How far are bond prices expected to fall?

[wildgoose007]

Is there a way to calculate how much bond fund prices are expected to fall, given the projected fed interest rate hike?

I googled for this, but can only find examples, and not actual formulas to calculate this. I am interested in the following funds, and how much they are expected to drop, given what the feds already said about the projected rate increase for 2022.

Here are the funds, their average duration according to Vanguard website, the drop that have already occurred (looking at 1Y history on google):

BND, 6.9 year, $86.85 -> $75.81, 12.71% drop
VTEB, 4.6 year, $55.59 -> $49.47, 11.01% drop
VCAIX, 4.5 year, $12.36 -> $11.06, 10.52% drop
VCITX, 5.9 year, $12.93 -> $11.10, 14.15% drop

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

Why do I want to know this? I want to know the total drop that I should be expecting, instead of this death by a thousand cuts each and every day. If everything is suppose to be priced in already, why don't these funds just drop to the target in one day, instead of dragging it on a slow and painful death! Or whether I should bail out if the current drop is only half way there!

[000]

No, because of the concept of "priced in". To perform your desired calculation we would need to know how much of the recent drop is due to pricing in expected hikes AND accurately predict how much future hikes will be.

However I think bonds have probably already seen much of the maximum pain they will see related to these hikes. Note that that is not a calculation, but a guess.

I guess market action tomorrow (CPI release) may go the other way, so you can be on the watch for that.

[j9j]

Great question. The bond drop has been more painful to me than the recent stock drop.

[z3r0c00l]

There are trillions of dollars at stake in questions like this. Supercomputers and the most brilliant economists generally can't tell you ahead of time what interest rates and bond prices will be next year. Your question can't be answered ahead of time except by luck.

[mega317]

There are trillions of dollars at stake in questions like this. Supercomputers and the most brilliant economists generally can't tell you ahead of time what interest rates and bond prices will be next year. Your question can't be answered ahead of time except by luck.

It's true.
BUT
Livesoft seems to be an accomplished bond market timer, just do whatever he does if you can read between the lines of his posts.

[vineviz]

No, because of the concept of "priced in". To perform your desired calculation we would need to know how much of the recent drop is due to pricing in expected hikes AND accurately predict how much future hikes will be.

Yep, that's about it.

The trick is to figure out what the market is is expecting and then figure out whether the future will turn out better or worse than it's currently expecting.

The Fed could keep raising its rates for two years and bond prices could go UP if the rate increases are smaller and/or slower than the prior expectation.

Also, it's worth reminding the OP that the Fed only sets the rate at which commercial banks borrow and lend to each other overnight. Bond yields are set by investors, not the Fed.

[wildgoose007]

No, because of the concept of "priced in". To perform your desired calculation we would need to know how much of the recent drop is due to pricing in expected hikes AND accurately predict how much future hikes will be.

Ha, "priced in" is so overrated!

I understand no one knows for sure how much the Fed will raise the interest this year. But, there's got to be some projections. Let's just pick one of these projections, say, 3% increase in interest rates. Is this then just a mathematical calculation? If so, what is the calculation for 3%?

There's got to be some calculation that can answer the question of, if projection is 3% increase, whether the drop is expected to be 5% more, or 15% more. My understanding is bonds have an underlying mechanism that's mathematically defined. It's not like people can just pump and dump bonds like stocks where anything goes, or can they?

[FrugalConservative]

Is there a way to calculate how much bond fund prices are expected to fall, given the projected fed interest rate hike?

I googled for this, but can only find examples, and not actual formulas to calculate this. I am interested in the following funds, and how much they are expected to drop, given what the feds already said about the projected rate increase for 2022.

Here are the funds, their average duration according to Vanguard website, the drop that have already occurred (looking at 1Y history on google):

BND, 6.9 year, $86.85 -> $75.81, 12.71% drop
VTEB, 4.6 year, $55.59 -> $49.47, 11.01% drop
VCAIX, 4.5 year, $12.36 -> $11.06, 10.52% drop
VCITX, 5.9 year, $12.93 -> $11.10, 14.15% drop

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

Why do I want to know this? I want to know the total drop that I should be expecting, instead of this death by a thousand cuts each and every day. If everything is suppose to be priced in already, why don't these funds just drop to the target in one day, instead of dragging it on a slow and painful death! Or whether I should bail out if the current drop is only half way there!

How would anyone know the answers to these questions?

[grabiner]

Bond traders don't expect prices to fall any further, given how they are trading bonds. The current yield curve is almost flat, which means that there is very little extra return for taking on more interest-rate risk. If bond traders expected long-term rates to rise, long-term bonds would have to have much higher yields than short-term bonds, in order to make them attractive investments despite the expected rise. But with five-year Treasuries yielding 2.91% and ten-year Treasuries yielding 2.99%, a ten-year investor can do almost as well buying a five-year bond and then another five-year bond when it matures, even if rates don't change in the next five years.

The rate that the Fed intends to increase is the very-short-term rate, and that is also reflected in the yield curve. Three-month Treasuries yield 0.89%, and six-month Treasuries yield 1.44%. An investor who buys a three-month Treasury and then buys another one in three months will earn the same as the six-month investor if three-month yields in August are 1.99%, so the expected three-month yield in August should be slightly below that.

[UpperNwGuy]

Why do I want to know this? I want to know the total drop that I should be expecting, instead of this death by a thousand cuts each and every day. If everything is suppose to be priced in already, why don't these funds just drop to the target in one day, instead of dragging it on a slow and painful death! Or whether I should bail out if the current drop is only half way there!

Sorry, but death by a thousand cuts is an inherent part of investing. This is why we have been advised to stop checking our portfolios all the time. Clearly, you have been checking.

You should not bail out if the current drop is only halfway there. That would be turning a temporary loss into a permanent one.

[000]

Ha, "priced in" is so overrated!

I understand no one knows for sure how much the Fed will raise the interest this year. But, there's got to be some projections. Let's just pick one of these projections, say, 3% increase in interest rates. Is this then just a mathematical calculation? If so, what is the calculation for 3%?

There's got to be some calculation that can answer the question of, if projection is 3% increase, whether the drop is expected to be 5% more, or 15% more. My understanding is bonds have an underlying mechanism that's mathematically defined. It's not like people can just pump and dump bonds like stocks where anything goes, or can they?

"Priced in" is overrated if one uses it mean markets are predicting everything that will happen or that active management cannot work, but determining what is priced in and by how much is a critical issue for the active management you are seeking to do.

We can use the duration of a bond to determine much one would expect it to move for an instantaneous 1% move in the relevant rate, but the federal funds rate is not the same as all the other rates, so we cannot use proposed FFR hikes for possible movements of bonds at other maturities. One reason raising the FFR may not lead to other yields climbing is if a recession is being priced in, which is not inconsistent with an inverted yield curve. Moreover, the reduction in the balance sheet is a bigger potential problem for longer dated bonds than anything they propose with the FFR.

[vineviz]

Ha, "priced in" is so overrated!

Under-appreciated is more likely.

I understand no one knows for sure how much the Fed will raise the interest this year. But, there's got to be some projections. Let's just pick one of these projections, say, 3% increase in interest rates. Is this then just a mathematical calculation? If so, what is the calculation for 3%?

Sure there are expectations about with the Fed will do this year. And the most likely course of action has already been "priced in" so to speak.

It's for this reason that there is no "mathematical calculation" that can translate a prediction about what the Fed will do not an expected change in bond prices.

[LISD]

Generally, bonds and bond funds drop 1% for each year of duration. So a fund with an 8 year average weighted duration will drop 16% if rates go up 2%.

I guess when I say "rates", I don't mean the federal funds rates. Bond rates. How they are correlated I'm not sure.

"Does anyone know what the current projected total fed rate increase will be?"

Yes, everyone has a projection and most will be wrong. Take your pick! I attended a Morgan Stanley presentation years ago and they presented a projection. They were wrong. So if they can't get it correct with all their resources, who can?

I wouldn't be buying bonds now (at least mid-to-long term), but held long term all these things even out. I also remember a lot of people in the mid 90s were upset about the share value loss when rates changed. But I don't remember anyone complaining when their bond values went up in 2001 because rates decreased. A good reason not to lump sum large amounts of money into bonds, unless you intend to remain in them for the long term.

[Beensabu]

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

It could be, if you knew. But nobody knows, though.

If someone replied to you and said "it's almost over" or "we're more than halfway there" or "we're not even halfway there yet", would you actually do something based on that random person's post? And if you got one of each plus random chime-ins in support of any, all, and every which way it could be or go, would you really be able to do something based on having essentially played a game of eeny-meeny-miney-mo to pic one as "the answer"?

Everyone is guessing, including the talking heads, bank CEOS, analysts, economists, bloggers, etc. The Fed doesn't even know how high they're going to end up having to raise the Federal Funds Rate (or when they'll have to lower it), let alone what bond yields the market is going to demand for various maturities. All those corporations issuing bonds have no idea how high their yields are going to have be in order for investors to lend to them.

It all happens in real time. You and I and everyone else only know what we know right now today up to this point in time.

Nobody knows today what tomorrow will bring. It's all just anticipation. That's how life goes.

[lgb]

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

It could be, if you knew. But nobody knows, though.

If someone replied to you and said "it's almost over" or "we're more than halfway there" or "we're not even halfway there yet", would you actually do something based on that random person's post? And if you got one of each plus random chime-ins in support of any, all, and every which way it could be or go, would you really be able to do something based on having essentially played a game of eeny-meeny-miney-mo to pic one as "the answer"?

Everyone is guessing, including the talking heads, bank CEOS, analysts, economists, bloggers, etc. The Fed doesn't even know how high they're going to end up having to raise the Federal Funds Rate (or when they'll have to lower it), let alone what bond yields the market is going to demand for various maturities. All those corporations issuing bonds have no idea how high their yields are going to have be in order for investors to lend to them.

It all happens in real time. You and I and everyone else only know what we know right now today up to this point in time.

Nobody knows today what tomorrow will bring. It's all just anticipation. That's how life goes.

Exactly right... as a recent real world example... you can have an idea something could occur... in present times over last several months Russian troops mounting up around Ukraine.. I could come to a conclusion of what might occur... they return home (and I could be wrong), or they advance and carry out a planned attack...(reality)..... however, if I was in say 2008, would I have ever thought about this occurring, either way? Of course not. Just like next week we could be discussing how maybe there were some strategic nukes dropped on Greenland.. also something you likely wouldn't have thought would occur......

I know you're wanting more certainty, but there isn't, it literally is just like what I've explained - that is your certainty - so there is no need to invest thinking there is some certainty

[SantaClaraSurfer]

I buy VCITX for retirement.

I have no idea what it will do next.

However, at 2.95% SEC yield, I am getting a nice tax equivalent yield at the current NAV.

Divide 2.95% by 1 minus your state + federal tax rate, or use this calculator to calculate the tax equivalent yield for yourself.

If the VCITX NAV drops more, my tax equivalent yield goes up, and I get to buy more shares at an even better deal.

If rates drop, my VCITX NAV will go up.

[wildgoose007]

Generally, bonds and bond funds drop 1% for each year of duration. So a fund with an 8 year average weighted duration will drop 16% if rates go up 2%.

I guess when I say "rates", I don't mean the federal funds rates. Bond rates. How they are correlated I'm not sure.

Thank you! Let's say rates go up by 3%, the VCITX at 6.9 year could drop up to 21%. Great. It has already dropped 14%, that means potentially 7% more to go should the rates go up 3%. That's all I wanted to know, what is the asymptotic upper bound based on these rate changes, a rough estimate. Should've did this calculation before hand (was blindly thinking it has fallen enough based on google charts).

Still I am curious what the formula for calculating these things is. Feels like this is mathematically defined (sure there are tons of outside factors that could influence the actual change, but something can be calculated mathematically based on these numbers.)

Stocks go up/down like a random walk. But bond funds are going straight down, consistently, day after day, by almost the same amount, lead me to believe that something else (other than people's emotions) are at play here. Nothing is priced in, it's going straight to its target at a consistent pace. Doesn't matter if stock is going up/down, doesn't matter if feds says they'll raise interest, or actually raised interest, it's just going straight down at a slow and steady pace. This doesn't make sense if things are suppose to be "priced in" like stocks do.

I buy VCITX for retirement.

I have no idea what it will do next.

If the VCITX NAV drops more, my tax equivalent yield goes up, and I get to buy more shares at an even better deal.

I am holding the same, 5.5% drop and counting! Looks like 7% more to go

Are the actual yields going up? or they are only going up because the NAV have dropped? ie, if one purchased it at the peak, the effective yield, hasn't change right? Or has it also improved? (I understand the new shares one buy will have better yield with NAV drop, but the existing shares (at the original price), did their yield change? They may improve as old bonds mature and replaced with newer bonds, but that would happen slower I assume...

[vineviz]

Thank you! Let's say rates go up by 3%, the VCITX at 6.9 year could drop up to 21%. Great. It has already dropped 14%, that means potentially 7% more to go should the rates go up 3%. That's all I wanted to know, what is the asymptotic upper bound based on these rate changes, a rough estimate. Should've did this calculation before hand (was blindly thinking it has fallen enough based on google charts).

You're still missing the most important point: bond prices don't react to changes in the Federal Funds rate.

The Fed Funds rate could go to 3% and bond prices could just as easily go up as go down.

There is not "mathematically defined" formula for predicting future bond prices. None.

[Marseille07]

You're still missing the most important point: bond prices don't react to changes in the Federal Funds rate.

The Fed Funds rate could go to 3% and bond prices could just as easily go up as go down.

There is not "mathematically defined" formula for predicting future bond prices. None.

Have you asked yourself if you'd hold 10-year bonds paying 2.5% when the FF rate is at 3%?

[Firefly80]

You're still missing the most important point: bond prices don't react to changes in the Federal Funds rate.

The Fed Funds rate could go to 3% and bond prices could just as easily go up as go down.

There is not "mathematically defined" formula for predicting future bond prices. None.

Have you asked yourself if you'd hold 10-year bonds paying 2.5% when the FF rate is at 3%?

This is called a Inverted Yield Curve and happens all the Time!

[vineviz]

You're still missing the most important point: bond prices don't react to changes in the Federal Funds rate.

The Fed Funds rate could go to 3% and bond prices could just as easily go up as go down.

There is not "mathematically defined" formula for predicting future bond prices. None.

Have you asked yourself if you'd hold 10-year bonds paying 2.5% when the FF rate is at 3%?

I'd do this in a heartbeat.

For one thing my investment horizon is longer than 24 hours.

For a second thing I couldn't lend at the Federal Funds rate if I wanted to since I'm not a commercial bank.

[Marseille07]

I'd do this in a heartbeat.

For one thing my investment horizon is longer than 24 hours.

For a second thing I couldn't lend at the Federal Funds rate if I wanted to since I'm not a commercial bank.

You have a good point. Perhaps the FF rate wasn't a good example to use on my end, should've discussed HYSA APY

[RetiredAL]

Is there a way to calculate how much bond fund prices are expected to fall, given the projected fed interest rate hike?

I googled for this, but can only find examples, and not actual formulas to calculate this. I am interested in the following funds, and how much they are expected to drop, given what the feds already said about the projected rate increase for 2022.

Here are the funds, their average duration according to Vanguard website, the drop that have already occurred (looking at 1Y history on google):

BND, 6.9 year, $86.85 -> $75.81, 12.71% drop
VTEB, 4.6 year, $55.59 -> $49.47, 11.01% drop
VCAIX, 4.5 year, $12.36 -> $11.06, 10.52% drop
VCITX, 5.9 year, $12.93 -> $11.10, 14.15% drop

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

Why do I want to know this? I want to know the total drop that I should be expecting, instead of this death by a thousand cuts each and every day. If everything is suppose to be priced in already, why don't these funds just drop to the target in one day, instead of dragging it on a slow and painful death! Or whether I should bail out if the current drop is only half way there!

Between Jan 2019 and Aug 2020, BND had an unprecedented climb from $79.33 to $89.46, a NAV gain of 12.7%. In that light, today's $76.07 price does not look so terrible.

Bonds should not be held with anticipation of NAV gains or losses. Bonds are held for the return of interest, and for ballast, as part of an overall balanced investment plan.

[LISD]

You're still missing the most important point: bond prices don't react to changes in the Federal Funds rate.

The Fed Funds rate could go to 3% and bond prices could just as easily go up as go down.

There is not "mathematically defined" formula for predicting future bond prices. None.

Have you asked yourself if you'd hold 10-year bonds paying 2.5% when the FF rate is at 3%?

I think what you meant to ask is "have you aksed yourself if you'd hold 10-year bonds paying 2.5% when current 10-year bonds are paying 3%".

Yes, I could see many that would be satisfied with this situation. If you are on a fixed income and need 2.5% to meet (or beat) your expenses, then you are good for the next 10 years. That's a good situation to be in.

[chassis]

Is there a way to calculate how much bond fund prices are expected to fall, given the projected fed interest rate hike?

I googled for this, but can only find examples, and not actual formulas to calculate this. I am interested in the following funds, and how much they are expected to drop, given what the feds already said about the projected rate increase for 2022.

Here are the funds, their average duration according to Vanguard website, the drop that have already occurred (looking at 1Y history on google):

BND, 6.9 year, $86.85 -> $75.81, 12.71% drop
VTEB, 4.6 year, $55.59 -> $49.47, 11.01% drop
VCAIX, 4.5 year, $12.36 -> $11.06, 10.52% drop
VCITX, 5.9 year, $12.93 -> $11.10, 14.15% drop

Does anyone know what the current projected total fed rate increase will be? (.5%? 2%? 3%?). Whatever it is, is it possible to calculate how much the NAV should drop for these funds with the said average duration? I get the sense that this can be calculated mathematically.

Why do I want to know this? I want to know the total drop that I should be expecting, instead of this death by a thousand cuts each and every day. If everything is suppose to be priced in already, why don't these funds just drop to the target in one day, instead of dragging it on a slow and painful death! Or whether I should bail out if the current drop is only half way there!

The answer to this question requires the knowledge of how far stocks will fall. To have that knowledge is hard to come by.

My stock holdings are reporting record earnings on record physical output. Physical output is a non financial metric and not directly subject to inflationary forces. More widgets are more widgets, selling price notwithstanding.

The economy has true fundamental demand now. The consumer is not over leveraged. Inflation has technically peaked. All are favorable factors.

Financial assets are going through gyrations and need to settle out. The real economy is humming.

[Beensabu]

Let's say rates go up by 3%, the VCITX at 6.9 year could drop up to 21%. Great. It has already dropped 14%, that means potentially 7% more to go should the rates go up 3%.

If you're going to look at it like this (which is fine, as long as you know you have no idea how high the yield might actually go), then at least look at the change in yield on whichever maturity treasury is closest to the average duration of the fund (not change in FFR).

7/30/20: 0.39
5/11/22: 2.94

2.94 - 0.39 = 2.55

2.55 x 6.9 = 17.6

BND 7/31/20: 89.46
BND 5/11/22: 76.07

89.46 - 76.07 = 13.39

13.39 / 89.46 = 14.97

It hasn't even been as bad as you would have expected, right? Unless the average duration of BND was maybe a little shorter a year or two ago? Or maybe it has something to do with that 4-5 month NAV uptrend (where the 5-year and 7-year yields were pretty flat) in the middle of the downtrend from ATH? By the way, what's up with the price going up for those months while the yield was flat? Where's the calculation for that?

Oh, and then actual return over the period is different story, too, isn't it?

Bond prices will fall until they don't, and then they'll go up again, and then they'll go down again, and so on -- and bond yields will go up and down and so on -- and you'll get your distributions along the way. Mine are set to reinvest.

[Northern Flicker]

What percentage of Fed funds rate hikes have even been followed by bond prices falling?

[Marseille07]

What percentage of Fed funds rate hikes have even been followed by bond prices falling?

Bond prices falling doesn't have to "follow" the hikes, as sometimes they preempt the hikes (example: the Ten hit 3% a day before the FOMC; now 2.89%). What's important is where the yield curve will be when the FF rate hits 3%. My guess is the Ten will be at least 4%.

[000]

What percentage of Fed funds rate hikes have even been followed by bond prices falling?

Bond prices falling doesn't have to "follow" the hikes, as sometimes they preempt the hikes (example: the Ten hit 3% a day before the FOMC; now 2.89%). What's important is where the yield curve will be when the FF rate hits 3%. My guess is the Ten will be at least 4%.

I wouldn't be surprised if May or June is the last hike we see for awhile.

[Marseille07]

I wouldn't be surprised if May or June is the last hike we see for awhile.

I would be. We see no sign of inflation slowing down. President Bullard ensures a 3% FF rate by EOY in my opinion.

[Northern Flicker]

What percentage of Fed funds rate hikes have even been followed by bond prices falling?

Bond prices falling doesn't have to "follow" the hikes, as sometimes they preempt the hikes (example: the Ten hit 3% a day before the FOMC; now 2.89%). What's important is where the yield curve will be when the FF rate hits 3%. My guess is the Ten will be at least 4%.

In the last two tightening cycles, I believe intermediate and long treasuries topped out after the 2nd 25 bp hike in the Fed Funds rate.

[Tom_T]

I wouldn't be surprised if May or June is the last hike we see for awhile.

I would be. We see no sign of inflation slowing down. President Bullard ensures a 3% FF rate by EOY in my opinion.

Agreed. More than one Fed person has said, very recently, that 50bps in both June and July makes sense. I don't think it stops there.

[LISD]

Let's say rates go up by 3%, the VCITX at 6.9 year could drop up to 21%. Great. It has already dropped 14%, that means potentially 7% more to go should the rates go up 3%.

If you're going to look at it like this (which is fine, as long as you know you have no idea how high the yield might actually go), then at least look at the change in yield on whichever maturity treasury is closest to the average duration of the fund (not change in FFR).

7/30/20: 0.39
5/11/22: 2.94

2.94 - 0.39 = 2.55

2.55 x 6.9 = 17.6

BND 7/31/20: 89.46
BND 5/11/22: 76.07

89.46 - 76.07 = 13.39

13.39 / 89.46 = 14.97

It hasn't even been as bad as you would have expected, right? Unless the average duration of BND was maybe a little shorter a year or two ago? Or maybe it has something to do with that 4-5 month NAV uptrend (where the 5-year and 7-year yields were pretty flat) in the middle of the downtrend from ATH? By the way, what's up with the price going up for those months while the yield was flat? Where's the calculation for that?

Oh, and then actual return over the period is different story, too, isn't it?

Bond prices will fall until they don't, and then they'll go up again, and then they'll go down again, and so on -- and bond yields will go up and down and so on -- and you'll get your distributions along the way. Mine are set to reinvest.

I had to stare at your numbers for a while, but I think what you are saying is that the decrease in the share value is made up by the increase in the yield as long as you hold onto the fund for a term equal to roughly the duration of the fund. Is that correct?

Looking at the increase in yield over 2 years (from .39 to 2.94%) has me wondering: why, in a period of time that is less than a third of the duration, has the yield gone up so high? Theoretically only a third of the bonds would have matured, and only those would renew for a higher yield.

[Marseille07]

In the last two tightening cycles, I believe intermediate and long treasuries topped out after the 2nd 25 bp hike in the Fed Funds rate.

It takes a while to unfold, but I have a hard time imagining when the FF rate hits 3% by EOY, the Ten would stay at 2.86%. It just doesn't make sense to take on more duration risk for lower coupon rate.

[sureshoe]

There are trillions of dollars at stake in questions like this. Supercomputers and the most brilliant economists generally can't tell you ahead of time what interest rates and bond prices will be next year. Your question can't be answered ahead of time except by luck.

It's true.
BUT
Livesoft seems to be an accomplished bond market timer, just do whatever he does if you can read between the lines of his posts.

So I would expect to see back dated market calls of shorting the bond market.
I'd also like to see predictions of bond performance from today and across the next 3-12 months.

Survivorship Fallacy - google it. People keep timing (and celebrating) up until the point they are bankrupt or demonstrated to fail repeatedly. Or, they get a Mad Money show and nobody cares because they yell.

[sureshoe]

Is there a way to calculate how much bond fund prices are expected to fall, given the projected fed interest rate hike?

This is actually incredibly easy to do accurately if you have all the numbers.

All you have to do is adjust the bond prices with the correct discount rate and do a Net Present Value. There are tons of bond calculators out there.

The only tricky part is you need that discount rate to calculate the correct price - and nobody knows the appropriate future discount rate.

[vineviz]

In the last two tightening cycles, I believe intermediate and long treasuries topped out after the 2nd 25 bp hike in the Fed Funds rate.

It takes a while to unfold, but I have a hard time imagining when the FF rate hits 3% by EOY, the Ten would stay at 2.86%. It just doesn't make sense to take on more duration risk for lower coupon rate.

It can make sense if no one expects the FF rate to remain at 3% for the whole ten years.

In fact, it's a pretty good get that FF rate will be back below 100bps at some point within the next five years.

[CuriousTacos]

In the last two tightening cycles, I believe intermediate and long treasuries topped out after the 2nd 25 bp hike in the Fed Funds rate.

It takes a while to unfold, but I have a hard time imagining when the FF rate hits 3% by EOY, the Ten would stay at 2.86%. It just doesn't make sense to take on more duration risk for lower coupon rate.

I'm not making a prediction about what will happen this time, but in previous tightening cycles, the Fed Funds rate often rose slightly above the 10yr rate. Presumably, the duration risk is offset at these times by a reduction in reinvestment risk (risk that rates could fall when reinvesting shorter duration bonds). How the market will view these two risks at the end of the year is anyone's guess.

[bobcat2]

The Fed has made noises about raising the federal funds rate to the neutral rate. There is no strict definition of the neutral rate but it is often taken to mean 25 bps above the inflation rate. So if the pce inflation rate is down to 3.75% by the EOY that would imply a funds rate of 4% then. My guess is that the funds rate will be about 3% by EOY and if inflation is higher the Fed will keep raising the funds rate until they get to neutral or the economy is definitely in a recession.

BobK

[Beensabu]

Let's say rates go up by 3%, the VCITX at 6.9 year could drop up to 21%. Great. It has already dropped 14%, that means potentially 7% more to go should the rates go up 3%.

If you're going to look at it like this (which is fine, as long as you know you have no idea how high the yield might actually go), then at least look at the change in yield on whichever maturity treasury is closest to the average duration of the fund (not change in FFR).

7/30/20: 0.39
5/11/22: 2.94

2.94 - 0.39 = 2.55

2.55 x 6.9 = 17.6

BND 7/31/20: 89.46
BND 5/11/22: 76.07

89.46 - 76.07 = 13.39

13.39 / 89.46 = 14.97

It hasn't even been as bad as you would have expected, right? Unless the average duration of BND was maybe a little shorter a year or two ago? Or maybe it has something to do with that 4-5 month NAV uptrend (where the 5-year and 7-year yields were pretty flat) in the middle of the downtrend from ATH? By the way, what's up with the price going up for those months while the yield was flat? Where's the calculation for that?

Oh, and then actual return over the period is different story, too, isn't it?

Bond prices will fall until they don't, and then they'll go up again, and then they'll go down again, and so on -- and bond yields will go up and down and so on -- and you'll get your distributions along the way. Mine are set to reinvest.

I had to stare at your numbers for a while, but I think what you are saying is that the decrease in the share value is made up by the increase in the yield as long as you hold onto the fund for a term equal to roughly the duration of the fund. Is that correct?

Looking at the increase in yield over 2 years (from .39 to 2.94%) has me wondering: why, in a period of time that is less than a third of the duration, has the yield gone up so high? Theoretically only a third of the bonds would have matured, and only those would renew for a higher yield.

Not really. I was just trying to show that even if you do use the general rule of thumb (% loss equal to duration for every +1% yield) to estimate potential fall in NAV price in relation to anticipated rise in yield, it's still not going to be perfect. And also that the actual return is going to be far more positive (even if still negative) than the change in price.

And the whole "as long as you hold onto the fund for..." rule of thumb is sort of similar because that's only the case with a one-time increase in rates. But in reality, rates go up and down and nowhere in particular over any random period of time. It's never "just this one increase and then we stay right there at that yield for 7 years".

General rules of thumb exist to help you wrap your head around a concept. They're not real rules.

[CuriousTacos]

Looking at the increase in yield over 2 years (from .39 to 2.94%) has me wondering: why, in a period of time that is less than a third of the duration, has the yield gone up so high? Theoretically only a third of the bonds would have matured, and only those would renew for a higher yield.

That yield calculation is not based on the original yield of each bond back when it was purchased (or issued), but on the current yield of each bond calculated based on its current market price.

[Northern Flicker]

In the last two tightening cycles, I believe intermediate and long treasuries topped out after the 2nd 25 bp hike in the Fed Funds rate.

It takes a while to unfold, but I have a hard time imagining when the FF rate hits 3% by EOY, the Ten would stay at 2.86%. It just doesn't make sense to take on more duration risk for lower coupon rate.

Well, I did not say this tightening cycle would be like previous ones, but what you are describing is called yield curve inversion. It is a phenomenon that has preceded 10 of the last 6 recessions, to use a euphemism of Nobel Laureate and economist Paul Samuelson. An inverted yield curve can portend a recession on the horizon, but it also is a not uncommon phenomenon during Fed tightening cycles.

[vineviz]

The Fed has made noises about raising the federal funds rate to the neutral rate. There is no strict definition of the neutral rate but it is often taken to mean 25 bps above the inflation rate. So if the pce inflation rate is down to 3.75% by the EOY that would imply a funds rate of 4% then. My guess is that the funds rate will be about 3% by EOY and if inflation is higher the Fed will keep raising the funds rate until they get to neutral or the economy is definitely in a recession.

There's also a school of thought, which I think makes some sense, that the yield on long-term Treasuries is a reasonable approximation of what the market thinks the neutral rate actually is.

When the Fed Fund rate and/or short-term rates reach that level (i.e. the yield curve starts to invert), that's basically the way the market expresses its view that recession is imminent because the dominant risk becomes low economic growth instead of high inflation. If this is true, Federal Funds rates over 3% would imply a hard landing instead of a soft one.

[manuvns]

Vanguard Emerging Markets Government Bond ETF (VWOB) is down 18.5% , Average duration 8.2 years

[Northern Flicker]

Not terribly long ago (in 2022) the Fed had articulated 2.75% as their consensus estimate of the neutral rate. I don’t know if that has been revised since, but I would not be surprised if it has.

I would think a derivation of the neutral rate from the inflation rate would use expected future inflation not a measure of past inflation. Maybe 25 bp above the TIPS breakeven rate somewhere on the yield curve?

As the Fed tightens, long term rates and expected inflation will change, so whichever might be used as an input, it is worth noting that the measured quantity is changing as the Fed tightens, partly in response to the tightening, so it is a moving target.

[LISD]

Looking at the increase in yield over 2 years (from .39 to 2.94%) has me wondering: why, in a period of time that is less than a third of the duration, has the yield gone up so high? Theoretically only a third of the bonds would have matured, and only those would renew for a higher yield.

That yield calculation is not based on the original yield of each bond back when it was purchased (or issued), but on the current yield of each bond calculated based on its current market price.

Got it, makes sense. Thank you.

The same income with a lower bond price means a higher yield.

[Call_Me_Op]

Vanguard Emerging Markets Government Bond ETF (VWOB) is down 18.5% , Average duration 8.2 years

Sure - but duration risk is only one risk for this fund.

[manuvns]

Vanguard Emerging Markets Government Bond ETF (VWOB) is down 18.5% , Average duration 8.2 years

Sure - but duration risk is only one risk for this fund.

it has 5.79% trailing yield which is 2.5 times of muni bond fund ! most risk are priced in at this time!