Questions about my perspective on bond funds

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Kencsp
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Questions about my perspective on bond funds

Post by Kencsp » Thu Jul 12, 2018 11:13 am

My minds perspective sees the following in regards to bond funds after reading too many forum threads on them.

Rising rates have dropped bond fund share prices-I see this as a firesale and want to buy the dips now for future growth. Buy total bond fund as its share price is a “value” that will long term rise. Meantime I get slowly rising yields while I wait for the growth in share price decades later.

Am I misunderstanding how bond funds work long term?

So many threads discuss rising rates bad but it’s a good time to stock up on bonds in my perspective. Is my perspective incorrect?

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ruralavalon
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Re: Questions about my perspective on bond funds

Post by ruralavalon » Thu Jul 12, 2018 11:27 am

Kencsp wrote:
Thu Jul 12, 2018 11:13 am
My minds perspective sees the following in regards to bond funds after reading too many forum threads on them.

Rising rates have dropped bond fund share prices-I see this as a firesale and want to buy the dips now for future growth. Buy total bond fund as its share price is a “value” that will long term rise. Meantime I get slowly rising yields while I wait for the growth in share price decades later.

Am I misunderstanding how bond funds work long term?

So many threads discuss rising rates bad but it’s a good time to stock up on bonds in my perspective. Is my perspective incorrect?
I think you have it right for any bond holding intended for as a long-term investment.

I would not try to buy on the "dips", but rather would buy with regular contributions every pay period.
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Kencsp
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Re: Questions about my perspective on bond funds

Post by Kencsp » Thu Jul 12, 2018 11:54 am

With this Mindset:

Total bond market-inter-down just a little 1-2%
Long term bond index-down 5plus%

? What makes more sense for value investing?

alex_686
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Re: Questions about my perspective on bond funds

Post by alex_686 » Thu Jul 12, 2018 12:03 pm

I would discard the "firesale" or "value" prescriptive. Bond yields have fallen since 2008 to historically low levels. The house has burned down and we are now in rebuilding mode, hopefully, to a more normal level. Or at least out of the basement.

I am a proponent of bonds but we should not sugarcoat that bond prices are in a rough spot right now.

Kencsp
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Re: Questions about my perspective on bond funds

Post by Kencsp » Thu Jul 12, 2018 12:16 pm

Owning bonds for decades I can def see the house burned down perspective.

If we owned zero bonds and were just getting in now would the perspective change?

would one begin to think the model we currently view as bonds be fundamentally changing? As in not the same investment it was touted to be when the vanguard stool model was created?

GibsonL6s
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Re: Questions about my perspective on bond funds

Post by GibsonL6s » Thu Jul 12, 2018 12:25 pm

I don't think you can apply a "value" mindset to bonds as you do stocks. The value is a function of interest rates for good quality bonds. Unless you have a view on interest rates you want to invest in, I don't think you can say bonds are X % cheaper I want to buy them.

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Phineas J. Whoopee
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Re: Questions about my perspective on bond funds

Post by Phineas J. Whoopee » Thu Jul 12, 2018 4:50 pm

Increasing yields are good for bond investors, including those using funds, over longer periods of time, because bond returns come from coupons. Even in terrible-case scenarios it's good after about twice the duration, and we may not be in a terrible case.
PJW

pkcrafter
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Re: Questions about my perspective on bond funds

Post by pkcrafter » Thu Jul 12, 2018 5:30 pm

Kencsp wrote:
Thu Jul 12, 2018 11:13 am
My minds perspective sees the following in regards to bond funds after reading too many forum threads on them.

Rising rates have dropped bond fund share prices-I see this as a firesale and want to buy the dips now for future growth. Buy total bond fund as its share price is a “value” that will long term rise. Meantime I get slowly rising yields while I wait for the growth in share price decades later.

Am I misunderstanding how bond funds work long term?

So many threads discuss rising rates bad but it’s a good time to stock up on bonds in my perspective. Is my perspective incorrect?
A bond is essentially a loan. You buy the bond for $1000 and the issuer says I"ll pay you xx amount of dollars at the end of the time period and that's what you will end up with no matter how much the prices bounces around during the time. The price will fluctuate so the interest rate remains competitive if you want to sell it before it mature.

https://www.bondview.com/glossary/duration

https://investor.vanguard.com/insights/ ... s-duration

Paul
Last edited by pkcrafter on Thu Jul 12, 2018 6:02 pm, edited 1 time in total.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

stocknoob4111
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Re: Questions about my perspective on bond funds

Post by stocknoob4111 » Thu Jul 12, 2018 5:57 pm

Kencsp wrote:
Thu Jul 12, 2018 11:13 am
So many threads discuss rising rates bad but it’s a good time to stock up on bonds in my perspective. Is my perspective incorrect?
Rates are not rising, they are holding. Morgan Stanley has forecasted just a few days ago that they anticipate 10Y yields to fall to 2.75 by end of 2018 and the yield curve to invert in mid 2019 when the 10Y will drop to 2.5. So, if anyone tells you for sure that rates are rising they don't know what they are talking about. The long yields are dropping because confidence in the long term outlook is waning, that is what the bond market is telling us. We were at 3.2 earlier, now at 2.85.. few weeks ago even dropped to 2.76, that is not rising to me. In addition the 10-2 spread is 28bps, the smallest it's ever been in a very long time which is pretty ominous.

Kencsp
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Re: Questions about my perspective on bond funds

Post by Kencsp » Thu Jul 12, 2018 8:40 pm

stocknoob4111 wrote:
Thu Jul 12, 2018 5:57 pm
Kencsp wrote:
Thu Jul 12, 2018 11:13 am
So many threads discuss rising rates bad but it’s a good time to stock up on bonds in my perspective. Is my perspective incorrect?
Rates are not rising, they are holding. Morgan Stanley has forecasted just a few days ago that they anticipate 10Y yields to fall to 2.75 by end of 2018 and the yield curve to invert in mid 2019 when the 10Y will drop to 2.5. So, if anyone tells you for sure that rates are rising they don't know what they are talking about. The long yields are dropping because confidence in the long term outlook is waning, that is what the bond market is telling us. We were at 3.2 earlier, now at 2.85.. few weeks ago even dropped to 2.76, that is not rising to me. In addition the 10-2 spread is 28bps, the smallest it's ever been in a very long time which is pretty ominous.
Ive noticed this-all the talk about the rising rates so I was researching and reading but all I saw was small st and int term bumps up.

Kencsp
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Re: Questions about my perspective on bond funds

Post by Kencsp » Thu Jul 12, 2018 8:44 pm

Thank you as always for the vision and info guys.

So I am at the point I am still not sure where to put my bond asset allocation monies into.

From a long term perspective nothing looks great long term. Its like the gains on bonds and small yields are lost to rising inflation making it a wash or minimal gains. To me CDs and other fixed incomes are a long term solutions (<10years).

I just don't see the long term play of safety in TBM at my age (30s).

So if not bonds then what?

alex_686
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Re: Questions about my perspective on bond funds

Post by alex_686 » Thu Jul 12, 2018 9:53 pm

Kencsp wrote:
Thu Jul 12, 2018 8:40 pm
Ive noticed this-all the talk about the rising rates so I was researching and reading but all I saw was small st and int term bumps up.
First, expected rate changes are already incorporated into bond prices. So now you have to enter into second order thinking - on how current expectations about rising rates is wrong - too fast, too little, etc. a.k.a. market timing.
Kencsp wrote:
Thu Jul 12, 2018 8:44 pm
From a long term perspective nothing looks great long term. Its like the gains on bonds and small yields are lost to rising inflation making it a wash or minimal gains. To me CDs and other fixed incomes are a long term solutions (<10years).

I just don't see the long term play of safety in TBM at my age (30s).

So if not bonds then what?
Second, yeah - bond have a rough path ahead. Then again, have you seen stock's P/E ratio? So no safety there either.

Third, what role do you think bonds have in your portfolio? Even reference "normal" times instead of the current conditions. For myself, bonds create a more efficient portfolio (better risk adjusted returns) and offers a rebalancing bonus.

stocknoob4111
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Re: Questions about my perspective on bond funds

Post by stocknoob4111 » Fri Jul 13, 2018 11:22 am

rates are down again today, 10YT has fallen to 2.831 as of now. So, no, rates are NOT rising, they are in fact falling if you take the trend of the last few months and I think this trend will continue.

I would just stick with the portfolio mix recommended here rather than do short term month-month analysis, it's been chosen for a reason. If you look at 2008 when the equity markets where going up in smoke Total Bond returned 5+%.
Last edited by stocknoob4111 on Fri Jul 13, 2018 11:27 am, edited 1 time in total.

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Blueskies123
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Re: Questions about my perspective on bond funds

Post by Blueskies123 » Fri Jul 13, 2018 11:27 am

Long rates are stable and recently have been moving down over the last few weeks. Short term rates are definitely going up. Money market funds and short duration bond funds are at 2%.

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