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Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Sun Jan 29, 2012 5:52 pm
by Taylor Larimore
Bogleheads:

This is an update of a post I made last year :

YEAR..INFLATION..TBM....GNMA ....TIPS
1996......3.3%.....3.6%.....5.2%
1997......1.7%.....9.4%.....9.5%
1998......1.6%.....8.6%.....7.1%
1999......2.7%....-0.8%.....0.8%
2000......3.4%....11.4%...11.2%
2001......2.8%.....8.4%.....7.9%......7.7% (TIPS first full year.)
2002......1.6%.....8.3%.....9.7%.....16.6% (Best annual return.)
2003......2.3%.....4.0%.....2.5%......8.0%
2004......2.7%.....4.2%.....4.1%......8.3%
2005......3.4%.....2.4%.....3.3%......2.6%
2006......3.2%.....4.3%.....4.3%......0.4%
2007......2.8%.....5.9%.....7.0%.....11.6%
2008......0.1%.....5.1%.....7.2%.....-2.8% (Worst annual return.)
2009......2.7%.....5.9%.....5.3%.....10.8%
2010......1.5%.....6.5%.....6.9%......6.2%
2011.....3.0% ....7.6%....7.7%....13.2%

It is notable that inflation has increased nearly 3% during the last three years but bond funds continue to perform nicely.

Past performance does not guarantee future performance.

Best wishes.
Taylor

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Sun Jan 29, 2012 6:20 pm
by ofcmetz
I wonder what this year will bring. As current yields will possibly remain unchanged this year. Of course they could go up or down as well.

I just threw some darts at the wall and I predict bond returns and inflation will be equal this year. ;) Or maybe not.

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Sun Jan 29, 2012 10:14 pm
by winterescape
Thanks Taylor for the historic chart. It helps me keep perspective.

The Vanguard site shows
Vanguard GNMA Fund Admiral Shares 7.80%
Vanguard Total Bond Mkt Index Admiral 7.69%
Vanguard GNMA Fund Investor Shares 7.69%
Vanguard Total Bond Mkt Index Inv 7.56%
so are you comparing the Total Bond Mkt Index Admiral to the GNMA Fund Investor Shares ?

I still like the somewhat shorter duration on the GNMA, but who knows…

Uniform type shares

Posted: Mon Jan 30, 2012 11:22 am
by Taylor Larimore
Hi Winterescape:

I used your figures to edit shares in the chart to "investor shares." Thank you.

You may find this Conversation interesting:

GNMA behavior in a sharply rising environment

Best wishes.
Taylor

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 11:32 am
by richard
Image

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 11:48 am
by LynnC
Hi Taylor,

Thanks to you and my reading here, I own two out of three funds and have for some time. Both funds are performing well.

Thank you,

LynnC

Re: Uniform type shares

Posted: Mon Jan 30, 2012 7:53 pm
by winterescape
Taylor Larimore wrote:Hi Winterescape:

I used your figures to edit shares in the chart to "investor shares." Thank you.

You may find this Conversation interesting:

GNMA behavior in a sharply rising environment

Best wishes.
Taylor
Taylor,
Thanks for the link to that thread, I had not read it. What I fail to see mentioned anywhere in the thread was what happened in 2008. Just plot gnma VS TBM in google.
http://www.google.com/finance?chdnp=1&c ... MUTF:VFIJX&

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 8:09 pm
by tipswatcher
As much as I watch TIPS - I have been investing in them for 13 years - I still admit I can be baffled at what causes that base rate to rise and fall.

(And, since I am a buy-and-hold TIPS investor, I haven't cared all that much up to the last six months. I am still a net buyer of TIPS, buying more than are maturing. I am having a real problem buying them at these current super low rates, and I have some super-great 10-year TIPS maturing this year. Sob.)

Thank you Taylor, for this chart, which I am trying to digest.

The best year for TIPS was 2002, with a return of of 16.6% but an inflation rate of only 1.6%

The worst year for TIPS was 2008, with a return of -2.8% and an inflation rate of 0.1%.

It doesn't appear that the inflation rate is directly related to the TIPS-fund return.

In fact, I would guess that TIPS do better in times of economic decline, and lower inflation rates, because easy Fed policy causes a FEAR of higher inflation. That is certainly the case today. But today's Treasury market is a shambles, with artificially, government-manipulated super-low rates in nominal Treasuries. The TIPS base rate is going to fall with the nominal rate, keeping some sort of 'expected inflation' spread.

I definitely FEAR inflation ... not now, but in the future. Maybe I am wrong, but buying a nominal 10-year Treasury seems foolish to me when I can buy a TIPS that will adjust for inflation over 10 years, even if I have to give up a small real yield.

Maybe I am wrong. Who knows?

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 10:27 pm
by Index Fan
I too have wondered at TIPS returns. Perhaps the Vanguard TIPS Fund has done well recently because of its similarity to long-term government bonds (i.e., its duration and treasury status).

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 11:05 pm
by Gamecock
Should add intl bonds to the list since vanguard is going to offer them soon.

TBM is 95% us bonds / 5% intl. Bonds.

Seem it will track the Barclays Global Aggregate ex-USD Float Adjusted Index (Hedged), but I cannot find this anywhere.

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Mon Jan 30, 2012 11:12 pm
by novastepp
I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Tue Jan 31, 2012 9:22 am
by hazlitt777
Gold did over 11% last year.

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Tue Jan 31, 2012 9:51 am
by aaron843
If I understand correctly, gold does well when the level of fear is increasing. Bonds do well when interest rates are falling. Does that sound generally right?

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Tue Jan 31, 2012 10:13 am
by hazlitt777
aaron843 wrote:If I understand correctly, gold does well when the level of fear is increasing. Bonds do well when interest rates are falling. Does that sound generally right?
Aaron, I never liked all this talk in financies of the "emotional element." Yes, emotions play a role short term. But long term, the fundamentals are the deciding factor. This is applicable to all financial assets. God should not get "special treatment" in regards to fear. There are fundamentals that drive gold too, like any other financial asset.

So I would put it this way: Bonds do well when interest rates fall or when there is lots of fear that rates will fall.

Stocks do well when their is prosperity, good business environments, good management, or a lot of "antifear" or "confidence" that the economy is good or will become better.

Gold does well when there is a lot of monetization of debt, currency debasement, deficit spending, and yes, when there is fear that these things will happen or will continue to happen.

Does that make sense. I think that is a more fair and accurate way of putting it.

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Tue Jan 31, 2012 10:21 am
by PreserveCapital
novastepp wrote:I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

LOL, as a teenager, did you ever think you would someday be high-fiving with the old man because of his bond portfolio returns? :sharebeer

Re: Total Bond Market; GNMAs; TIPS and Inflation

Posted: Tue Jan 31, 2012 10:30 am
by hazlitt777
PreserveCapital wrote:
novastepp wrote:I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

LOL, as a teenager, did you ever think you would someday be high-fiving with the old man because of his bond portfolio returns? :sharebeer
Just don't be overexposed. The fundamentals are not looking good long term. So be diversified and don't misunderstand what many who are warning about bonds are really saying.

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Sat Jan 19, 2013 5:17 pm
by winterescape
Taylor Larimore wrote:Bogleheads:

This is an update of a post I made last year :

YEAR..INFLATION..TBM....GNMA ....TIPS
1996......3.3%.....3.6%.....5.2%
1997......1.7%.....9.4%.....9.5%
1998......1.6%.....8.6%.....7.1%
1999......2.7%....-0.8%.....0.8%
2000......3.4%....11.4%...11.2%
2001......2.8%.....8.4%.....7.9%......7.7% (TIPS first full year.)
2002......1.6%.....8.3%.....9.7%.....16.6% (Best annual return.)
2003......2.3%.....4.0%.....2.5%......8.0%
2004......2.7%.....4.2%.....4.1%......8.3%
2005......3.4%.....2.4%.....3.3%......2.6%
2006......3.2%.....4.3%.....4.3%......0.4%
2007......2.8%.....5.9%.....7.0%.....11.6%
2008......0.1%.....5.1%.....7.2%.....-2.8% (Worst annual return.)
2009......2.7%.....5.9%.....5.3%.....10.8%
2010......1.5%.....6.5%.....6.9%......6.2%
2011......3.0%.....7.6%.....7.7%....13.2%
2012......1.7%.....4.1%.....2.5%......6.9% (winterescape update)

It is notable that inflation has increased nearly 3% from 2008 to 2011, but bond funds continued to perform nicely.

Past performance does not guarantee future performance.

Best wishes.
Taylor

Taylor, a couple of data points to restart this thread. And.... for 2012 ....
Vanguard Total Bond Mkt Index Adm 4.15%
Vanguard GNMA Fund Admiral Shares 2.45%
Vanguard Inflation-Protect Sec Adm 6.90%

Vanguard Total Bond Mkt Index Adm Average duration 5.2 years
Vanguard GNMA Fund Admiral Shares Average duration 3.6 years
Vanguard Inflation-Protect Sec Adm Average duration 8.5 years

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Posted: Sat Jan 19, 2013 7:28 pm
by clacy
Is there a method of using TIPS vs nominal bonds to calculate real interest rates?

Updated returns

Posted: Sat Jan 19, 2013 8:33 pm
by Taylor Larimore
Winterscape:

Thank you for the 2012 year-end returns and duration figures. I edited the quote with your additions.

It is notable that TIPS with the longest duration, enjoyed double-digit returns during the 2008-2011 inflationary period.

Best wishes.
Taylor