Ask Avantis: Investing in Bonds Amidst High Inflation

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JonL
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Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

'Bogleheads® Live' is where the do-it-yourself investor community asks questions to financial experts – live on Twitter.

For the Wednesday, September 28th episode, Hozef Arif answers your questions about investing in bonds amidst high inflation.

We'll be going live at 11:00 AM Pacific / 2:00 PM Eastern.

Hozef Arif is a Senior Portfolio Manager for fixed income strategies at Avantis Investors.

Here are some resources before the chat:

Why Yesterday's Rising Rates Don't Guarantee Poor Bond Returns Today
https://www.avantisinvestors.com/conten ... today.html

What Happens if the Yield Curve Inverts?
https://www.avantisinvestors.com/conten ... verts.html

What's Up with Interest Rates?
https://www.avantisinvestors.com/conten ... tions.html

The Sum and the Parts: The Effects of Fixed Income Composition in Various Asset Allocations (advisor-facing)
https://www.avantisinvestors.com/conten ... parts.html

You can submit your questions below. (I may include your question in the episode. No guarantees.) Or, you can ask your questions live by joining us on Twitter Spaces.

When we're within one week of the event, I'll include a link.

While anyone can listen to a live Twitter Space event on desktop, you'll need to be using the Twitter app from a mobile device to ask questions (if you’d like to participate in the Q&A).

If you're not already signed up for Twitter, you can do so here: https://twitter.com/. You can sign up with your Google or Apple account, or via phone, or by email.

Looking forward to seeing you there.

Thank you,
Jon Luskin
Host
Bogleheads® Live

P.S. Listen to past episodes of Bogleheads® Live via the podcast: https://boglecenter.net/category/bogleheads-live/

The Bogleheads® Live series is hosted by me, Jon Luskin, CFP®, a long-time Boglehead®. This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated. You can donate at https://boglecenter.net/donate.
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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drumboy256
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by drumboy256 »

Looking forward to it Jon!

Question: How can you convince people that bonds, even in target date funds that are 30+ years out are worth it in a well rounded portfolio?

Follow up - Do you think age is the right determining factor in terms of bond duration? :sharebeer
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er999
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by er999 »

Here’s some questions I have about bonds. Feel free to use some or all of them.

When is the proper duration for bonds? Does he agree with the idea that long term investors (say 45-55 years old still in accumulation phase) should have their first 20% of bonds dedicated to long term treasurys as advocated by vineviz on this forum? Are short term bonds better for stability of principal as advocated by others? Or is a total bond fund best?

Should bonds be all treasurys and investors take their risk in equities by having a slightly higher equity percentage than if they had a more total bond market approach with both treasurys and corporate bonds?

Are ibonds a free lunch for the small investor and everyone should buy ibonds for the 10 years prior to retirement in preference to other forms of bonds or would this be recency bias?

For the small investor who has the option of bank cds, should we be sort of market timing bonds since the lower limit for us is 0% nominal (as compared to institutions that don’t have anyplace similar to safely store cash)? Now is clearly a better time to buy bonds than in 2021 when treasurys yielded a little over 1%, but people are told you can’t time the market. Does it make sense to buy more bonds or shift to longer term when rates are up or will this always be a losers game?
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

drumboy256 wrote: Sun Sep 18, 2022 1:48 pm Looking forward to it Jon!

Question: How can you convince people that bonds, even in target date funds that are 30+ years out are worth it in a well rounded portfolio?

Follow up - Do you think age is the right determining factor in terms of bond duration? :sharebeer
Thank you - and thank you for the great questions.

They're the first to go on the list.

:sharebeer
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

All fantastic questions, er999.

Thank you. They're going on the list!
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

I just got off the phone w/ Hozef. I was able to ask all sorts of great questions about investing - while he wanted to go over some basics of the Twitter platform. We talked about interest rate risk, the break-even inflation rate, and more! I wish I had recorded the conversation - it would have made a good addendum to the podcast.

Anyway, I'm looking forward to hearing what additional questions folks have for Hozef on investing in bonds amidst high inflation.
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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typical.investor
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by typical.investor »

JonL wrote: Sun Sep 18, 2022 12:31 pm 'Bogleheads® Live' is where the do-it-yourself investor community asks questions to financial experts – live on Twitter.

For the Wednesday, September 28th episode, Hozef Arif answers your questions about investing in bonds amidst high inflation.

We'll be going live at 11:00 AM Pacific / 2:00 PM Eastern.

Hozef Arif is a Senior Portfolio Manager for fixed income strategies at Avantis Investors.

Here are some resources before the chat:

Why Yesterday's Rising Rates Don't Guarantee Poor Bond Returns Today
https://www.avantisinvestors.com/conten ... today.html
I appreciate this article, but have some what I see as rather fundamental questions that it entirely doesn't address.

What about real yields?

I see now that the 5 year real yield is said to have moved from recently negative to 1.25%. Wow, that seems like a great yield.

Yet, the 5 year treasury is only 3.7%. With inflation measured at 8.5%, how can this all be?

Ok, perhaps the math works by assuming a much lower rate of inflation in the future, but is the bond market even capable anymore of estimating future inflation. The Fed was buying bonds even until 3.22 when inflation had already reached 8+%.

I mean the 1976-2022 data used in the article is interesting and everything, but have we ever really seen a real Fed unwinding? There really seems to be such a disconnect between short term rates and inflation.

I mean sure I can hold my duration indefinitely and recover from rate hikes, but if the yield is persistently below inflation - to what effect?

And with TIPS often running at negative real yields, I don't see them as a savior either. Ok, so timing nominals/cash or nominals/short bonds doesn't work per the article. What about timing nominals/tips from the point of real yield?
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

Phenomenal questions, typical.investor.

They are going on the list!
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
DaufuskieNate
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by DaufuskieNate »

Avantis describes their fixed income investing process as follows:

"Pursues the benefits associated with indexing such as diversification and transparency of exposures, but with the ability to add value by making investment decisions using information embedded in current yields."

I'm curious how this process works in practice. Bonds can be evaluated from the perspectives of credit risk and term risk. On the credit risk side, does Avantis use their own independent evaluation of credit risk by issuer? I ask this because bond rating agencies are notorious for lagging the market with rating changes. Spreads widen well in advance of a downgrade and also narrow in advance of an upgrade. I also wonder if price information from stocks helps inform their credit decisions on corporate bonds. On the term risk side, does their evaluation of call and put provisions on bonds also include looking at information embedded in equity and equity options prices?
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

DaufuskieNate wrote: Thu Sep 22, 2022 10:05 am Avantis describes their fixed income investing process as follows:

"Pursues the benefits associated with indexing such as diversification and transparency of exposures, but with the ability to add value by making investment decisions using information embedded in current yields."

I'm curious how this process works in practice. Bonds can be evaluated from the perspectives of credit risk and term risk. On the credit risk side, does Avantis use their own independent evaluation of credit risk by issuer? I ask this because bond rating agencies are notorious for lagging the market with rating changes. Spreads widen well in advance of a downgrade and also narrow in advance of an upgrade. I also wonder if price information from stocks helps inform their credit decisions on corporate bonds. On the term risk side, does their evaluation of call and put provisions on bonds also include looking at information embedded in equity and equity options prices?
Thank you for the question. It's going on the list.

:happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by phoroner »

Perhaps Hozef could share insights into how an individual investor could/should adjust their bond portfolio based on Equity factor tilts such as those that Avantis uses? For example, for someone with US equities in VTI vs AVUS, or a stronger tilt with AVUV, does it make sense to change the bond portfolio? how?

thank you.
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by JonL »

phoroner wrote: Fri Sep 23, 2022 6:25 pm Perhaps Hozef could share insights into how an individual investor could/should adjust their bond portfolio based on Equity factor tilts such as those that Avantis uses? For example, for someone with US equities in VTI vs AVUS, or a stronger tilt with AVUV, does it make sense to change the bond portfolio? how?

thank you.
Thank you, phoroner. Your question is going on the list!

:happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
AlwaysLearningMore
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Re: Ask Avantis: Investing in Bonds Amidst High Inflation

Post by AlwaysLearningMore »

Does your guest have an opinions or insights into the municipal bond market in terms of (1) relative safety of AA-rated bonds and better; (2) the maximum allocation to municipal bonds in an individual's fixed income portfolio (e.g., no more than 25% in municipals across all investment accounts). (Concentratiing on bond funds such as Vanguard's intermediate-term tax exempt, and not investing in individual bonds, or risky muni's from Illinois, Puerto Rico etc.)

Thank you for considering this question.
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