Ever?

Post by HootingSloth »

McQ, great data and presentation as always. Thank you.
Elysium wrote: Sat May 07, 2022 8:54 am I understand the intent of this thread is to show historical comparison and it is very helpful. Writing this below only to express my thoughts based on many other threads on bonds lately, not as a response of the content of the original post,

Is it really that shocking, truly speaking bonds are doing what they are expected to do. I mean, everyone here on BH at least should know about the inverse relationship between interest rates and bond prices. Given that when we buy a bond or bond fund we look at it's duration to determine how much it can lose in value for every unit increase in rates. We then use the new rate to figure out how long before we can recover the value. We also know inflation and deflation are additional factors to consider when selecting bonds to pair with our other assets.

Given those, LTT bonds with an average duration of 18 years fell by 18% when interest rate went from 2% at end of 2021 to 3% as of this week. Did we not know that this relationship or we did not expect rates to rise like that. Neither should be unexpected. We should be prepared for both. The other possibility could have been rates dropping from 2% to 1%, or at some future date rates going to 4% for another 18% loss in value. These rate movements aren't permeant though, there would be other cycles and other possibilities. In a deflation / recession scenario we need protection of nominal Treasury bonds, since we do not know when that will happen we hedge our bets with some nominal treasury bonds, some TIPS, some short term bonds and may be a bit of cash for stability.

While this is one of the worst bond markets in history, it still is no reason for us to avoid nominal treasury bonds, we simply don't know when we will need them. Personally, on average my fixed income portfolio is down about 8.5%, slightly better than TBM, mainly due to the presence of TIPS and a small cash components, with an average maturity close to 9 years and everything is high quality. The positive side is that the average rate on the highest quality longest duration is now looking 3% and on the TIPS front is nearing zero real rates from being negative for so long. Ignoring the price drop, I can see positive returns if the cycles change in the next 8-9 years when I need to think of using some of this money. Even if it doesn't I can still go another 8-9 years without using this money because there are stocks. In the end, it appears there isn't anything shocking or unexpected about this bond market than what we could have expected it to be at some point in our lifetime.
Agree with your post.

I think that the reason people are surprised is that they do not, for the most part, think about bonds as a financial instrument with particular properties in the way you describe. Instead, they start by listening to advice, which is reasonable enough itself, to think of their portfolios as a whole and to look at how their bonds and stocks (and anything else they might hold) perform together.

The way this, reasonable in itself, insight is presented, however, leads to a couple of errors. First, people are told about stocks and bonds being uncorrelated (or perhaps negatively correlated) and take from that statement that their bonds will be stable or go up at times when their stocks are falling. When the inevitable periods come where both are falling, they are surprised and think that something has gone wrong, when in fact everything is working as expected and rising interest rates are simply causing future cash flows to be valued less in the present.

Second, the insight above is almost always presented by showing back tests, presented as a pretty graph of what happened between two particular endpoints. This kind of backtest is an insidious thing, because everyone grasps the overall pattern it presents immediately and intuitively, while it makes it oh-so-easy to avoid thinking about events that may have small annual probabilities (our brain subconsciously tricks us to ignore them) but, when viewed on the level of an entire lifespan, are quite likely to happen. So, when we see a bond drawdown that matches ones that seem to happen several times a century, the focus on this kind of backtesting makes it feel really surprising, when we should have seen it as a perfectly likely outcome over the course of our investment careers.
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Re: 2022: Worst. Bond. Market. Ever?

Post by AlphaLess »

Fantastic thread, McQ. Thank you for putting it together!!!
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Re: 2022: Worst. Bond. Market. Ever?

Post by AlphaLess »

Booglie wrote: Sat May 07, 2022 8:59 am What this period proves to me is that ETF bonds are garbage. If you like bonds, hold the real deal.

As for a quick anecdote, I checked a 5-year bond ETF from another country and compared to holding a 6-year bond (there are no bonds that exactly match that 5-year period) through the same duration. Holding the actual bonds actually gave more than double the return, and taxes are actually lower too.

Also, UNLESS THE ENTITY ISSUING THE BONDS DEFAULTS, holding the actual bonds won't ever give you negative nominal returns, like it can happen with bond ETFs.
This is not a good comment. Despite your bond showing par value of $100, it's market is below $100, when yields have risen, relative to the interest coupon on the bond.
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Re: 2022: Worst. Bond. Market. Ever?

Post by NiceUnparticularMan »

Elysium wrote: Sat May 07, 2022 8:54 am
McQ wrote: Fri May 06, 2022 4:09 pm Returns for the first four months of 2022 have come as a shock to many bond holders. Using Vanguard Index ETFs as the measure, through April 29th, Long Treasuries (VGLT) had notched a negative total return of -18.09%, Long Corporate bonds (VCLT) had declined -19.86%, and even Intermediate Treasuries (VGIT) had declined -7.54%. Those are total returns, income included.

The Vanguard Total Bond Market Index ETF (BND, keyed to the AGG) was also sharply down, by 9.56%.

The magnitude of these declines raises a question: Is this the worst bond performance ever? I went on a search through several historical databases to find out.
I understand the intent of this thread is to show historical comparison and it is very helpful. Writing this below only to express my thoughts based on many other threads on bonds lately, not as a response of the content of the original post,

Is it really that shocking, truly speaking bonds are doing what they are expected to do. I mean, everyone here on BH at least should know about the inverse relationship between interest rates and bond prices. Given that when we buy a bond or bond fund we look at it's duration to determine how much it can lose in value for every unit increase in rates. We then use the new rate to figure out how long before we can recover the value. We also know inflation and deflation are additional factors to consider when selecting bonds to pair with our other assets.

Given those, LTT bonds with an average duration of 18 years fell by 18% when interest rate went from 2% at end of 2021 to 3% as of this week. Did we not know that this relationship or we did not expect rates to rise like that. Neither should be unexpected. We should be prepared for both. The other possibility could have been rates dropping from 2% to 1%, or at some future date rates going to 4% for another 18% loss in value. These rate movements aren't permeant though, there would be other cycles and other possibilities. In a deflation / recession scenario we need protection of nominal Treasury bonds, since we do not know when that will happen we hedge our bets with some nominal treasury bonds, some TIPS, some short term bonds and may be a bit of cash for stability.

While this is one of the worst bond markets in history, it still is no reason for us to avoid nominal treasury bonds, we simply don't know when we will need them. Personally, on average my fixed income portfolio is down about 8.5%, slightly better than TBM, mainly due to the presence of TIPS and a small cash components, with an average maturity close to 9 years and everything is high quality. The positive side is that the average rate on the highest quality longest duration is now looking 3% and on the TIPS front is nearing zero real rates from being negative for so long. Ignoring the price drop, I can see positive returns if the cycles change in the next 8-9 years when I need to think of using some of this money. Even if it doesn't I can still go another 8-9 years without using this money because there are stocks. In the end, it appears there isn't anything shocking or unexpected about this bond market than what we could have expected it to be at some point in our lifetime.
So I think this is a pretty diverse forum. And I think you may be describing some people here, but not others.

I think, for example, there is a large group of people here who have adopted the view that something like Total Bond is all the fixed income you need (outside of maybe an emergency fund), on various theories including that it is as diversified as anyone could reasonably want.

You have implicitly rejected that theory, and indeed the entire concept behind Total Bond, by naming a mix of fixed-income that includes things Total Bond does not include, and does not include things that Total Bond does include.

And in that sense, you couldn't possibly be describing the people who bought into the Total-Bond-is-all-you-need strategy.

As a final thought, I will note there are maybe a few of us who don't actually believe it makes sense to try to use bonds to hedge against both unexpected deflation/disinflation and unexpected inflation, and that since you really need to pick one, it makes sense to pick hedging against unexpected inflation.

That apparently has become a small group after a few decades of inflation being more under than over expectations at the time of bond purchase. And possibly things like TIPS real rates being more transparent than nominal real rates have contributed.

But we shall see what happens next.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Mr. Rumples »

Below is a link to Siegel's paper which is referenced above. Siegel's conclusions are not without controversy. Siegel uses data from Sidney Homer. For a different perspective read McQuarrie: https://papers.ssrn.com/sol3/papers.cfm ... id=3269683

https://rodneywhitecenter.wharton.upenn ... 4/9109.pdf

(The bond market prior to the introduction of the greenback in the 1860's had one further twist; the US only issued coinage. Paper notes (money) were issued by banks, at one point over 8,000 different issuers were out there. Like bond rating companies today, there were several publications that rated the notes and thus, a $5 note might not get $5 (the US government generally prohibited notes of less than $5). The lack of paper notes and money resulted in large parts of the south relying on a barter even after the New Orleans and Charlotte mints opened.). The interplay of bonds and notes is not an area heavily researched.)
Last edited by Mr. Rumples on Sat May 07, 2022 9:44 am, edited 1 time in total.
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Re: 2022: Worst. Bond. Market. Ever?

Post by SimpleGift »

JoMoney wrote: Sat May 07, 2022 8:53 am If one looks at the classic Prof. Jeremy Siegel "Stocks For The Long Run" chart, you see a very clear change in the dollars "real" value vs. gold , but also in the "real" return of Bonds & Bills in inflation adjusted terms.
But aren't the changes in Siegel's chart just showing the pre- and post- gold standard abandonment regimes?
Prior to the abandonment of the gold standard, deflation was dominant, and high inflation was mainly happening around wars — and then prices would fall back into a deflationary cycle between wars (chart above). After abandonment of the gold standard, we've of course been experiencing persistent inflation as a more-or-less permanent force and expectation.
Last edited by SimpleGift on Sat May 07, 2022 1:27 pm, edited 2 times in total.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Samuel Glover »

rich126 wrote: Sat May 07, 2022 7:21 am I'll never understand why someone keeps an investment they were told was going to go down. The FED has made it clear they are raising rates for a long time now. Throw in the fact (well, to me) rates were pushed down way too low last year due to non-financial reasons (covid), it just makes no sense to me unless people really thought the FED wouldn't go through with it.
The market doesn't wait for rates to rise before it prices in rate hikes. All available information is immediately priced into the market. In fact, the total expected rate hikes announced by the Fed are almost certainly already priced into bond yields. We may very well be at the worst of it in terms of declining bond NAVs (Jason Zweig had a great article on this yesterday).

But market timers who sell based on guesses about future prices are good for those of us who buy and hold and continue to average in.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Booglie »

AlphaLess wrote: Sat May 07, 2022 9:35 am
Booglie wrote: Sat May 07, 2022 8:59 am What this period proves to me is that ETF bonds are garbage. If you like bonds, hold the real deal.

As for a quick anecdote, I checked a 5-year bond ETF from another country and compared to holding a 6-year bond (there are no bonds that exactly match that 5-year period) through the same duration. Holding the actual bonds actually gave more than double the return, and taxes are actually lower too.

Also, UNLESS THE ENTITY ISSUING THE BONDS DEFAULTS, holding the actual bonds won't ever give you negative nominal returns, like it can happen with bond ETFs.
This is not a good comment. Despite your bond showing par value of $100, it's market is below $100, when yields have risen, relative to the interest coupon on the bond.
It is a good comment because with the actual bond, you can let your bonds mature, and you will be paid as promised. Bond ETFs will always sell bonds after a while, so they will never mature. And that's automatic, so they may sell at the worst possible time. Only a handful bond ETFs have a target date, but why hold them and pay a fee when you can hold the bonds yourself?
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Re: 2022: Worst. Bond. Market. Ever?

Post by Tom_T »

NiceUnparticularMan wrote: Sat May 07, 2022 8:30 am
Tom_T wrote: Sat May 07, 2022 8:15 am If I buy a Treasury, be it 30 days, a year, two years, whatever, there is zero risk if I hold to maturity, outside of inflation.
Inflation over 30 years can be a very large variable, and such a bond could lose a lot of its real value. So unless you are doing something like matching a fixed-rate loan over the same term, I am not sure that really counts as "safe" in a practical sense.
True enough. I keep things relatively short (two years' max.) Also, there are no "safe" investments with your criteria apart from I suppose I Bonds, and money has to go somewhere. I'd rather make some interest with a bond than zero interest with cash.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Booglie »

Tom_T wrote: Sat May 07, 2022 9:47 am
NiceUnparticularMan wrote: Sat May 07, 2022 8:30 am
Tom_T wrote: Sat May 07, 2022 8:15 am If I buy a Treasury, be it 30 days, a year, two years, whatever, there is zero risk if I hold to maturity, outside of inflation.
Inflation over 30 years can be a very large variable, and such a bond could lose a lot of its real value. So unless you are doing something like matching a fixed-rate loan over the same term, I am not sure that really counts as "safe" in a practical sense.
True enough. I keep things relatively short (two years' max.) Also, there are no "safe" investments with your criteria apart from I suppose I Bonds, and money has to go somewhere. I'd rather make some interest with a bond than zero interest with cash.
Cash is important not just for safety, but for liquidity. Suppose you just suffered a car crash, and you must pay NOW $10,000 in hospital expenses, or else you die. And it's a Sunday, so the stock market is closed. That's in such a situation that cash comes handy.

Of course, my example may not be accurate depending on where you live, but you get the point.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Tom_T »

Booglie wrote: Sat May 07, 2022 9:55 am
Tom_T wrote: Sat May 07, 2022 9:47 am
NiceUnparticularMan wrote: Sat May 07, 2022 8:30 am
Tom_T wrote: Sat May 07, 2022 8:15 am If I buy a Treasury, be it 30 days, a year, two years, whatever, there is zero risk if I hold to maturity, outside of inflation.
Inflation over 30 years can be a very large variable, and such a bond could lose a lot of its real value. So unless you are doing something like matching a fixed-rate loan over the same term, I am not sure that really counts as "safe" in a practical sense.
True enough. I keep things relatively short (two years' max.) Also, there are no "safe" investments with your criteria apart from I suppose I Bonds, and money has to go somewhere. I'd rather make some interest with a bond than zero interest with cash.
Cash is important not just for safety, but for liquidity. Suppose you just suffered a car crash, and you must pay NOW $10,000 in hospital expenses, or else you die. And it's a Sunday, so the stock market is closed. That's in such a situation that cash comes handy.

Of course, my example may not be accurate depending on where you live, but you get the point.
Of course. I didn't mean to imply that I kept NO cash around. It's just that some people seem to be saying that they'd rather have cash than bonds, period.
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Re: 2022: Worst. Bond. Market. Ever?

Post by grabiner »

rich126 wrote: Sat May 07, 2022 7:21 am I'll never understand why someone keeps an investment they were told was going to go down. The FED has made it clear they are raising rates for a long time now. Throw in the fact (well, to me) rates were pushed down way too low last year due to non-financial reasons (covid), it just makes no sense to me unless people really thought the FED wouldn't go through with it.
The rate that the Fed wants to raise is not the relevant rate for a bond investment. The Fed targets a change in the overnight lending rate, which directly affects other very-short-term rates. If you buy a one-month T-bill, you don't care what the Fed will do to rates in July because your T-bill will have matured by then, so your rate should be closely linked to the Fed's rate target. Meanwhile, bond traders are trading long-term bonds at prices which reflect their expectations of economic conditions over the next ten years, including the Fed's planned moves.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Dottie57 »

NiceUnparticularMan wrote: Sat May 07, 2022 7:16 am
KlangFool wrote: Sat May 07, 2022 7:01 am Folks,

In summary, cash is not trash. Have some gold and silver too.

Diversification is a good thing.

KlangFool
Not to get derailed, but I want to note there are potential alternatives to both nominal bonds and cash, gold, or silver. For example, things like stable value funds, the TSP G fund, or TIPS are alternatives to cash. And diversified commodities funds are an alternative to just gold or silver (obviously precious metals might be part of such a fund).
But what are Stable Value funds invested in. Find it difficult to find good information about them. The SVF in my 401k. insurance contracts are involved. But how risky are these?
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Re: 2022: Worst. Bond. Market. Ever?

Post by Firefly80 »

NiceUnparticularMan wrote: Sat May 07, 2022 9:37 am
As a final thought, I will note there are maybe a few of us who don't actually believe it makes sense to try to use bonds to hedge against both unexpected deflation/disinflation and unexpected inflation, and that since you really need to pick one, it makes sense to pick hedging against unexpected inflation.

Please Explain why it’s more important to protect against Inflation then Deflation?

Intermediate term TIPS Funds lost nearly -10% in 2013 in a Deflationary scenario similar to what’s happening with Nominals now.
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Re: 2022: Worst. Bond. Market. Ever?

Post by Tier1Capital »

This is great material. Thank you to McQ and everyone who contributed.

One thought I'd add is while the comments about "the year not being over yet", are obviously accurate, most people view the world in the context of drawdowns and not calendar year returns. As an example, Bogleheads often mention stocks have experienced 50% drawdowns, using the GFC as an example, but going back to 1928, the S&P 500 has never been down 50% in a single calendar year. We'd probably all be better off by only looking at year end returns, but the journey matters for most investors, and drawdowns more accurately capture that experience than yearly returns.

I personally think (and hope) we're getting close to the end of this fixed income drawdown. Once things calm down, higher yields will start doing their job and temper losses over longer timeframes.
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Re: 2022: Worst. Bond. Market. Ever?

Post by JoMoney »

Tier1Capital wrote: Sat May 07, 2022 4:21 pm... We'd probably all be better off by only looking at year end returns...
I agree, but nothing special about calendar years... rolling years, or even rolling 5-year periods would be better ;)
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Re: 2022: Worst. Bond. Market. Ever?

Post by willthrill81 »

But TBM is fantastic because it has the word 'total' in it! :wink:
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